Net contribution clauses are often a bone of contention in contract negotiation. Although they frequently crop up, surprisingly there has been little case law - until very recently - on their legal effect.

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Net contribution clauses are often a bone of contention in contract negotiation. Although they frequently crop up, surprisingly there has been little case law - until very recently - on their legal effect.

How Does a Net Contribution Clause Work?

A net contribution clause usually says something like "X's liability for breach of contract or negligence shall not exceed such amount as would be just and equitable for X to pay having regard to X's responsibility for the particular loss or damage".

The idea is that a contractor or consultant isn't left to shoulder the entire loss suffered by an employer where other parties were also responsible for the loss.

Under common law, where a party's breach of obligation causes another to suffer a loss, that is usually enough to render that party liable to compensate the innocent party for its entire loss, even if another person's actions contributed to the loss.

Taking a simple example: if a building defect, that costs £10,000 to rectify, results from a combination of:

  • an error in design made by the architect; and
  • poor workmanship by the builder

the employer may be able to sue the architect or the builder individually for the full reasonable cost of repair (i.e. £10,000). This can produce real advantages to employers, as it means that they only need to sue one person, and not everyone who may have been responsible for the employer's loss.

If, however, the architect were sued, and had to pay £10,000 to the employer, it would be entitled under statute law to claim contribution from the builder for an amount that is "just and equitable" for the builder to pay, having regard to its responsibility for the defect. If the builder and the architect were equally responsible for the defect, the architect should be able to recover £5,000 from the builder.

The potential difficulty for the architect, in this example, is if the builder has gone broke. The architect would then be required to pay £10,000 to the employer, without recouping anything from the builder.

However, with a net contribution clause the architect's liability to the employer is only for a "just and equitable" amount, having regard to the architect's responsibility for the defect. In our example, this would mean that the employer may only recover, say, £5,000 from the architect, but nothing from the insolvent builder. Net contribution clauses shift the risk of insolvency up the contractual chain.

The Langstane case

In this recent Scottish case there was an issue between two of the parties (the employer and an engineer) as to whether they had agreed to apply the ACE Conditions of Engagement, and if so which version. The engineer contended that the version which applied incorporated a net contribution clause.

The court found that the applicable ACE form included a net contribution clause. However the employer said that, even if a net contribution clause was included in the contract form, the court should not enforce the clause because (among other things) it was unusual and unduly onerous.

Under both English and Scots law a clause in a contract (especially one which has not been negotiated) may be unenforceable if it is unusual and unduly onerous, and was not sufficiently drawn to the attention of the party to whom it would be onerous. There may also, at least in England and Wales, be scope (depending on the facts) for attacking a net contribution clause on the basis that it constitutes an unreasonable limitation of liability for the purposes of the Unfair Contract Terms Act 1977.

Unusual and Unduly Onerous?

The court said that the net contribution clause in this case was not unusual or unduly onerous, so there was no need for it to be flagged up specifically. It was important to the court's reasoning that:

  • The ACE forms of contract had included net contribution clauses since 1993 (even though their inclusion had attracted controversy, by excluding the employer's common law right to sue a single party for its full loss)
  • The employer was familiar with the ACE forms (and indeed had suggested that an ACE form be used); and
  • Although the net contribution clause shifted the risk of insolvency from the engineer to the employer, the employer could seek to protect itself by contracting with financially-sound and insured parties

As a comment on the last point: although an employer can take steps to investigate a contractor's or consultant's financial position, there are limits as to the availability of insurance for certain types of breaches of contract (e.g. poor workmanship). The employer also faces the risk of the contractor or consultant doing (or not doing) something that renders the insurance ineffective.

Implications

  • Enforceability. Langstane does not provide a ringing endorsement of net contribution clauses. There may be circumstances in which they will be struck down. Depending on the facts, they could possibly be struck down if used by construction professionals in consumer contracts. In a commercial context, there may be a question of whether such clauses constitute an unreasonable limitation of liability (although the judge in the Langstane suggested they would not)
  • Standard Forms. Some standard forms of appointment for consultants, such as those published by RIBA, ACA and ACE include net contribution clauses. They are also used commonly in collateral warranties. Other standard forms (e.g. the CIC Consultants' Contract) do not use them. Net contribution clauses are not always commercially acceptable, especially where large and experienced developers are involved. The Langstane decision does not pose an immediate threat to the standard forms, although future attacks on net contribution clauses should be expected
  • Internationally. In Australia, net contribution clauses are effectively enshrined in statutes concerning "proportionate liability", which render a party liable only for its "fair share" of damages, which may not be the whole loss suffered. Proposals have been made by industry groups (including ACE itself) for similar legislation to be implemented in the UK, but the enactment of such legislation is not currently on the government's agenda

Reference: Langstane Housing Association Ltd v Riverside Construction (Aberdeen) Ltd [2009] CSOH 52

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 22/04/2009.