Net Contribution Clauses

In this article, Michael Woolley looks at one of the topics commonly encountered in the appointment of construction professionals, net contribution clauses.

Net contribution clauses are sometimes found in consultant appointments and collateral warranties at the request of the professional or its insurers. To understand the aim of net contribution clauses, it is necessary to know when they might apply and the legal position without such a clause. 

The clauses come into play in circumstances where two or more parties have both contributed to a problem. 

Why use a net contribution clause?

Suppose for example that an engineer (E) is involved in the design of a generator flue which turns through a sharp angle in a roof space where he, (E), knows there will be timber roof beams. An Architect (A) designs the roof structure and knows that the flue will go through it and should liaise and coordinate with (E). As part of the commissioning procedure the generator is started up and run up to full speed for a period of time. Where the flue gases reach the angle, it heats up and causes the nearby timber roof beams to catch fire, destroying the roof and the network cabling installed ready for occupation. The conclusion was that both (A) and (E) were at fault. 

In these circumstances at common law the building owner (O) could recover the full amount of his loss from either (A) or (E). As between (A) and (E) they could claim contribution to anything they had to pay by virtue of the Civil Liability (Contribution) Act under which, if the parties could not agree, the court would decide the degree of responsibility and thus how (A) and (E) should share the payment of the claim between them.

Professionals and their insurers wanted to deal with this situation. They thought it was unfair that they should have to shoulder a claim in full when others involved might have had significant responsibility. There are quite a few points to be considered including if one of those responsible were to become insolvent before the claim is paid. Looking at the example above, suppose (A) was 33% to blame and (E) was 67%. If (E) became insolvent and its insurance then lapsed, (A) would have to pay the full loss and would not be able to obtain a contribution from (E) - (E) might be liable but would have no means to pay.

There is another point of note and one which is also a driver for the wider use of net contribution clauses. In the example given above, the subcontractor providing and installing the generator might also have had some responsibility (as would a main contractor under a design and build contract) but the employer could not claim against either of them because of the joint names insurance cover effected in respect of fire. As a result, neither (A) nor (E) could seek or obtain a contribution to what they had to pay from those other parties.

What does a typical clause look like?  

You might expect to see something like this (in fact taken from a collateral warranty):

‘the consultant’s liability to a purchaser or tenant under this agreement shall be limited to the proportion of the purchasers or tenants losses which it would be just and equitable to require the consultant to pay having regard to the extent of the consultant responsibility for the same.’

This addresses the issue of paying a proportionate part of the loss, and indeed the courts have suggested that the starting point of ‘just and equitable’ is the same as the apportionment exercise that would be carried out where one party at fault seeks contribution from another. There are however potential glosses on the meaning of ‘just and equitable.’ For example, should it take into account the terms of appointment of another consultant who might be potentially liable. That issue was met by adding a qualification that the clause operated on the basis of an assumption that:

‘other consultants have provided contractual undertakings to the purchaser or tenant… and there are no limitations on liability as between the consultant and the employer.’

The aim of that is to avoid the argument that one consultant had a cap on their liability and so it would be just and equitable for the other one (at least as against the employer) to pay more. An employer may see a certain irony in a consultant seeking to limit its liability on the basis that other consultants have no such limits.

Another qualification seen is:

‘the other consultant has paid to the purchaser or tenant such proportion of the purchasers or tenants losses as it would be just and equitable for them to pay having regard to the extent of their responsibility…. ’

The aim of that is to avoid the argument that one consultant should pay more because, even though another might be found to have responsibility they were unable to pay, and it would thus be unfair to leave the employer without reimbursement for his losses. It also answers the position where one of the consultants has become uninsured in respect of the claim, effectively deeming payment to have been made whether that is the case or not.

If a net contribution clause limits the liability of a party potentially responsible, then the clause may be the subject of the Unfair Contract Terms Act and subject to questions of reasonableness.

Key advantages 

So, from the consultant’s point of view, the key advantages include: 

• lower financial exposure
• removing the need to bring proceedings under the Civil Liability (Contribution) Act and the expense and risk which goes with that 
• a useful negotiating factor in dealing with any claims
• better risk management (which may help in securing cover in an otherwise hard insurance market) 

Consultants may also seek other restrictions upon their liability (such as an overall cap). 

Key risks 

What then from an employer’s point of view? Obviously, the employer will want to obtain for itself the best protection it can.  

The obvious risk is that one of the parties liable becomes insolvent. In cases where latent defects do not manifest themselves until sometime after construction this is a particular risk. Given that any professional indemnity insurance policy that might respond would be the one in place at the time the claim was first made, insolvency will usually mean that there will be no professional indemnity insurance cover after that happening 

A net contribution clause undoubtedly reduces the common law right which an employer would have to claim its full loss. That may seem less of a risk in circumstances where other potentially liable consultants are able to meet their responsibility. There remain however potential issues. An employer or warranty beneficiary will have to claim against and prove responsibility against each of the parties responsible. Again, looking at the example above, (A) might accept responsibility in principle, but say it was only 25% at fault. In those circumstances, would an employer want to continue an argument over 8% of its losses in circumstances where (if it did not win the argument) it would potentially have to pay its own costs and the consultant’s costs of a claim? The same would go for the claim against (E). Suppose (E) accepted 60% responsibility - would the employer fight on over 7%, given the risk? Remember that each of these claims is effectively separate and in the circumstances the risk for the employer is of losing 8% and 7% respectively, of the claim. It is almost inevitable that the clause means the employer will recover less than the full entitlement where each of the consultants was jointly and severally liable for the employer’s loss.

Employers commonly observe that they are the innocent party in these circumstances and should not have to face these enhanced risks. Part of the fee they pay is a contribution to the consultant’s professional indemnity insurance and those insurers are well experienced in managing the issues of handling claims whereas employers are not.

A particular note so far as funders are concerned. Banks are notoriously risk averse and most have standard instructions to refuse net contribution clauses. This can give rise to negotiating problems where a consultant is insistent, yet the proposed funder is resolute about their position.

Going Forward

Looking at matters in the round there seems no doubt that net contribution clauses will continue to be raised as one of the risk management tools used by a prudent consultant. As always, there is a commercial balance to be struck between the parties with each considering what it really wants out of the development.