A judge recently said net contribution clauses were ‘fair and reasonable’, but clients have good reason to feel unhappy with the way they work in practice

One of the by-products of the recession, 20 years ago was the rise of net contribution clauses (NCC). These controversial provisions increasingly appeared in standard forms. The RIBA, the Association of Consultant Architects and the Association for Consultancy and Engineering all include them in their standard consultants’ appointments. The Construction Industry Council and the British Property Federation propose NCCs for their collateral warranty forms only. The JCT’s warranties also include NCCs. It is in negotiations for appointments (rather than warranties) that the inclusion of NCCs generates disagreements.

Let me first explain how NCCs work. Take a developer whose new building needs reconstructing at a cost of £10m because of defective workmanship by its contractor and negligent design by its architect. The contractor is, say, 60% responsible for the need to rebuild and the architect is 40% responsible. The developer may recover the full £10m from either. It need not sue both. That means the architect is liable for the full £10m if the contractor goes insolvent. It is entitled under statute law to a “just and equitable” contribution from the contractor (that is, about £6m), but given the contractor’s insolvency, that right is worthless. The architect must bear the full liability even though it is only 40% responsible.

This is where the NCC comes in. In effect it says: “A’s liability shall not exceed such sum as would be just and equitable for A to pay given A’s responsibility for the loss and assuming all others responsible have paid their just and equitable share.” Under an NCC, a consultant does not bear the developer’s entire loss if other parties are also responsible. If, in our example, the architect’s appointment included an NCC, the developer would recover only £4m from the architect and sing for the rest. The NCC transfers the risk of the contractor’s insolvency from the architect to the employer.

There had been little case law on NCCs. Recently, a judge suggested they were “fair and reasonable”, in the context of a developer (Langstane) unsuccessfully claiming that an NCC in its engineer’s appointment was unenforceable under the UK’s Unfair Contract Terms Act 1977.

A developer who is unfortunate enough to be wronged by many parties with Net contribution clauses in their contracts is worse off than one that is wronged by only one

Importantly, the court found that, first, the parties had dealt for 20 years under the latest ACE form (which the engineer’s appointment incorporated). Second, the parties should have known the ACE would update its terms and that they included an NCC from 1993 onwards. Third, the developer could try to protect itself against the insolvency of other parties by contracting with financially sound and insured parties.

This last point has another side. A developer can investigate a contractor’s or consultant’s financial position before working with them, but this is no guarantee against insolvency. Also, contractors find insurance against poor workmanship and materials prohibitively expensive. Developers also run the risk of insured consultants doing something that renders their insurance ineffective.

A developer who is wronged by many parties with NCCs in their contracts is worse off than one that is wronged by only one of them. Adjudication is not conducive to a developer chasing a multiplicity of parties in an attempt to achieve 100% recovery. If one of those parties is insolvent, it is unclear why the developer (who has suffered the loss) rather than the other parties (who have helped cause the loss) should pick up the tab.

For this reason the Law Commission and the DTI in the nineties opposed enshrining NCCs in a “proportionate liability” statute. In 2004 the government rejected the ACE’s campaign for such legislation – like Australia’s. It is not now, it seems, on the government’s agenda, even with the greater risk of contractors and insurers going insolvent.

The real issue is affordable insurance for consultants. net contribution clauses may reduce consultants’ premiums but, vis-à-vis developers, this may offer more conflict
than solutions

In this regard one should not read too much into the recent change to the law affecting auditors. From 6 April 2008 auditors were permitted to limit their liability to a fair and reasonable amount, so they may include NCCs in their appointments. However, this merely puts them in the position that construction consultants are already in.

Following the Langstane case, NCCs may still be struck down if the developer is not deemed so familiar with them or is a consumer, but the judgment makes this risk seem smaller. The real issue is affordable insurance for consultants. NCCs may reduce consultants’ premiums but, vis-à-vis developers, this may offer more conflict than solutions. NCCs will continue generally to be disputed in appointments and conceded in warranties. Rather than arguing about NCCs, project insurance may offer a way forward.

Original print headline - You ask me for a contribution