A quick guide clarifying what a net contribution clause is, which summarises the effect of such a clause and the arguments for and against its use.
What is a net contribution clause?
A construction client can think of a net contribution clause as a limit on the professional consultant or contractor’s liability.
If there is a defect in a construction project that causes a loss, it is often more than one party’s fault. For example, the architect and the engineer may be jointly responsible for a design defect. Under the common law, the client suffering that loss can sue any one or all of the parties at fault for breaching their contract with the client. If the client is successful, each party at fault will be 100% liable for the client’s damages, whatever their share of the blame. (This joint and several liability does not allow the client to recover more than 100% of its damages overall.)
A net contribution clause is a contract term stating that, where more than one person is liable for the same loss or damage, the contracting party’s liability will be limited to the fair and reasonable (or just and equitable) amount that a court would apportion against it. An individual net contribution clause’s terms affect the detail of the apportionment. A more extensive net contribution clause is sometimes called a fair shares clause. It includes additional wide-ranging assumptions that may further reduce an apportionment.
What is the practical effect of a net contribution clause?
Without a net contribution clause, if an architect and an engineer are each liable to a construction client for the same loss, the client could recover up to 100% of its damages from the architect, despite the joint liability of the engineer. The architect could then seek to recover a share of those damages from the engineer under the Civil Liability (Contribution) Act 1978.
With a net contribution clause in the architect’s professional appointment, if the client claimed damages from the architect alone and a court found the architect only 60% liable, the client could recover only 60% of its damages. The client would have to claim the remaining 40% of its damages separately against the engineer. If the engineer was insolvent and unable to satisfy the client’s claim, the client could recover only 60% of its total damages. Faced with net contribution clauses in key documents, a client (or the beneficiary of a suite of collateral warranties or third party rights) must claim against all the responsible parties and take the litigation and insolvency risks associated with its claims.
When might I use a net contribution clause?
A net contribution clause is most common in a form of collateral warranty or schedule of third party rights provided by a professional consultant in favour of a purchaser or tenant for a commercial property development. Additionally, it may be used in any other collateral warranty or schedule of third party rights (including one provided by a contractor or sub-contractor) and in any professional appointment on a construction project. However, it is rare in a building contract or in any document used for an international, infrastructure or engineering project.
Professional indemnity insurers, construction industry professional bodies and lawyers advising professional consultants advocate using a net contribution clause as extensively as possible. A client may resist agreeing to a net contribution clause, in particular in a collateral warranty or schedule or third party rights in favour of a funder or in any professional appointment. It will want to minimise its risks and the limits of liability it agrees with professional consultants. However, using an appropriate net contribution clause in a collateral warranty or schedule of third party rights can help a professional consultant manage its liability and so keep its professional fees and insurance costs lower.
What are the main arguments for and against?
A professional consultant may argue that a net contribution clause:
- Is fair, whereas the common law position of 100% liability without 100% responsibility is unfair.
- Prevents the risk of one professional consultant’s insolvency transferring to another professional consultant (or its insurers).
A construction client may argue that a net contribution clause:
- Seeks to circumvent an established rule of common law.
- Transfers insolvency risk to the client, in circumstances where it cannot insure against that risk.
- Only ever limits the liability of a party who has already been found to be at fault.
- Is not acceptable to a funder providing development finance.
This quick guide was produced by PLC Construction
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