Two weeks ago, Melinda Parisotti presented a plan to end the struggle between consultants and clients over net contribution clauses. This led to a sharp difference of legal opinion. Now read on …

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From Building

>> Hi everyone, can we recap on Melinda’s controversial proposal to scrap net contribution in collateral warranties by using third-party rights in consultants appointments. Melinda, why did you make this suggestion?

Melinda Parisotti >> It’s a simpler and less painful way of ensuring that consultants and contractors can claim from jointly liable parties, provided those other parties remain solvent. And there is no precondition that the client extract warranties from others in the distant future – something over which they have no real control.

Building >> How is it set up?

Melinda Parisotti >> Briefly, the client agrees with each consultant and contractor individually that it will only appoint consultants and contractors who, in their own contracts with the client, will grant third-party rights under the Contracts (Rights of Third Parties) Act to purchasers, tenants and financiers. This should result in a right of contribution between the jointly liable parties by virtue of the Civil Liability (Contribution) Act.

Building >> Rachel, what problems can you foresee?

Rachel Barnes >> Melinda seems to have forgotten why net contribution clauses came to be included in collateral warranties in the first place. This was about 20 years ago when the early forms of British Property Federation collateral warranties incorporated net contribution clauses. At that time there was a severe recession and developers, contractors and subcontractors were going bankrupt.

Melinda suggests that the insolvency risk can be dealt with in another way. But how? The risk has to fall on one side or the other. Just because we have not had a recession for some time does not mean there won’t be another. It also does not mean that companies are not becoming insolvent now. We have five or six cases in the office where contractors are insolvent.

Melinda >> I make no pretence that, if the consultant or contractor does not feel able to risk the insolvency of a jointly liable party and can pass it to purchasers, tenants and financiers instead, this option is not for him. But looking at it from the sharp end, there is a much greater risk that other culpable parties will not have granted warranties to the claimants, rather than that they are insolvent.

Ann Minogue >> As the DTI said when it looked at joint and several liability, why should the one innocent party – namely the client, purchaser or tenant – bear the loss on the insolvency of a jointly liable party? It is this aspect of net contribution clauses that meets resistance. Melinda’s proposal is a compromise that is likely to find wide acceptance.

Melinda suggests that the insolvency risk can be dealt with in another way. But how? The risk has to fall on one side or the other

Melinda >> Most consultants and contractors do not ask or expect their lawyers to eliminate all risk. They just want something they feel they can live with when balanced against the value of the job. The insolvency of others is a practical risk that consultants and contractors understand all too well. It is not a complex legal question.

Ann >> Again, I absolutely agree with Melinda. Too often lawyers interfere in commercial issues upon which they are not qualified to advise. Also, of course, consultants do for the most part know the identity of the other consultants with whom they will be working. They have just as much information about their financial position as does the client. They are usually involved in the choice of the contractor. And at the end of the day it is the consultant who controls whether or not they are negligent. This is a risk that the client cannot manage or even assess.

Rachel >> Net contribution clauses have been widely accepted right across the industry for the past 20 years as a sensible commercial concession in return for warranties being given. They can also be found in some contracts of engagement. To suggest that they are generally so unpopular as to be deal-breakers is nonsense. They were included in the CIC forms of warranty and have even been included in third-party rights attached to the recent BPF consultancy agreement, hardly a consultant-friendly document. Most people also seem to find them reasonably easy to understand.

Ann >> I am not convinced that the CIC forms of warranty can be said to have much support among clients. Quite the reverse.

Rachel >> Warranties may be replaced by third-party rights, but the difference is cosmetic. Abandoning the net contribution clause is to transfer the insolvency risk back to the warranty (or third-party rights) giver.

Melinda >> Remember, I’m on the consultants’ side. I just don’t believe in making it any harder for them to get work than it has to be. You say net contribution is not a deal-breaker. I think some consultants and contractors might have something to say about that when they have their jobs held over their heads on the issue. If it’s not the principle as a whole that is disputed (a big “if”), then you can bet there will be an argument about its precise terms. But if net contribution is readily accepted – no problem and no issue! Consultants and contractors should grab it with both hands because, it is more advantageous to them. What I am talking about is a realistic compromise where net contribution cannot be achieved.

Ann >> It does seem to me that lawyers on whichever side of the fence should look for opportunities to make transactions simpler and to encourage standardisation of documentation. They should not provoke conflict by adopting extreme positions. Melinda’s suggestion is a brave and sensible compromise.

Rachel >> Melinda also questions why consultants’ licences are subject to fees. This is because a developer could go bust and the funder decide to take over and complete the development. They often found it was cheaper to employ new consultants to finish the project than to pay the outstanding fees of the consultants. The funder could do this if the licence to use the consultant’s documents in his collateral warranty with that consultant permitted this. Again, this was not thought to be fair and therefore the licence to use the consultants’ documents was made contingent on his fees being paid.

Melinda >> The licence to use documents can and should still be subject to the payment of fees. Third-party rights can be made conditional in this way.

Ann >> As you both well know, this is a major concern to some funds/banks who simply will not accept this qualification. If a developer goes bust, the fund may have already advanced the money to the developer to pay the fees and it is being asked to pay twice in order to secure a copyright licence. Rachel must understand the concern of funders in these circumstances. This has nothing to do with net contribution clauses.

Most consultants do not ask their lawyers to eliminate all risk. They just want something they can live with when balanced against the value of the job

Rachel >> Another advantage of a net contribution clause is that the provider of the warranty does not have to make a claim for contribution against the other wrongdoer at all. This gets round the legal difficulties that may, in some cases, prohibit such a claim, but does not, of course, relieve the provider of the burden of having to prove that the other party is liable and what the (notional) contribution from that party should be. Melinda’s proposal does not allow for this.

Melinda >> Contractors and consultants would, indeed, actively have to claim a contribution from jointly culpable third parties, but that is the way it goes in every other industry. As for any “legal difficulty” that might prohibit recovery from others, you can generally assume that if one exists, it’s because the law considers there is a fair and valid reason why you should not recover – so you live with it. Why should consultants, contractors or their insurers try to wriggle out of that?

Ann >> Again, I agree with Melinda. Nobody would pretend that net contribution clauses are watertight in their legal effect.

Rachel >> The essence of Melinda’s proposal is that the client will be contractually committed to requiring each member of the team, in its contract with the client, to acknowledge the same third-party rights. I do not think it can be assumed that clients will agree to that. In my experience they dislike having their hands tied in their negotiations with other parties.

Melinda >> The client’s hands are not tied. If they prefer net contributions, all the better. But there are clear benefits for it in going down this route in terms of more commercially acceptable documentation to offer to his purchasers, tenants and financiers.

Rachel >> What about the people who do not contract with the client at all – for example, subcontractors, subconsultants, suppliers and others further down the chain? These people may also be responsible for damage, but will not have third-party rights. Melinda’s proposal would leave these other parties out of the net.

Melinda >> The parties that you list would either be the responsibility of the main consultants or main contractor anyway, or they are not usually listed in current net contribution clauses in any event and so would already be outside the net.

Ann >> Clients are happy to give commitments in relation to things that are within their control, and procuring collateral warranties or third-party rights from key consultants and the contractor is within the client’s control. But surely Rachel is not trying to encourage us to require that every subcontractor, subconsultant and supplier also gives collateral warranties/third party rights? We’ll all drown in paper.

Building >> Okay, thanks everybody, I think that’ll be all we have space for. I wonder what the readers will make of what you’ve said …