Net Contribution Clauses in Construction Contracts
What is a Net Contribution Clause?
A net contribution clause is one of the most controversial clauses which may be included in a consultant appointment and collateral warranties or schedules of third party rights. Essentially, it has the effect of reversing the common law position of joint and several liability and limits the defaulting party’s potential liability where more than one party is responsible for the loss.
For example, an architect and an engineer may both be responsible for a design defect on a construction project that results in a loss. Under the common law, the client can sue either one or both of the parties at fault for the loss it has suffered, due to the architect’s and engineer’s breach of their respective contracts with the client. In other words, the principle of joint and several liability generally allows the innocent party to recover up to 100% of its losses from any defaulting party that caused the loss, even if others are also partly to blame for that loss.
A net contribution clause deviates from the usual position at common law and seeks to limit the damages the defaulting party pays to a reasonable or a “just and equitable” proportion of the total losses. The just and equitable amount depends on the extent of liability of the defaulting party for the total losses. How this “proportion” is assessed in practice depends on the precise terms of the net contribution clause. If the particular clause refers to several parties, such as consultants and design sub-contractors and several parties have a liability, the proportion of the loss which the client can recover from any one party is further reduced.
What is the practical effect of a net contribution clause?
As stated above, without a net contribution clause, if two parties (such as an architect and an engineer) are each liable for the same loss, because they both contributed to the design, the client could recover up to 100% of its damages from one, despite the joint liability of the other. The party sued would then have to seek to recover a share of those damages from the other under the Civil Liability (Contribution) Act 1978.
With a net contribution clause in an appointment or warranty, if the client claimed damages from one party and a court found that party only 50% liable, the client could recover only 50% of its damages. The client would have to claim the remaining 50% of its damages separately against the other party. If the second party was insolvent and unable to satisfy the client’s claim, the client would recover only 50% of its total damages. Faced with net contribution clauses in construction documents, a client (or the beneficiary of a collateral warranty or third party rights) must claim against all the responsible parties and take the litigation and insolvency risks associated with its claims. In other words, a net contribution clause transfers risk to the innocent party.
A net contribution clause is only of assistance where there are two or more parties responsible for a loss. It will not assist if only one party is at fault and so is usually only relevant for design consultants.
What are the arguments for and against net contribution clauses?
As far as a client is concerned, a net contribution clause:
- Seeks to avoid the established common law principle of joint and several liability that only imposes liability on parties who are at fault and therefore is inappropriate.
- Transfers risk to the client, in circumstances where it cannot insure against that risk and may force it to commence actions against several parties in order to recover its full losses. In particular it exposes clients to insolvency risk.
- Is generally not acceptable to funders and other warranty beneficiaries who do not wish to have to pursue several parties in order to recover their losses.
As far as a consultant is concerned, a net contribution clause:
- Avoids a consultant, who is only partly to blame for a problem, becoming liable for 100% of the damages
- Prevents the risk of one consultant’s insolvency transferring to another consultant (or its insurers).
- Avoids a consultant having to commence proceedings and recovering damages from other parties that are also to blame for the client’s or beneficiary’s loss.
In practice, whilst many insurers will seek the inclusion of a net contribution clause on behalf of their insured consultant clients, most clients and their lawyers will reject the request in an appointment document. They may be more relaxed about including one in a warranty or a third party rights schedule, where they feel the beneficiary may be willing to accept it.
For further information on this topic, please contact Derryn Rolfe, or you an give us a call on 0345 070 6000.