A Net Contribution clause is a common feature in standard forms of appointment used in the UK construction and engineering industry. Employers often don’t understand this clause and request that it is removed, whereas, Consultants/Contractors (and their professional indemnity insurers) want this clause to be included in most appointments. Below, we look at why.
When construction goes wrong, it is not unusual for more than one party to be liable for a breach of contract. For example, an architect and engineer might be jointly responsible for a design defect on a project. At common law, the client suffering the loss will sue one or all of the parties at fault. If the client is successful, each party will be 100% liable for damage, whatever their share of the blame. (This liability will be joint and several). The client could then seek to recover 100% of the loss from the architect (despite joint liability from the engineer), who in turn would seek to recover a share of the damages from the engineer, under the Civil Liability (Contribution) Act 1978.
If an appointment incorporates a net contribution clause, it means that where more than one person is liable for the same loss or damage, the contracting parties liability will be limited to a just and equitable amount that a court would apportion to it. If the court found the architect 70% liable, the client could only recover 70% of damages from the architect. The client would have to go after the engineer for the other 30%. If the architect was then found to be insolvent, the client would only be able to recover 30% of its damages.
Net contribution clauses are mostly common in collateral warranties or third party rights provided by a professional consultant in favour of a purchaser/tenant but they can be used in any professional appointment on a construction project. Below is a list of some of the key arguments for and against the use of these clauses:
For net contribution clauses
A professional consultant/contractor may argue that a net contribution clause:
- prevents the risk of one consultant/contractor’s insolvency issues transferring to another consultant/contractor or their insurers;
- imposes a limitation on its liability;
- is fair, whereas the Civil Liability (Contribution) Act 1978 position of 100% liability without 100% responsibility is unfair.
Against net contribution clauses
A client/employer may argue that a net contribution clause:
- goes against the established Civil Liability (Contribution) Act 1978;
- only ever limits the liability of a party who has already been found to be at fault
- means the client/employer might not be able to recover all damages if insolvency arises
Ultimately, whether or not a net contribution clause is included is a matter of negotiation. The consultant/contractor will argue that it should be included on the basis it should not have to insure against the risk of another’s insolvency and the client will argue that as long as the consultant/contractor is not negligent, it will not incur any liability at all. The conclusion of negotiations is likely to turn on a more holistic view – i.e., taking into account other commercial factors. Our advice is simply that it is unwise to have a “must include” or a “must not include” attitude – each project is different and sometimes the matter merits the clause, other times it does not.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.