Last edited 22 Sep 2020

Net contribution clauses on construction projects

In construction it is not unusual for more than one party to be responsible for a breach of contract. For example, there may be a design fault, a failure to inspect, and poor workmanship, all contributing to a defect in the works. Under common law (the Civil Liability (Contribution) Act 1978) all parties can be jointly and severally liable for the loss or damage that flows from the breach.

This means that the client can pursue the parties either jointly, or individually (severally) for the full amount of the loss. If the client decides to pursue one of the parties for the full amount, then that party may in turn pursue the other parties that contributed to the breach to recover their share of the amount claimed.

In practice, the claimant may decide to pursue the parties jointly, and allow the court to apportion liability between them (NB this is not a matter of proportionate liability, which does not exist in English Law, but is simply the apportionment of the full liability in contribution proceedings). However, 'several' liability can be of benefit to the client, if for example, the contractor becomes insolvent, allowing them to recover all of their losses from the remaining parties.

This can leave consultants and contractors open to very large claims, making them jointly and severally liable with parties that they did not themselves appoint, and whose performance they have little influence over.

The Latham report proposed that joint and several liability should be replaced by 'proportionate liability'. However, this was rejected by the secretary of state for trade and industry Peter Mandelson. His position was endorsed by the British Property Federation (a body that represents the interests of construction clients).

The amount that can be recovered from one party can be limited by a net contribution clause. This restricts liability to the amount for which the party being pursued is responsible. Other amounts must be recovered from the other parties. Net contribution clauses assume that parties responsible for the same loss or damage are all contractually liable to the other party to the contract, and that they have paid the share that they would have been apportioned under common law.

Without a net contribution clause, a designer and a builder are each liable to the client for the defective works. In this case, the client can recover all of its loss from the designer despite the joint liability of the builder. The designer must then seek to recover a portion of those damages from the builder under the Civil Liability (Contribution) Act 1978.

The effect of a Net Contribution clause is that if the court found the designer 70% liable and the builder 30% liable, the client can recover only 70% of its damages from the designer. The client must also then seek recourse by a further claim against the builder to recover the remaining 30% of its loss.

With a Net Contribution clause, if the builder becomes insolvent when the client brings its claim against the designer who is 70% liable, the client may in practice recover only 70% of its total loss. if there were no Net Contribution clause, the architect could be liable for 100% of the damages under the Civil Liability (Contribution) Act 1978.

Insurers often stipulate that professional consultants include a Net Contribution clause where Collateral Warranties are used.

Clients tend to resist net contribution clauses as they transfer the risk of not being able to recover losses onto the client. Whilst this is fair in that the client did appoint all the parties, the client themselves are completely innocent of the breach.

Net contribution clauses have become increasing popular in appointment agreements and collateral warranties. Questions remain however about whether they are always enforceable, for example where one of the parties to whom liability is apportioned is not present in court. However, in 2009, in the Scottish case of Langstane Housing Association v Riverside Construction (Aberdeen) Ltd, the court seemed to accept that this sort of clause was not unusual and that the client could, if they wanted, insure themselves against unrecoverable losses.

In the case of West & Anor v Ian Finlay & Associates, the judge considered the Unfair Terms in Consumer Contracts Regulations 1999 (which protects consumers against unfair standard terms in contracts with businesses and states that any ambiguity should be interpreted in favour of the consumer), deciding that the net contribution clause was ambiguous and interpreting it in context concluded that it did not encompass the main contractor, only the other contractors and specialists appointed directly by the claimants. However, this decision was overturned on appeal in 2014 as the Court of Appeal found that the clause was clear and that the Claimant could have negotiated its terms or made other provisions if they had wished. See West & Anor v Ian Finlay & Associates appeal for more information.

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