West & Anor v Ian Finlay & Associates appeal

Followers of case law will be familiar with the first decision concerning this case in 2013 where the defendant architect, Ian Finlay & Associates (“IFA”) was found liable in negligence that resulted in extensive damp and mechanical and electrical defects in Mr and Mrs West’s (“the Claimants”) home (See West & Anor v Ian Finlay & Associates) . IFA’s contract contained a net contribution clause which the judge found to be ineffective to limit its liability based on unfairness under the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”).

The 2014 case centres on IFA’s appeal of the effectiveness of the net contribution clause and is the first of its kind to examine such clauses in the Court of Appeal. It provides welcome clarity for contractors, consultants and their advisers whose contract terms might include such clauses, where previously their scope and effect were unclear.

The Claimants bought a £1.7m house in Putney and engaged IFA and a main contractor (“Armour”), as well as other directly appointed contractors, to undertake renovation of the house. IFA assisted in the selection of Armour and administering the building contract. The project proved disastrous with significant damp and mechanical and electrical problems resulting in extensive damp remedial works and the replacement of the mechanical and electrical works.

Armour became insolvent and so the Claimants pursued IFA claiming £800,000 for negligence for its lack of advice regarding damp and failure to notice and have rectified the defective mechanical and electrical works.

The defendant was found liable for design defects and a failure of its inspection duties as well as a failure to properly co-ordinate the works.

IFA contended its liability was limited as its terms of engagement contained a net contribution clause: “Our liability for loss or damage will be limited to the amount that it is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you.” The meaning and effect of the clause was not explained to the Claimants and neither was the clause negotiated between the parties.

The original Technology and Construction Court (TCC) judge found the clause unfair as it offended the UTCCR due to its ambiguity and determined that IFA was therefore liable for the whole of the Claimant’s loss. Due to the ineffectiveness of the net contribution clause to limit IFA’s liability, the principles of joint and several liability applied leaving IFA to shoulder Armour’s insolvency.

The Court of Appeal had to consider three issues arising from the appeal:

The construction of the net contribution clause.
The rate of interest awarded to the Claimants.
The correct amount for damages for distress and inconvenience awarded to the Claimants.

The validity of the net contribution clause was assessed against the following main factors:

The interpretation of the clause.
Whether the clause caused a significant imbalance to the rights and obligations of the parties contrary to the requirement of good faith.
Whether the clause was unfair under the UTCCR or unreasonable under the Unfair Contract Terms Act 1977.

The judges interpreted the net contribution clause against the circumstances of the case pertaining at the time of the contract and gave the clause its ordinary and natural meaning. They found the clause to be “crystal clear” in that the Claimants were appointing all other contractors and consultants, including the main contractor, Armour. The net contribution clause therefore clearly encompassed Armour and appeared to limit IFA’s liability.

In terms of the second factor above, the judges considered that the net contribution clause plainly caused an imbalance to the rights and obligations of the Claimants not least because it failed to highlight the risk that IFA’s liability would be limited ousting the joint and several liability principle and also that they would shoulder the insolvency risk. They felt it wise, as the RIBA guidelines provide, to draw such clauses and their effects to the specific attention of consumers. However, these risks alone were not considered in the circumstances to cause a significant imbalance to the rights of the parties contrary to the requirement of good faith. This is because the court felt the savvy Claimants to be in an equal bargaining position to IFA, that they were able if they had given the clause consideration to have negotiated it out, or to have sought other protection (for example, insurance against the insolvency risk or a performance bond from the contractor). They also determined that net contribution clauses are fairly common in commercial agreements and the particular clause was openly presented in fairly large print without IFA acting contrary to good faith principles as the 2013 Technology and Construction Court (TCC) judge also found. The evidence demonstrated Mr West’s awareness of the existence of the clause.

The Court of Appeal therefore found the net contribution clause to be valid, binding on the Claimants and effective to limit IFA’s liability to what it would be reasonable for it to pay taking account of Armour’s contractual liability.

The court remitted the case to the Technology and Construction Court for the apportionment of damages to be made under the clause.

This case illustrates the significance of ensuring the clear drafting of net contribution clauses and that they are specifically brought to the attention of consumer clients before the contract is concluded in order to be able to rely on them and ensure their enforceability. This coincides with RIBA’s guidance.

In commercial construction contracts, net contribution clauses do not feature commonly in terms of engagement but are more likely to appear in collateral warranties. They may, though, appear in the appointments for architects undertaking domestic work for consumer clients where they are engaged on standard RIBA terms. This decision may result in a reluctance to have such clauses included in commercial construction contracts but it is important to understand their significance in limiting liability to what is reasonable.