Over Taylor Biggs

The validity and effect of such clauses has not been tested by the English Courts but a recent case in Scotland has considered them in light of the Unfair Contract Terms Act 1977 and has rekindled the debate.

Net contribution clauses first came into fashion some 20 years ago.  They are controversial but have been included in most of the professional bodies' Terms of Appointment.  They have also appeared in Warranties given to third parties.  Warranties proposed by the Construction Industry Council, the Joint Contracts Tribunal and the British Property Federation include net contribution clauses.  Disagreements tend to arise when net contribution clauses are included in Appointments of Contractors and Consultants.

A net contribution clause operates, for example, where a Contractor and Engineer are responsible for refurbishment works owing to defective workmanship and negligent design.  It is important to note that the Engineer is in some way liable.  Joint and several liability for the client's loss applies.  If the Contractor is, say, liable for 75% of the cost, the Engineer is liable regardless for the full 100% if the Contractor is insolvent.  The Engineer might be entitled to a claim against the Contractor for the 75% contribution but insolvency renders that worthless.  This means the Engineer is liable for the full 100% of liability even though only 25% responsible.

A net contribution clause limits the Engineer's liability for its just and equitable proportion, on the assumption that all others who are responsible have paid their just and equitable share.  If a net contribution clause had been included in the Appointment in the circumstances mentioned above, the Engineer would simply meet its 25% responsibility and the claimant (normally the Developer) would have to pay the rest.

The recent Scottish case concerned which version of an Engineer's conditions of engagement applied - either the 1988 or 1998 version.  The letter of Appointment simply referred to the "current terms". The Developer claimed that a net contribution clause included in the 1998 terms under the Appointment was unenforceable under the Unfair Contract Terms Act 1977, as it was unreasonable.  As it happened, the Court decided the clause did not exclude or restrict the Engineer's liability.  The 1997 Act did not apply and the Appointment therefore included a valid net contribution clause. 

The Court found that the parties had operated under the Association of Consulting Engineers' (ACE) form for the last 20 years and said the Developer would have known that the ACE updated its terms to include a net contribution clause from 1993 onwards (which demands a sophistication that has raised a few eyebrows).  The 1998 version included a net contribution clause.  The Engineer was under no obligation to point out that the later version included such a clause. 

The Court felt the Developer could protect itself against the risk of insolvency by contracting with financially sound and insured Consultants.  However, clearly, there is no guarantee of future solvency.  If a Consultant or Contractor is insolvent, the Developer is left to suffer the risk rather than the other parties who contributed to the loss.

Following the Scottish decision, it seems that a net contribution clause may be struck down if the Developer is unfamiliar with the provision or is a consumer but this is likely to have narrow practical effect.  The inclusion of a net contribution clause may well reduce a Consultant's or Contractor's insurance premiums but, clearly, provides greater headaches for Developers.

Several commentators argue that the Scottish decision is incorrect, given that the judgment indicated the purpose of a net contribution clause was to prevent Consultants being held liable for breaches of obligations by others.  They argue that net contribution clauses give Consultants partial protection against the full consequences of their own breach of duty.  If the Consultant is not in breach, he will not be liable at all.  Some suggest the finding merely compounds the misconceived view put forward by Consultants and insurers that without a net contribution clause, the Consultant may end up, however innocently, with the full 100% liability. 

It is therefore felt the judgment is not to be taken as the Court's approval of net contribution clauses from a commercial viewpoint, although some may argue that it does.  Developers need not accept a net contribution clause, as they are not necessarily fair or represent a commercially acceptable balance of risk between Developer and Consultant.  Instead, a net contribution clause could be regarded as a means of bypassing the common law position of joint liability.  No doubt, the debate has yet to run its full course.