Net contribution clauses – Case study 1

Langstane Housing Association Limited -v- Riverside Construction (Aberdeen) Limited [2009]

Antony Oliver
20 September 2014

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The Langstane Housing Association case also serves as a useful example of how a net contribution clause would operate in practice.

The background to this case was as follows:

• Langstane Housing Association (Langstane) had purchased the upper floors of a fire damaged building in Aberdeen with the intention of renovating it and converting it for residential use. They subsequently appointed an architect and consulting engineer to advise on the renovation and a contractor (Riverside) to carry out the renovation works.
• During the course of the renovation works, the building suffered from a partial collapse and Langstane brought a claim for losses in excess of £3m against Riverside, the architect and the consulting engineers.
• Langstane’s claim against the consulting engineer was advanced on the basis that the firm of consulting engineers was liable on a joint and several basis for the full loss. The consulting engineers, on the other hand, argued that they had the benefit of a net contribution clause and could not, therefore, be held liable for the contribution made by Riverside and the architect to the loss.
• A preliminary hearing took place in the Scottish Court of Session focusing solely on the claim against the consulting engineers. The purpose of this was to resolve a dispute between Langstane and the consulting engineers concerning what contract terms governed the relationship between the two parties. 

The consulting engineers had been working for Langstane for over 6 years as part of an informal consultancy panel by the time they were appointed for this particular project in 2001.

As is often the case when a relationship between client and consultant covers many years and many projects, the consulting engineer’s appointment in 2001 was by way of a simple letter instructing the firm to carry out certain work for an agreed fee. No particular contract terms were specified in that letter, so the Court had to decide what contract terms were intended to apply given the manner in which the parties had previously contracted. 

The consulting engineers argued that the Association of Consulting Engineers (now the Association for Consultancy & Engineering) Conditions of Engagement B(1) applied (the ACE Conditions) and the Court found in favour on this point. The Court also found that those ACE Conditions of relevance to this case are those published by the ACE in 1998.

The 1998 ACE Conditions contain a net contribution clause and the next question put to the Court was whether this clause is subject to the Unfair Contract Terms Act 1977 (UCTA) and, if so, whether the inclusion of the clause breached the terms of the UCTA. In very brief terms, the UCTA prevents a party from limiting or excluding liability for negligence (breach of duty in Scotland) except where that contract term is fair and reasonable. If an exclusion or limitation of liability is not fair and reasonable, then it will have no effect. 

Outcome

The Court’s decision on this point is interesting. It found that the net contribution clause did not seek to exclude or restrict the engineers’ liability for a breach of duty; rather it sought to ensure that the consulting engineers were only liable for their own breach of duty and could not be held jointly and severally liable for the breaches of others. It follows that if the clause was not a restriction or limitation of liability, it could not be caught by the provisions of the UCTA, so the issue of whether it is fair and reasonable is immaterial.

Whilst the Court did not need to consider whether the net contribution clause was fair and reasonable within the terms of the UCTA, the Judge decided to pass comment on this anyway and concluded that the clause was indeed a fair and reasonable term in any event.

As a result, the net contribution clause was held by the Court to be enforceable and Langstane could only pursue the consulting engineers for their equitable contribution to the loss. when confronted by clients who have reservations about including net contribution clauses within their terms and conditions; rather than consultants talking about limiting their liability by way of net contribution, we can talk about agreeing to be wholly responsible for our own actions, but not willing to take on the risk of others failing to do their part. It is also worth bearing in mind that the client is the party best placed to manage the risk posed by the default of other parties involved in projects. It is after all the client who has control over the selection, instruction and the terms on which those parties are appointed.