Net contribution clauses – Case study 2

The claim related to a small new build residential development and highlights what can happen when net contribution clauses are included within appointment documents.

Antony Oliver
20 September 2014

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The developer had engaged a consulting engineer to undertake civil, structural, mechanical and electrical services under the standard Association for Consultancy & Engineering (ACE) appointment and an architect was engaged under the standard Royal Institution of British Architects (RIBA) appointment.

In total, the amounts claimed came to over £2M, roughly half of which related to the remedial costs incurred by the home warranty provider and the remainder to the property owners’ consequential losses.

Both ACE and RIBA appointments contained net contribution clauses. A contractor was appointed separately and the developer also contracted with a warranty provider to provide home warranties for each of the houses on the development. 

Some years after completion of the development, numerous defects were discovered, most of which related to inadequacies with the first floor joists and supports and the lack of appropriate lateral restraint straps and strutting as required by the Building Regulations.

The property owners brought a claim against the developer and in addition the home warranties were called on. Having paid for the cost of remedial works, the home warranty provider then sought to recover those costs from the developer. The developer in turn sought to pass on the warranty provider’s and property owners’ claims to the contractor and the professional team.

In total, the amounts claimed came to over £2M, roughly half of which related to the remedial costs incurred by the home warranty provider and the remainder to the property owners’ consequential losses. 

It seemed fairly clear that the main cause of the defects was poor workmanship by the contractor. The developer’s case against the architect and consulting engineer was based on an allegation that they had failed to note the defects during site inspection visits and that this failure amounted to negligence. 

The contractor then entered liquidation, leaving the architect and consulting engineer as the only possible targets for the developer’s claim. One point of note here is that, although the exact relationship was murky, it appears that there was a degree of common ownership between the developer and contractor and the more cynical amongst us might conclude that the contractor’s liquidation suited the developer’s aims quite well. Ordinarily, joint and several liability would have allowed the developer to seek recovery of his entire loss from the architect and/or consulting engineer.

However, the consulting engineer and architect sought to argue that a large number of defects were workmanship related and properly attributable to the contractor. Given that both parties had the benefit of a net contribution clause in their appointments, they argued that they could not be held liable for the contractor’s contribution to the loss, but only for that part of the loss properly attributable to their negligence. 

Outcome

The claim went to mediation and the developer accepted that, should the case reach the Courts, the net contribution clauses would likely be enforced to prevent him from recovering the full loss from the two consultants. A settlement was agreed whereby the consultants paid a contribution of 20% to the total loss.

There is little doubt in this case that had the architect and consulting engineer not benefitted from net contribution clauses in their appointments, the developer would have pushed for a much bigger settlement and it is our considered view that the existence of the clauses saved the two consultants well over £1M.

It is also likely that the case would have been more difficult to settle out of court which would have resulted in a far higher defence costs bill.