Net contributions and limits of liability

Chapter 5: Net contribution and limitations of liability

The aim of a net contribution clause is to see that a consultant is only liable for its fair share of a loss and is not exposed to the contribution other parties have made to that same loss. It seeks to modify the law on ‘joint and several’ liability, which would otherwise automatically apply in situations where the same loss has been caused by multiple parties.

The law of joint and several liability is best explained by way of an example. Suppose that a loss of £100,000 was incurred by a developer and it was found that the architect was 30% responsible for the loss and the contractor 70% responsible. In such circumstances, joint and several liability would allow the developer to pursue either the architect or the contractor for the full amount of his loss. He could, therefore, recover the full £100,000 loss from the architect, who would then be left to recover the contractor’s 70% contribution. Clearly, if the architect is unable to enforce a contribution claim against the contractor for some reason (e.g. because the contractor has ceased trading), he or his insurers would be left significantly out of pocket. 

Whilst net contribution clauses have only recently been tested in the Courts of England and Wales, one such clause was considered in the Scottish case of Langstane Housing Association v. Riverside Construction and was felt by the Courts to be a perfectly valid contractual provision. Although this decision does not create a precedent applicable in England and Wales, it is likely to be considered persuasive  in relation to similar cases.

Net contribution clauses – Case study 1

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

How net contribution clauses can assist in managing claimants’ expectations

The fact that net contribution clauses have rarely been tested by the Courts (the Langstane case is the only UK Court case to date), despite the fact that they are relatively common and appear in many standard forms of appointment and collateral warranty, suggests that they are generally accepted and understood in the industry. Our experience of dealing with out-of-court settlements reflects this. Net contribution clauses are rarely challenged by claimants and, during the early stages of a claim, they can prove very helpful in managing a claimant’s expectations of what an individual consultant is liable for. 

Net contribution clauses – Case study 2

This  next claim example illustrates the benefits of this in practice. The claim related to a small new build residential development and highlights what can happen when net contribution clauses are included within appointment documents

Dealing with net contribution clauses in contract

A complaint often made by clients when net contribution clauses are proposed by consultants is that they shift the risk of insolvency of another member of the project team to the client. The problem with this argument is that it presupposes that the professional team is somehow better placed to manage the solvency risks of the remainder of the team. In reality, the client is in a far better position to do so. The client has control over whom it appoints and can ensure that it appoints organisations of repute, carrying adequate balance sheets and adequate levels of insurance. 

Some key points to consider when negotiating a net contribution provision with your client are as follows:

• It is the client who chooses the contractor and the rest of the professional team. Why should the consultant bear the risk of the poor workmanship by the contractor if, for instance, the client selects his contractor on a lowest cost basis? 
• It is the client who determines on what terms the team is to be engaged. You have no control over whether the rest of the project team are appointed on equal terms to yourself. Why should you bear the risk of the client not being able to recover a proportion of loss from another team member solely because he has accepted a lower cap on liability from that party than the cap applying in your own appointment?
• It is the client who can insist on appropriate insurances. 
• The clauses are used widely in the industry and appear in many standard industry appointments and collateral warranties. 

Limitation of liability

Limiting liability in contract, by way of a financial cap or other means, is becoming increasingly important, especially as we face rising claims costs associated with more complex construction disputes. 

Although liability cannot be excluded or restricted in relation to damages for death or personal injury, parties to a contract can agree to limit any other liability that they may incur to each other, e.g. for breach of contract or negligence. Inserting a financial cap, thereby defining the maximum amount you will be liable for, is still the most commonly accepted form of limitation of liability clause.  

It is important to remember that agreeing to maintain a certain level of professional indemnity cover in your contract will not serve to limit your liability in any way. To achieve protection, a specific clause dealing with limiting your liability needs to be inserted.

Simple benefits of a financial cap on liability

Limitations of liability case study no.1

A consultant was appointed by a developer to undertake various environmental surveys in respect of the redevelopment of former brickworks into housing.

Limitations of liability Case Study no.2

This claim arose in relation to a project for the redevelopment of a brownfield site for use as a waste processing facility.

Other limitation clauses 

Limitations of liability Case Study no.3

It is not only defined caps on liability which provide protection. Exclusions with regards to particular types of losses can also be a valuable risk management tool 

Conclusion

It is becoming more common to see the inclusion of financial cap clauses in appointments agreements and collateral warranties and such clauses can pay dividends in the event that a professional negligence claim ever arises. 

Any proposed cap must be drawn to the attention of the other party to the contract and a figure discussed and negotiated with them and this process recorded. By doing so, it is much more difficult for the other party to successfully challenge the cap in court. Also, it is important to bear in mind that any limitation of liability will have to satisfy the test of “reasonableness” under the Unfair Contract Terms Act 1977. 

What is reasonable depends on the circumstances of each case.

The type of cap under a contract should be considered. It may be an each and every claim basis, so that each claim could be to the full value of the limit. Alternatively, it might be drafted so that it applies on an aggregated basis. An aggregate cap, limiting your total liability under that agreement would be our recommendation, as it provides the greatest protection.

Each project has to be looked at on its merits and a number of factors should be considered, including:

• the nature and extent of the risks of the project, having regard to its size, complexity etc;
• an assessment of the damages that would be payable in the event of a claim in negligence (e.g. the cost of repeating the work/construction costs);
• the resources that the consultant could be expected to have available to meet any liability;
• any previous dealings between the parties;
• the amount and cover available to the consultant under his PI policy.

Great care needs to be taken in drafting clauses capping liability. In the event of a dispute any limitation of liability will be construed against the person who drafted it? Legal advice should therefore be sought on the wording of the clause itself. We recommend the use of industry standard wordings such as those from the ACE or RIBA Conditions.

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Introduction
Understanding contractual terms
Indemnity clauses
Strict liabilities
Certification
Net contributions and limits of liability
Novation
Closing remarks