Get a net contribution clause if you can – they can be worth their weight in gold
A defect in a construction project can often be the result of breaches of contract by a number of different parties. In those circumstances, it is usually open to the client to recover all of its losses from one party even though more than one party has caused them.
For example, if the defect is the result of poor workmanship by the contractor and a failure of the architect to notice it during an inspection, the client is entitled to recover all its losses from the architect.
To limit its liability, the architect can claim a contribution from the contractor to the sum it is ordered to pay to the client under the Civil Liability (Contribution) Act 1978. This would result in the court ordering the contractor to pay a contribution which it considered ‘just and equitable’, taking into account the extent of the contractor’s responsibility for the client’s losses. A substantial contribution would usually be appropriate where the contractor carried out defective work and the architect’s only breach of contract has been a failure to notice it.
The ability to make a claim for a contribution from the contractor is no help if it is not in a financial position to pay it
However, the ability to make a claim for a contribution from the contractor is no help if it is not in a financial position to pay it. The architect is then left having to compensate the client much more than might be considered a fair reflection of the extent to which the architect is responsible for the client’s losses. This can lead to substantial increases in architects’ insurance premiums.
To avoid these problems, architects often try to include a net contribution clause in their appointments. This seeks to limit the architect’s liability to the client to the amount that it would be fair and reasonable for the architect to pay taking into account the extent of its responsibility and the responsibility of other parties for the client’s losses. However, it has been unclear whether or not such clauses are enforceable.
Is it fair?
In the case of West & Another v Ian Finlay & Associates, it was argued that a net contribution clause in an architect’s appointment was unenforceable because it was unfair under the terms of both the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999.
The Court of Appeal decided the clause was not unfair under the terms of the Act, first because it was prominently located in the appointment and so the client ought reasonably to have known about it, and secondly because the parties were in a relatively equal bargaining position, so the client could have sought to renegotiate the clause or appoint another architect.
The Court dismissed the argument that the clause was unfair because it did not cause a significant imbalance between the parties’ rights under the appointment, contrary to the requirement of good faith.
As a result the Court enforced the net contribution clause. However, it indicated that, before entering into the appointment, the architect should make it clear to the client that the clause would leave the client rather than the architect exposed to irrecoverable losses if a contractor or consultant who is jointly responsible with the architect for losses to the client becomes insolvent.
Many clients are not prepared to accept net contribution clauses in appointments, but architects should seek to include them if possible. To limit the chances of the court refusing to enforce a net contribution clause, the architect should write to the client before entering into an appointment, specifically drawing its attention to the clause and briefly explaining its potential impact.
Douglas Wass is with Macfarlanes LLP
A quasi-contract is a concept invented by the courts to enable them to order one party to pay for work carried out by another in circumstances where they have not reached agreement as to the terms of a contract governing their relationship. For example, construction work is often carried out by a contractor at the request of a client while the parties are still negotiating the terms of the building contract which it is intended will apply to the work. If the parties are unable to agree the terms of the building contract, the contractor may be left with no formal contract on which to base a claim against the client for payment for work it has carried out. To avoid an unjust situation where the client can take the benefit of the work without having to pay for it, the courts can decide that the conduct of the parties gave rise to a quasi-contract, pursuant to which the contractor is entitled to be paid a reasonable sum for work it carried out at the client’s request.