Back to basics: net contribution clauses

Net contribution clauses are often a hot topic of debate when negotiating construction documents, particularly professional appointments.  What are they and why should employers be cautious of them?

What is a net contribution clause (NCC)?

A net contribution clause is a type of limitation of liability clause commonly requested by consultants and/or their insurers for inclusion in their appointment documents and collateral warranties.

The clause seeks to change the common law principle of joint and several liability.  Within a construction context, this usually states that, if there is a problem with the project resulting in a loss, and that loss was caused by more than one of the parties designing or constructing the project, the innocent party can claim against any of the parties at fault and each will be 100% liable for the damages, whatever their share of the blame.

So, for example, if a structural engineer and an architect are each liable for the same defective work, the developer can choose to recover 100% of the damages from either party.  That paying party would then need to seek to recover a share of those damages from the other guilty party through the Civil Liability (Contribution) Act 1978.

With a net contribution clause, each guilty party would only be responsible for paying their contribution of the loss.  For example, if the court found a structural engineer to be 60% liable for the loss and an architect to be 40% liable, the developer can only recover a maximum of 60% from the structural engineer and a maximum of 40% from the architect, so the developer would need to claim against both parties for their respective contributions.

Why do construction professionals ask for an NCC?

From the consultant’s perspective, there are obvious benefits in being able to secure a net contribution clause in their appointment documents and collateral warranties, namely:

• lowering their potential risk and financial liability for a project by knowing that they will only be responsible for their own actions;
• demonstrating better risk management to their insurers, which may help in securing more favourable terms on renewals; and
• removing the need to potentially bring proceedings under the Civil Liability (Contribution) Act against the other guilty parties and the expense and risk associated with that.

The clause can also be combined with other limitation of liability clauses, including overall caps on liability and evaporation clauses.

Why do employers need to be cautious around requests for an NCC?

From the employer’s perspective, agreeing to the insertion of a net contribution clause will be giving up an important protection that is usually available to an innocent party under the normal operation of English law.

The main risk is that one of the guilty parties becomes insolvent, stops its professional indemnity insurance cover or otherwise ceases trading before the claim can be resolved.  This is a particular risk in construction as latent defects can often only emerge several years after practical completion of a project.  In the example above, if the structural engineer was still able to meet a claim, but the architect had since become insolvent, the employer would only be able to recover 60% of its claim.  The principle of joint and several liability enshrined in English law is deliberately there to avoid an innocent party being harmed in this way.

Even if all the parties remain solvent, there are additional problems to consider with a request for a net contribution clause, including:

• Instead of being able to bring just one claim in relation to all its damage relating to a particular loss, the employer will potentially need to bring two or more claims against any party that is to blame, including the need to prove responsibility against all of them. This will make it a much more time-consuming and costly exercise.
• Generally, net contribution clauses are drafted so that the burden of proving a consultant’s degree of fault is placed on the employer. It is likely to be onerous to prove evidence of a particular level of fault. The drafting of some clauses can be ambiguous too, with their effect unknown.  For example, limiting the recovery of loss to that which is ‘just and equitable’ for the consultant to pay.
• A standard net contribution proposed by a consultant or its insurers assumes that the relevant consultants have entered into appointments on similar terms. In fact, each consultant has specific services with different responsibilities, so this assumption within the drafting can be a fallacy, giving uncertainty over how that drafting may be interpreted in court.

Summary

Requests for net contribution clauses will continue to be keenly negotiated in professional appointments and collateral warranties as consultants and their insurers look to practice risk management.  However, employers need to be cautious in accepting them as their inclusion can lead to important protections being given away.

If you would like further advice on net contribution clauses or any other construction matter, then please contact a member of our construction team.