Net Contribution clauses: TCC decision turned on its head by West v Ian Finlay turned on its head by Court of Appeal

Net Contribution clauses: TCC decision turned on its head by West v Ian Finlay turned on its head by Court of Appeal

Emily Monastiriotis and Jonathan Spencer of Bond Dickinson LLP discuss the application and construction of net contribution clauses (NCCs) following the recent Court of Appeal decision in West v Ian Finlay.

Original news

West v Ian Finlay & Associates (a firm) [2014] EWCA Civ 316, [2014] All ER (D) 281 (Mar)

The claimants had retained the defendant architect during a house renovation project. Following completion of the works, significant defects in them were discovered. Following remediation of the defects, the contractor became insolvent. The claimants subsequently issued proceedings against the architect and an issue arose as to whether the architect’s liability was limited by the net contribution clause in its appointment, excluding liability for losses for which the contractor was responsible. The judge found that the net contribution clause had not limited the architect’s liability in respect of losses caused by the contractor as it had been ambiguous and so the Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083 (UTCCR) required the court to give the clause the interpretation that was most favourable to the claimants. The Court of Appeal, Civil Division, allowed the architect’s appeal and held that the clause had been an effective limit on the architect’s liability. The clause had not been ambiguous in its meaning and nor had it been unfair for the purposes of UTCCR, reg 5(1).

What is a net contribution clause?

The general principle behind NCCs is to limit the liability of a consultant or contractor to an amount that would be considered by a court to be just and equitable for the consultant or contractor to pay, in the event of a claim, based on the consultant’s or contractor’s actual responsibility for the loss. Without an NCC, the normal legal position is that of joint and several liability—ie the employer can pursue just one party for 100% of its losses (for example the architect), regardless of the extent of the architect’s responsibility. The architect then has to go to the cost and expense of seeking to recover at least part of its monies from culpable third parties.

Has there been much judicial guidance on NCCs?

NCCs crop up frequently in terms of appointment, but there has not been much judicial guidance on the operation of NCCs, other than a Scottish case from 2009. However, in April 2013, the operation of a NCC was considered in London’s Technology and Construction Court (TCC), in the case of West v Ian Finlay [2013] EWHC 868 (TCC), [2013] All ER (D) 125 (Apr).

The key consideration in West was whether the NCC included reference to the main contractor, who seemed to be liable for many of the losses complained of and who subsequently became insolvent. The court decided that the NCC did not operate to limit the defendant architect’s liability. However, on 27 March 2014, the Court of Appeal overturned the first instance decision of the TCC and enforced the NCC in the defendant architect’s appointment to limit its losses by excluding those for which the main contractor was responsible.

What was the original decision’s analysis on the meaning of the NCC?

The court considered that there was, ‘at its lowest’, doubt about the true meaning of the NCC included in the architect’s terms of engagement, which stated:

‘Our liability for loss of damage will be limited to the amount that is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you.’

The court indicated that if there was any doubt, UTCCR should be considered. UTCCR, reg 7(2) provides that ‘if there is any doubt about the meaning of a written term the interpretation which is most favourable to the consumer shall prevail…’

Therefore, if there is any doubt as to the interpretation of a NCC, the consumer shall have the benefit of being provided with the most favourable interpretation of the NCC. However, it is important to note that UTCCR applies to consumers only, and not businesses. If the employer is a business, but the consultant contracted on its own standard terms, the Unfair Contract Terms Act 1977 (UCTA 1977) would apply. In which case the clause would have to be reasonable—on balance. In any event, if there is any ambiguity in a NCC, then it will be construed against the consultant.

The court made it clear that the NCC had to be construed in its context and particular consideration was given to the words ‘other consultants, contractors and specialists appointed by you’.

The court considered that the initial correspondence between the employer and the architect, at the outset of the project, suggested that the parties understood the words of the NCC to be directed to the consultants, contractors and specialists whom the employer were instructing themselves for the works (kitchen and conservatory) outside of the main contract with the building contractor.

The court did not have to consider the true interpretation of the NCC. However, Edwards-Stuart J commented:

‘…if I had to do so, I would hold that, in the context of the factual background to this agreement, the clause means what I consider the parties thought it meant, namely that it does not apply so as to limit IFA’s [the architect’s] liability to the Wests [the employer] in a situation where the other party is Armour [the main contractor]’

What was the Court of Appeal’s analysis on the meaning of the NCC?

The Court of Appeal has turned the judgment of the court of first instance on its head. The Court of Appeal highlighted that the key question in considering the original judge’s reasoning as to the construction of the NCC, is the context upon which the original judge and the employer placed such reliance. According to the Court of Appeal, the first consideration in any construction exercise is to consider the normal meaning of the words.

The Court of Appeal did not accept that there was any ambiguity in the meaning of the NCC and considered that the words were ‘crystal clear’. The NCC stated that the architect’s liability was to be limited to the amount that it was reasonable for it to pay having regard to ‘the contractual responsibilities of other consultants, contractors and specialists appointed by [the employer]’. The Court of Appeal considered that there was no limitation on the words ‘other consultants, contractors and specialists’ and therefore that they must be taken to mean any such persons including the main contractor.

The Court of Appeal stated:

‘In these circumstances, we also do not agree with the judge that the NCC is ambiguous. The NCC has a clear meaning and the relevant factual matrix does not lead us to the conclusion that the parties should be taken to have used the wrong language to express their agreement.’

Based on the Court of Appeal’s conclusion that the NCC had a ‘clear meaning’, the Court of Appeal said that it must go on to consider the questions of unfairness under UTCCR, reg 5 and reasonableness under UCTA 1977 raised by the employer.

Did the Court of Appeal decide the NCC was fair?

UTCCR, reg 5(1) states:

‘A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’.

Having considered the leading case Director General of Fair Trading v First National Bank plc [2001] UKHL 52, [2002] 1 All ER 97 and other authorities, the Court of Appeal reached the view that the NCC caused an imbalance between the parties but it did not consider that, viewed in isolation, that imbalance was significant for the following reasons:

  1. the employer were in an equal bargaining position with the architect, and they could have re-negotiated the NCC, gone to another architect or even possibly protected themselves from the risk posed by the NCC by some other commercial route (insurance or a performance bond)
  2. the employer ‘undoubtedly ought reasonably to have known of the existence of the NCC, placed prominently as it was on the third page of the Agreement’, and
  3. there was no particular conditions or restrictions attaching to the NCC, ie a time limit or similar

The Court of Appeal concluded that the NCC satisfied the requirement of reasonableness, within the meaning of UCTA 1977. It was therefore decided that, in all the circumstances, the NCC was an effective limitation of the architect’s liability.

Did the Court of Appeal provide any guidance on the application of the NCC?

The Court of Appeal decided that the amount that it would be reasonable for the architect to pay should be approached in the same way as an evaluation of contribution under the Civil Liability (Contribution) Act 1978, s 2(1) (CLIA 1978). CLIA 1978, s 2(1) provides that in proceedings for contribution between persons liable for the same damage, the amount recoverable shall be ‘such as may be found by the court to be just and equitable having regard to that person’s responsibility for the damage in question’.

The Court of Appeal decided that the original judge should have gone on to consider the amount that it was reasonable in all the circumstances for the architect to pay having regard to the contractual responsibilities of the main contractor. Therefore, the case has been remitted to the original judge sitting in the TCC to carry out an evaluation of the proper apportionment of liability as between the architect and the main contractor that would have been made under CLIA 1978.

What is the practical impact of the Court of Appeal’s decision?

NCCs are now increasingly popular for professional indemnity insurers and consultants looking to limit their potential liability and, therefore, this decision will be good news for them. However, although the Court of Appeal enforced the operation of the NCC, consultants still need to ensure that the wording of NCCs is clear and easy to understand. Further, while the Court of Appeal has provided clarity on the operation of NCCs—whether or not the NCC will work (or whether it is deemed unfair or unreasonable) will depend on the facts of the case. At least, for now, NCCs are back in fashion.

Interviewed by Sarah Harvie. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

This article was first published in LexisPSL Construction on 1 April 2014. Click here for a free one week trial of Lexis®PSL Construction.

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About the author:

Sarah specialises in non-contentious construction law. She has extensive experience advising contractors, public- and private-sector employers, consultants, developers and banks on construction projects and in relation to construction contracts and their associated documents. Sarah also has experience advising project companies and construction contractors on PFI projects in various sectors. She qualified at CMS Cameron McKenna before joining Trowers & Hamlins. She subsequently spent nearly five years in the construction & engineering team at Pinsent Masons. For three years prior to joining LexisNexis, Sarah was Commercial Legal Adviser at Wates Group Limited, a major contractor, where she provided legal advice to the business units in relation to pre- and post-contractual commercial activities.