12 December 2014

Don’t fall into the net…Contribution Clause


If you are appointing an architect or any other consultant to undertake services, and… (also happen to be a banker (or are just savvy),) you will need to watch out for a Net Contribution Clause (NCC) in the consultant’s appointment. If you sign up to an unamended ‘industry standard’ consultant appointment as the consultant will call it, beware, it is very likely to have an NCC, and this will affect what you can recover from that consultant in the event of a breach. A new case has just confirmed this.

A client enters into a contract with an architect for carrying out works in their property worth £1.7 million (new stairwell, woodwork, conservatory etc). The client makes various appointments and appoints the architect using a RIBA contract form with some amendments. The architect and the client have a friendly relationship, and the architect also assists the client in appointing a contractor. This situation is a familiar one for residential projects, and came under scrutiny in the case of Stephen West, Carol West v Ian Finlay & Associates (IFA) [2014] EWCA Civ 316.

IFA’s appointment included a Net Contribution Clause (NCC). This meant that IFA’s liability for loss or damage suffered by the Wests 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 also appointed for the project.

The property had serious damp issues and the Wests had to move out. Soon after the remedial works, the contractor (Armour) went into administration. The first instance judge ruled against IFA and found that it had breached its professional duties in respect of the damp although to some extent the breach was also due to Armour. IFA appealed successfully to the Court of Appeal relying on the NCC to limit its liability.

When does a NCC become important? Due to the operation of the NCC, IFA pays only what is just and equitable having regard to that person’s responsibility for the damage in question. The commercial effect of the NCC is that it requires the Wests to take the insolvency risk of the contractor and any others being unable to pay their contribution, so reducing the likelihood that the Wests can recover the whole of their losses. The Court of Appeal thought this was reasonable.

Why does it matter how the NCC is drafted? The NCC limited IFA’s liability very significantly because it referred to anyone, anytime, appointed by the Wests. Its contract administration function was relevant, as was background correspondence and other information, but not as important as contractual construction. NCCs should be removed from standard form appointments where possible, or the named ‘contributors’ in the clause reduced (to maximise the client’s ability to recover its losses under the particular appointment).

Can a client claim that the consultant has breached good faith? According to the Court of Appeal, the openness of the presentation of the clause by IFA to the Wests, fair dealing and reasonable equality of bargaining power between the parties, satisfied the requirement for good faith. So no, the Wests could not argue breach of good faith in this instance.

Can a client argue that this is a strange clause and not market standard? The Court of Appeal seemed to consider that the NCC was market standard as it is used in the popular RIBA forms. However, the Court of Appeal seems to have ignored the fact that RIBA forms are often amended by lawyers and surveyors to remove unhelpful limitations on liability such as NCCs, particularly in circumstances where a bank or other investor is supporting the project. In our view, a client can credibly argue that an NCC should not be used in a professional appointment.

Can a client use the Unfair Terms in Consumer Contracts (UTCC) Regulations or UCTA? Possibly not, depending on the facts of the case. In this case, the UTCC Regulations were not breached as the parties had reasonably equal bargaining power. The NCC was also considered to have satisfied the requirements for reasonableness under UCTA.

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