2019年12月11日

Net contribution clauses in construction

What is a net contribution clause?

A net contribution clause (NCC) is a clause that is commonly used within construction documents such as professional appointments or collateral warranties that reverses the common law position of joint and several liability.

Under the common law, if a party is partially to blame for causing loss to another party, the innocent party is entitled to pursue the at-fault party for 100% of the claim, even if they did not cause 100% of the loss.

For example, let's say that a client engages an architect and a building contractor to undertake works at their property. There are problems with the works and there is a dispute as to who is at fault.

The client engages an expert to investigate the cause of the problems and the expert concludes that the problems were caused in unequal proportions, 20% by the architect's design and 80% by the building contractor's workmanship. With liability split between the architect and the building contractor, where does this leave the client if they wish to bring a claim?

Well in the ordinary course of things, the client may pursue the building contractor, the architect or both for 100% of their claim. The client can do this to recover 100% of their claim at common law, despite the expert's findings on liability.

This is of course good news to the client who gets to keep their options open but this comes to the detriment of the building contractor and architect who may feel aggrieved that they are exposed to the full claim.

Why are NCCs used?

Whilst it may seem obvious that there good commercial reasons for a construction professional to insist upon an NCC, clients are usually resistant to the inclusion of such clauses. There are two areas insolvency risk and litigation risk which highlight the issue.

Going back to the architect who is 20% at fault, if we suppose that the building contractor who was 80% at fault has become insolvent, then the client might reasonably consider that its best option is to pursue the remaining solvent party, the architect.

Without an NCC, the insolvency risk of the building contractor is placed on the architect who may be liable for 100% of the claim rather than their 20%. In this situation, the inclusion of an NCC transfers the insolvency risk from the architect onto the client who faces the possibility of not recovering the 80% from the insolvent building contractor.

Similarly, the inclusion of an NCC can transfer the litigation risk from the professional to the client.

If for example, there was no NCC in place and the client believed that the building contractor had deep pockets and was able to settle the claim, but that the architect was of limited means, the client might commence proceedings against the building contractor alone on the basis that it could pay 100% the claim. It would then be up to the building contractor, to bring the architect into the proceedings for a contribution of the losses being sought from the building contractor.

If on the other hand there was an NCC in place, the client would need to commence proceedings against both the building contractor and the architect for their respective proportions of the losses. The responsibility for commencing proceedings against both professionals is therefore shifted from the professional to the client where there is an NCC.

Treatment of NCCs at law

An NCC is a term of the contract and each clause must be considered on its own merits. There are no assurances that an NCC will automatically be enforceable as the wording of the clause will vary from contract to contract.

Provided that an NCC has been clearly drafted, the Courts should rule that such clauses are effective and this has been confirmed by the Court of Appeal in West and another v Ian Finlay & Associates [2014] EWCA Civ 316.

Alternatives to an NCC

Given that an NCC transfers risk from the professional to the client, such clauses are frequently negotiated out of appointments and warranties. Where there is an institutional funder providing finance for a development, such clauses are usually prohibited by such funders as a condition precedent to the funding agreement.

For consultants, although there are possible alternatives to the inclusion of an NCC such as the extension of joint insurance and integrated project insurance to cover the professional in question, or possibly reaching agreement that other professionals provide warranties on similar terms or the inclusion of caps on liability much will depend on the client and the funder's position.

The construction and engineering team at Taylor Wessing are frequently instructed to advise employers, funders, contractors and professional consultants on all aspects of an NCC.

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