Net contribution clauses – did the Court of Appeal get it right?

We discuss what we consider to be the most important British judgment on net contribution clauses.

The decision of the Court of Appeal in West v Ian Finlay & Associates (2014) is undoubtedly the most important British judgment on net contribution clauses, not least because it is the first time that an appellate court has considered whether or not a net contribution clause is effective.

Given net contribution clauses’ continuing controversy during the negotiations for construction and engineering projects – they are the issue that takes up more of the Mills & Reeve’s team’s time than any other – it is worth asking whether or not their Lordships got the decision right.

The case itself concerned who should bear financial responsibility for defective renovation and improvement work at a house in Putney. The main problems were damp in the lower ground floor and defective mechanical and electrical work. The contractor was insolvent and Mr and Dr West sued the architect. At first instance, Edwards-Stuart J awarded the Wests damages of just under £1 million plus interest. In doing so, he decided that the net contribution clause in the architect’s appointment was not effective. He held that the wording was ambiguous and should therefore be construed against Mr Finlay, especially as Mr and Dr West were consumers who benefited from regulation 7(2) Unfair Terms in Consumer Contracts Regulations 1999.

The Court of Appeal disagreed, holding that the net contribution clause was not at all ambiguous and disagreeing with Edwards-Stuart J’s interpretation of the 1999 Regulations. The Court also rejected a separate challenge to the effectiveness of the clause under the Unfair Contract Terms Act 1977.

On a narrow interpretation, the Court of Appeal’s decision rests on its own facts. The Court applied the normal rules of contractual interpretation when assessing the meaning of a disputed clause. The fact that this process is more of an art than a science helps to explain why they could reach such a radically different conclusion to the judge who now heads the Technology and Construction Court.
However, it is important, and not just because it is appellate authority. First, and given the tortuous negotiations parties often go through in relation to net contribution clauses, its decision means that a very simply-worded net contribution clause (“Our liability for loss and 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 employed by you”) gave the architect the protection it needed.

Secondly, and perhaps more importantly, the Court of Appeal made this comment:

“We also weigh in the balance…that…[net contribution clauses]…are by no means unusual…and…we doubt whether any lawyer advising a commercial party to a building contract would be likely to object to such a term.”

Irrespective of your views as to whether or not net contribution clauses are fair, that is a controversial conclusion, presumably reached without considering any evidence on whether or not it is normal in the market for construction clients to waive their common law entitlement to the protection offered by joint and several liability.

The answer to the question whether or not the Court was right may well depend on your underlying views of the fairness or otherwise of net contribution clauses.

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