Net Contribution Clauses – why you should be wary
In a Northern Ireland case , the court gave wide effect to a Net Contribution Clause in favour of the architect.
What is a Net Contribution Clause and why should I be worried?
A Net Contribution Clause means that the architect’s liability is capable of being reduced to reflect the extent to which the court considers the architect is in fact responsible. In short, the architect is only responsible for the bit of the loss that they caused.
In the classic dispute over whether it is the architect’s design or contractor’s workmanship that has caused the problem, the overall effect is that the claiming party may have to pursue not one but two or more defendants to recover all of its losses.
In circumstances in which the contractor has become insolvent, the very real downside for employers (including education institutions) is that they may only be able to recover a contribution from the architect and have to bear the cost of the contribution which would have been paid by the insolvent contractor but for the insolvency itself.
So what was the case about?
Radius Housing Association (Radius) engaged JMP Architects (the architect) to design and oversee the procurement and construction of two blocks of apartments for use for social housing in Northern Ireland. The contractor was appointed on the JCT standard building contract with quantity 2005.
Subsequently, the contractor became insolvent.
The contract required waterproofing of the development to ensure that the apartments being constructed were dry, free from damp penetration and fit for habitation. The slab in the courtyard provided for the use of hydro-guard, a waterproofing system. However a quantity surveyor error meant that only 64 square metres of the total 300 square metres of the required hydro-guard had been measured. This meant that the hydro-guard specified was unable to cover all the slabs. As a result, the architect devised an alternative to the original full tanking solution. This involved the substitution of hydro-guard with “famguard”, which was not a full tanking system but a partial tanking solution.
One of the key points the court took on board was that famguard was more reliant on the expertise of the person carrying out the application in order to achieve a satisfactory bonding between the famguard “skirt” and the underlying concrete. The works were carried out but ultimately there were ongoing problems with water ingress at both apartment blocks. It was agreed between the parties that the application of the famguard had failed, allowing water into the apartment.
The court decided that the architects were in breach as they did not obtain the consent of Radius to change from a full tanking system to a partial tanking system. Had Radius been properly advised as to the advantages and disadvantages of the partial tanking system, the court found that Radius would not have agreed to the change unless it could be assured that the workmanship carried out would be to a high level. In which case, the court also decided that the architect was in breach not only for amending the original design but also for not taking adequate steps to ensure that the new higher risk design would be effectively implemented.
The court also decided that the contractor was negligent in respect of implementing the change of design.
The architects were appointed under the standard conditions of engagement, which included a Net Contribution Clause. Such clauses, if effective, change the legal position that an employer may sue either a contractor or architect for the full amount of its losses (assuming that both are partially responsible for the loss). This leaves one of the parties to pursue a contribution from the other under the Civil Liability (Contribution) Act 1978.
In this case, instead of the architect being liable for 100% as they were jointly to blame with the contractor, under the Net Contribution Clause, the architect became responsible only for their share of the blame.
The court accepted that the Net Contribution Clause in the architect’s appointment was effective. This means that Radius will only be able to recover the losses that the court apportioned to the architect’s breaches.
The effect of this is that, because the contractor was insolvent, Radius’s recovery will be limited to that which the court decides the architect is responsible for. It will have to take the rest of the losses on the chin.
In an attempt to get round this, Radius argued that because the architect was in breach of the obligation to obtain consent as to the change in design, it was responsible for the whole of Radius’s losses that accrued from the change in design. The court rejected this argument. The court noted that the Net Contribution Clause was widely drafted and therefore applied to all of the architect’s obligations under the appointment.
So what does this all mean and what should I do about it?
This case does not create new law, it follows a series of cases in which the effect of Net Contribution Clauses has been found to be valid by the courts. The court is yet to decide what apportionment of Radius’s claim should be laid at the architect’s door. However, in light of the contractor’s insolvency, that portion (whatever it is) will not be recovered by Radius.
Best practice for all employers, including education institutions, must be to resist Net Contribution Clauses when negotiating professional appointments. However, if that does not prove possible (and we recognise that architects’ professional indemnity insurers are often resistant to their deletion), as a backstop it is worth at least seeking to insist that any Net Contribution Clause is limited to a failure to meet the primary services and not to any other obligations which may be outside of those core services but nonetheless still important.