It is sensible to establish the nature and number of third parties who might be expecting warranties or third-party rights, says Mark Klimt
A common argument between client and architect when negotiating appointment terms or collateral warranties is the inclusion of a net contributions clause. These clauses are designed to counter the common law rule of joint and several liability, which fixes each party who has contributed to a loss with potential responsibility for the full loss (for example if the other parties are no longer available). The net contributions clause is intended to ensure that the architect is only liable for that part of the joint loss which they have actually caused.
However, there have not been many instances where this wording has been tested in the courts, and there is a suspicion that the hard-won inclusion of such a clause could turn out to be a pyrrhic victory, should the courts find that the wording is ineffective. If the law is that joint contributors to a loss are both responsible up to 100 per cent, why should one party’s insolvency be at the risk of the suffering claimant? (The counter argument is that the client was responsible for choosing the parties, and so will have had greater control than the architect over their solvency.)
The recent High Court decision in West & West v Ian Finlay & Associates would appear to challenge the validity of net contribution clauses, but on closer analysis actually validates such clauses, if properly worded. The Wests instructed Finlay to redesign their Putney property and to administer the building contract which the Wests entered into with contractor Maurice Armour. Significant defects in Armour’s workmanship, necessitating the replacement of the M&E services and extensive remedial work for damp, led to a claim of approximately £800,000. Among other defences, Finlay sought to rely upon the wording of the net contribution clause in its appointment with the client, which included:
‘Our [Ian Finlay & Associates] liability for loss or damage will be limited to the amount that it is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you [the Wests].’
The court first considered whether such a clause was ‘unfair’ under the Unfair Terms in Consumer Contracts Regulations 1999 and stated that in order to satisfy the tests for unfairness, the term must be contrary to the requirements of good faith and cause a significant imbalance in the parties’ rights and obligations, to the detriment of the consumer. It was held that Finlay was not guilty of any lack of good faith, nor out to take unfair advantage of the Wests. It was also noted that such a clause in Finlay’s bespoke contract was considered to be consistent with that approved by the RIBA (although the standard RIBA Domestic Appointment does not include a net contributions clause).
The problem with the clause, however, was that its wording was ambiguous, and as such, under the contra proferentum rule and as required by regulation 7(2) of the Unfair Terms in Consumer Contracts Regulations 1999, ‘if there is doubt about the meaning of a written term, the interpretation which is most favourable to the consumer shall prevail’. Reference in the net contributions clause to ‘other…contractors’ could have referred to any party other than Finlay with who the Wests contracted. However, as Finlay was not a ‘contractor’, another interpretation of ‘other contractors’ was subcontractors other than Armour. As this was the interpretation which most favoured the Wests, the court was obliged to construe it accordingly and allow the Wests to recover from Finlay, not only that proportion of the loss which was attributable to its defective design and/or inadequate contract administration, but also the loss caused by Armour (by now in liquidation), since Armour was outside the limiting effect of the net contributions clause.
It is important to remember that had there been no culpability at all on the part of Finlay, no liability would have attached, simply because Armour was in liquidation and the net contributions clause was held not to include Armour. In this case, the real headline-grabber is that the Technology and Construction Court has confirmed that a net contributions clause does not offend the Consumer Protection regulations as being ‘unfair’ and had it been properly drafted, would have saved Finlay and its insurers a whole heap of money.
Mark Klimt is a partner at law firm DWF Fishburns