REUTERS | Alex Domanski

Net contribution: a problem shared?

I can’t believe that it is nearly five years since I blogged on the Langstane case. Time obviously flies when you’re getting old.

For those of you with short memories or with youth on your side, in Langstane a Scottish judge held (among other things) that a net contribution clause (NCC) in a consultant’s appointment was not “unreasonable” for the purposes of the Unfair Contract Terms Act 1977. That led to a flurry of claims from consultants (and their representative bodies) that NCCs were “fair” and “judicially endorsed”. Of course, the case decided nothing of the sort; merely that the NCC in question was not so unreasonable as to fall foul of UCTA.

Since then, the world has moved on. Grinding recession has given way to slow, but definite recovery. A Brit has won Wimbledon. London has staged possibly the greatest ever Olympic Games. We have survived four years of coalition government… and NCCs have continued to gain a foothold. The argument has graduated from “it’s only fair” or “why should I take the blame for the mistakes of others?” to “it’s market standard”.

None of these statements is necessarily true. But – when spoken with conviction – they all sound plausible. It is probably fair to say that, at least in consultants’ collateral warranties (or third party rights), NCCs now appear more often than not. Moreover, they are gaining currency in a non-construction context, with other professionals – such as auditors and even lawyers – seeking to include them in their standard terms of engagement.

That being the case, it is no surprise that the subject has found its way to the English Court of Appeal. The decision in West and another v Ian Finlay & Associates (a firm) may well be right on its facts, but some of the reasoning appears startling and merits a closer look.

“Unreasonableness” and UTCCR

The Court of Appeal held that the NCC in question was not unreasonable for the purposes of the Unfair Terms in Consumer Contracts Regulations 1999, UCTA’s equivalent in a consumer context. It found (contrary to the judge’s view in Langstane) that the clause operated to limit the architect’s liability, but that on the facts this did not cause a significant imbalance between the parties’ rights. The clients were “savvy” (he a banker, she a neuroscientist) and at least as capable of understanding the NCC as the architect, who may well not have appreciated its effect. Moreover, the clause was located prominently in the standard form and there was no attempt to hide it away in the small print.

So far so good, but it is when examining the wider implications that the court appears to have strayed into murky waters. Three particular points leap out.

Is an NCC “commercially acceptable”?

Probably the most eye-catching part of the decision is the assertion that “we doubt whether any lawyer advising a commercial party to a building contract would be likely to object to such a term or press for its deletion”. With respect, that simply is not my experience. On the contrary, NCCs continue sharply to divide opinion. Many lawyers are happy to accept them (at least in consultants’ warranties, although rarely in the primary appointment), but others remain implacably opposed. As I suggested in my second blog on Langstane, the courts seem to be out of touch with the reality of contract negotiations for major construction projects. It would perhaps be helpful if they steered clear of offering views on matters outside their day to day experience.

RIBA form as “evidence of acceptability”

Like the judge in Langstane, the Court of Appeal seemed to place much store by the inclusion of NCCs in the RIBA and ACE standard forms as evidence of their general acceptance in the market. However, again this ignores the harsh reality that those advising commercial parties invariably steer clear of the RIBA and ACE forms, precisely because they include NCCs and other such limitations. As such, they can hardly be seen as defining the market position.

Anyway, hang on a minute. Isn’t this all the wrong way round? I thought the inclusion of a limitation clause in a supplier’s standard terms of business (which were not expected to be individually negotiated) was prima facie evidence of unreasonableness. We don’t know all the facts, but it is probably fair to assume that the architect at least tacitly held out the RIBA terms as a balanced document that protected the interests of both parties. That being the case, it was surely incumbent on him – or, perhaps more realistically, the RIBA – to draw the NCC specifically to the attention of the client and to explain its meaning and effect.

And let no one be in any doubt that an NCC represents a potentially significant erosion of the client’s rights. As the court noted, its main impact is to transfer the risk of insolvency of other parties from the consultant to the client. Even a “savvy” layman could not realistically be expected to spot that. On the contrary, the language of a typical NCC drips the scent of sweet reason. What could be fairer than that a consultant should only be liable to the extent of his responsibility?

This is likely to be all the more significant in a consumer context, where the architect will invariably play a large part in selecting the contractor. True, the client will ultimately enter into the building contract. But the architect will very likely have drawn up the tender list, conducted the tender process and recommended the winning bidder. So – as between the (by definition) negligent architect and the (by definition) innocent client – the transfer of insolvency risk to the client no longer seems self-evidently fair. It is clear that the Court of Appeal was troubled by this, but not sufficiently to tilt it towards a finding that the NCC was “unreasonable” for the purposes of UTCCR.

Apportionment of liability

Finally the court held that, in apportioning the share of damages to the consultant under an NCC, it should apply the principles embodied in section 2(1) of the Civil Liability (Contribution) Act 1978. On its face this does not seem surprising, but it ignores one crucial feature of the NCC world; namely, that the co-defendant (in the scenario described above, the contractor) is not there to defend himself. As a result, in order to maximise his claim against the architect, the client is left in the invidious position of having to prove that, in fact, the contractor was not the main cause of the problem and that the primary fault lay with the architect.

This somewhat surreal proposition – with the client fighting the contractor’s corner, but no doubt lacking much of the key evidence – casts a further shadow on the legitimacy of the NCC as a “standard” contract term. At the very least, many commercial clients will seek to shift the burden of proof, so that it is for the party relying on the NCC to show that it would have been able to secure a contribution but for the other party’s insolvency.

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