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Net contribution clauses and UCTA

In my previous post, I outlined the facts in Langstane Housing Association Ltd v Riverside Construction Aberdeen Ltd and considered the judge’s surprising decision on the meaning of “current” when deciding which version of the ACE conditions applied. In this post I look at the judge’s analysis of the net contribution clause in the ACE conditions and the potential application of the Unfair Contract Terms Act 1977 (UCTA).

The dispute in summary

In short, Langstane v Riversidewas was a dispute about whether a Housing Association (Langstane) had appointed an engineer (Riverside) on the 1988 or 1998 version of the ACE conditions. The distinction was important because the 1998 version contained a net contribution clause, which would limit Riverside’s liability to Langstane. In deciding that the contract between the parties did include a net contribution clause the judge considered:

  • What was meant by the word “current” in the letter of appointment.
  • Whether the net contribution clause passed the test of reasonableness in UCTA.

Should a consultant draw its client’s attention to a net contribution clause?

The judge held that any client using the ACE conditions would have been well aware of the existence of the net contribution clause in the later (1998) version. He therefore saw no basis on which Riverside ought to have drawn it to Langstane’s attention when proposing the 1998 edition. That finding may be consistent with the facts, but it is difficult to reconcile with the judge’s earlier statement (when deciding the meaning of “current”) that users are not generally interested in the differences between revisions of the ACE form. It also credits Langstane with a level of sophistication in contractual matters that may not be shared by many clients, particularly in the public sector.

Does a net contribution clause exclude or restrict liability?

The judge ruled that the net contribution clause did not seek to exclude or restrict Riverside’s liability, so section 16 of UCTA did not apply. With respect, it is difficult to understand the judge’s reasoning on this point. The effect of a net contribution clause is that, if two or more parties are responsible for a defect, each party will not be 100% liable on a joint and several basis (as the common law provides), but only for their “just and equitable” proportionate share. In my view, it could hardly be clearer that this amounts to a restriction on liability.

Does a net contribution clause protect the consultant from liability for breaches of duty by others?

The judge went on to say that the purpose of net contribution is to prevent consultants being held liable for breaches of duty by others. As a matter of law, that is simply incorrect. Net contribution clauses exist to give consultants (partial) protection against the consequences of their own breaches of duty. If the consultant himself is not in breach, he will not be liable at all. Moreover, the judge’s finding perpetuates the myth (put about by some consultants and their insurers) that, without a net contribution clause, they may end up innocently carrying the can for defaults by other parties.

Is a net contribution clause “unreasonable” within the meaning of UCTA?

The judge held (obiter) that the clause passed the UCTA test of reasonableness. His reasoning was that Langstane had chosen a form of contract that included a net contribution clause (which they had not – see my previous post) and was best placed to manage the risk of insolvency of another team member (how?).

Does this judgment mean that net contribution clauses are reasonable?

It should be noted that the judge was specifically addressing the question of whether the clause was so unreasonable as to fall foul of UCTA. The judgment should not therefore be taken as judicial approval of net contribution clauses from a commercial/moral standpoint, although some consultants will no doubt seek to use it in that way. Joint and several liability is an established principle of English law and can readily be justified, not least from the perspective of protecting innocent consumers. The Law Commission considered the position in the mid-1990s and decided that no change was needed to the joint and several liability principle. It would be unfortunate if careless judicial comment were to drive change via the back door when Parliament has seen fit to keep the front door locked.

Practical lessons

Despite the judge’s finding to the contrary, a net contribution clause does limit a professional consultant’s liability. This makes it an important provision that must be negotiated on an informed, commercial basis. In doing so parties should note the following points:

  • Given the deficiencies in the court’s reasoning outlined above, it remains good practice for a professional consultant to highlight to its client any provision that, in practice, limits the professional consultant’s liability (including a net contribution clause) before entering into a formal appointment.
  • A client should not assume that standard forms of appointment, such as those produced by the ACE or RIBA, represent a fair or commercially acceptable balance of risks between the parties.
  • Before accepting a net contribution clause, a client should consider how it would cope with the insolvency of one or more members of the professional team. For example, how would this affect its ability to recover damages for negligent advice or defects in the project?
  • A client should ignore any suggestion that this judgment endorses net contribution clauses as reasonable additions to a professional appointment. A net contribution clause is a means of by-passing the common law position of joint liability. Despite some calls for reform and changes to the law in other Commonwealth countries (such as Australia), there are no immediate plans to change the legal position in England and Wales.

One thought on “Net contribution clauses and UCTA

  1. John’s concern that Langstane would be erroneously cited as an endorsement of net contribution clauses has proved well-founded. The Association for Consultancy and Engineering (ACE) has just launched its new suite of professional appointments and ACE chief executive, Nelson Ogunshakin, refers to Langstane as justification for a net contribution clause, saying:

    “With a recent Scottish case supporting the inclusion of ACE’s net contribution clause in consultancy contracts, we are… leading the way in limiting the liability of engineers. ACE exists to make life easier for consultancy and engineering firms while being fair to clients and we are confident the new agreements will continue that approach.”

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