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Net contribution clauses – “by no means unusual”?

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24/10/2014

In the recent case of West v Ian Finlay & Associates [1], the Court of Appeal found 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 or ‘press for its deletion’.

As the main contractor engaged by Mr and Mrs West was insolvent, they sued the architect for the costs of repairing the defective renovation and improvement work which had been carried out on their home. The architect’s appointment contained the following 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“.

At first instance, the judge found that the clause was ambiguous and this meant that it had to be given the meaning most favourable to the Wests under regulation 7(2) Unfair Terms in Consumer Contracts Regulations 1999 (UTCC).  The clause was therefore ineffective and he did not reduce the amount of damages awarded to the Wests to take into account the main contractor’s responsibility for some of the losses.

The Court of Appeal held that the clause was not ambiguous and that “the normal meaning of the words is crystal clear“. It also found that the clause was neither unfair under the UTCC nor unreasonable under the Unfair Contract Terms Act 1977. The clause was therefore effective and reduced the architect’s liability to the Wests.

Whilst the Court of Appeal suggested that lawyers would likely accept a net contribution clause, we believe these will continue to be hotly contested, as they significantly alter risk allocation between the parties.

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[1] [2014] EWCA Civ 316

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