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Judgment sheds light on enforceability of net contribution clauses in consumer contracts, but what of business ones?
The legal standing of net contribution clauses have vexed litigators, construction lawyers and professional indemnity lawyers for many years.
A recent judgment by Mr Justice Edwards-Stuart in the Technology & Construction Court (TCC) in West & Anor v Ian Finlay & Associates is a step towards ending the guessing game.
Mr and Mrs West bought a property in Putney, close to the River Thames and Wandsworth Park, and instructed architect Finlay and appointed the contractor Armour. The Wests planned to procure a high-spec kitchen, balustrades and other items from third parties, outside the scope of the main building contract.
What followed was an age-old tale of demanding clients, a contractor with tight profit margins and an architect caught in the middle - in short, a recipe for litigation. After problems with their plumbing, the Wests sued for £800,000. Armour promptly went bust and Finlay and his insurers were the last men standing.
In defence of the claim, Finlay sought to limit his liability by relying on a net contribution clause in his contract, which stated: “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 appointed by you.”
As the Wests were consumers, Edwards-Stuart J looked to the Unfair Terms in Consumer Contracts Regulations 1999 as an interpretive aid. The regulations provide that clauses must be “fair” and any ambiguities determined in favour of the consumer. For guidance on the interpretation of fair, the court looked at the judgment of Lord Bingham in Director general of Fair Trading v First National Bank. ‘Fairness’ was equated by Edwards-Stuart J as open and transparent dealing.
On the facts, there had been no ‘lack of good faith’ on the part of Finlay - just negligence. He had not tried to hide the clause or take advantage of the Wests. As such, the court found the net contribution clause to be “fair”.
Before Finlay was able to squarely point the finger at the contractor, however, came a salutary reminder of the contra proferentem rule. The judge took issue with the imprecision of the wording; “other consultants, contractors and specialists appointed by you”.
He held that this sweeping phrase did not include work/services for which Finlay was receiving a fee, including the work undertaken by Armour. Instead, it referred to the work and goods to be supplied by the third parties outside of the building contract; the Wests’ new kitchen, for example. The net contribution clause was struck down and Finlay and his insurers had to pay up.
So, are net contribution clauses enforceable or not? Provided that the clause is fair and clear, the answer seems to be yes in terms of consumer contracts.
If net contribution clauses are acceptable in consumer contracts, it should follow that they will be enforceable in business-to-business contracts, and Edwards-Stuart J’s judgment has signalled a move in this direction.