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We live in a blame culture, in which those who suffer damage expect to be compensated fully. However, no one expects to pay more than their fair share of any damage suffered. So what has been done by the Government to ensure that those who want to receive full compensation are looked after and those who caused damage only pay their fair share? Answer: the Civil Liability (Contribution) Act 1978 (the act).
Net contribution clauses are now included in contracts to remove perceived injustices that can result in the application of the act. However, the effectiveness of these clauses has yet to be tested in the courts.
The Civil Liability (Contribution) Act 1978
It is often the case, especially in a professional negligence claim, that there is overlapping responsibility for the alleged damage. The act provides that a person who is liable to a claimant for a loss may recover a just and equitable contribution from another person who is liable in respect of the same damage.
However, the defendant remains liable for the whole amount of the loss even though there may be overlapping responsibility. If the third party is insolvent, then the defendant (or often the professional indemnity insurers) will be unable to recover a contribution from the third party towards the damages. The defendant is also at risk for the third party’s legal costs if unable to prove the contribution claim against the third party.
The net contribution clause
A great deal of attention was given to the use and content of net contribution clauses as a result of the House of Lords decision in Co-operative Retail Services Ltd v Taylor Young Partnership Ltd & Ors (2002). The case concerned a building project that was badly damaged by fire. For the purposes of the relevant court applications, it was assumed that the consultant, contractor and subcontractor had been negligent in respect of the fire damage. They were all covered by a joint insurance policy with the result that they could not sue each other for losses covered by the policy. The combination of the insurance policy and clauses in the JCT contract they had entered into resulted in the contractor and subcontractor having no liability to the client for the fire damage. The client commenced proceedings against the consultants and, because the contractor and subcontractor had no liability for the damage to the client, the consultants could not make a claim against either the contractor or the subcontractor for any contribution to damages. The consultants had to bear the whole of the damages in circumstances where the contractor and/or the subcontractor could have had substantial responsibility for the
Given that the act requires that courts ensure all those who are liable for the same damage make a just and equitable contribution to the damages awarded, many regard the House of Lords judgment in this case to be inequitable. The Lords appears to have taken the view that the professional team was well aware of the relevant provisions contained within the construction contract and thought that any problem that the team may have was simply a matter of it not having obtained appropriate insurance cover. Lord Bingham stated: “It would no doubt have been open to [the consultants] to seek to be included as co-insured in the joint names, in insurance, or have made other arrangements.”
Lord Bingham presumably relied on judicial knowledge when making this statement, as an insurance policy that provides cover to the employer, contractor and professional team in relation to a construction project is not commonly available.
The decision turned on the meaning given to ‘liability’. Lord Denning, in the Court of Appeal, considered the meaning of ‘liability’ twice and found that it meant ‘responsible in law’. It is possible to be at blame for damage suffered by others while not being liable in law for that damage.
The practical effect of Lord Denning’s definition of ‘liability’ adopted by the Lords can be illustrated by looking at a few reported cases.
Co-operative Retail Services: the effect of the act was altered by the client, contractor and subcontractor being co-insured, with the result that the contractor and the subcontractor had no liability to the client for the fire damage to the construction works.
Littlewood v George Wimpey & Co and British Overseas Airways Corporation (1953): the action against British Overseas Airways Corporation failed because it was statute-barred, so George Wimpy & Co was liable to pay 100 per cent of the damages awarded.
Smit Tak Offshore Service & Ors v Youell and General Accident Fire and Life Assurance Corporation plc (1991): the tug’s owners had no liability for the vessel to remove the wreck, which had sunk under tow, but the Dubai authority considered that the tug’s owner was responsible for the removal of the wreck.
The effect of the clause
The act provides that each party that is responsible for the damage is jointly liable to pay all of the compensation. If a party which is in part to blame for the damage disappears, has no funds or is insolvent, then the others who are liable end up having to pay the share of the compensation that would otherwise have been paid by impecunious or disappeared parties.
The net contribution clause seeks to remove ‘joint liability’, leaving all who are to blame with individual, or ‘several’, liability. If a party is impecunious or disappears, the resulting loss falls on the party that suffered the damage.
Under a net contribution clause the court is required to make a just and fair allocation of blame. The task is the same as that which a court is asked to perform under the act, except it is intended that, under the clause, the court only considers the question of ‘blame’, without any limitation imposed by the consideration as to legal liability.
The effect of the net contribution clause is to limit the liability of the defendant. The Unfair Contract Terms Act 1977 provides that a person cannot restrict their liability for loss or damage (other than for death or personal injury) by reference to any contract term, save to the extent that the term is reasonable. Furthermore, as with any clause restricting liability, any ambiguity will be construed against the party relying on it, and the defendant bears the burden of proof.
In practice, it is not clear how these principles will apply to a net contribution clause and whether the clause will be found to be reasonable. The defendant will bear the burden of proving that although they are ‘liable’ for the loss, a non-party is to blame (in whole or part), and therefore the loss (in whole or part) is excluded by the clause. For the purpose of negotiation of a settlement of a dispute, a defendant can raise allegations against non-parties in order to achieve a better settlement. The defendant’s involvement in a project or matter should result in the defendant having documents showing the involvement of non-parties in causing any damage. The defendant should therefore be able to discharge at trial the evidential burden of proving that a non-party was to blame (in whole or part) for the damage. The defendant will have the advantage of the non-party not being present at court to defend itself. The claimant may therefore have not only to prove their claim against the defendant, but also present evidence ‘in defence’ of the non-party.
It is difficult to believe that a net contribution clause will not be considered in detail by a court in the near future. A decision can then be made as to whether a party that is to ‘blame’ will only pay what is just and equitable after due consideration of the level of blame, as opposed to the ‘liability’ of others.
George Brown is a litigation partner at Reed Smith. He was assisted with this article by associates Mel Grose and Neil Purslow