In a previous article, we set out what collateral warranties are and some key features to look out for.
In this deep dive mini-series, we will take a detailed look at some features and provisions of collateral warranties. This instalment will focus on net contribution clauses (“NCC”).
What are net contribution clauses and what do they solve?
NCCs seek to limit the liability of a warrantor – for example, a design consultant or sub-contractor - for losses caused by multiple parties, even in situations where those other parties are unwilling or unable to pay their share of the damages.
NCCs look to alter the legal principle of joint and several liability, that in a situation where multiple parties have caused loss to an innocent party the innocent party can recover all of its losses from either party. The paying party can then recover a proportion of the total loss from the other party/parties under the Civil Liability (Contribution) Act 1978. The principle of joint and several liability, therefore, places the least inconvenience on an innocent party when recovering its losses caused by multiple parties.
As a practical example, an employer may suffer loss caused by a consultant’s negligent design and a sub-contractor’s poor installation of that design. Under the principle of joint and several liability, the contractor could claim against either the consultant or sub-contractor which would then recover a proportion from the other defendant. If the consultant and/or sub-contractor’s collateral warranty included a NCC, it would limit the amount that the employer could recover from them.
What types of net contribution clause are there?
There are multiple types of NCC, each with a different balance of risk between the beneficiary and warrantor to the collateral warranty. Some examples include:
- Basic clauses. These clauses may limit the warrantor’s contribution to a “fair and reasonable” proportion of the beneficiary’s loss. In West v Finlay & Associates [2014] EWCA Civ 316, the court upheld such a clause, saying that it was “binding and valid”. Basic NCCs are perhaps the most beneficiary-friendly type, as the words “fair and reasonable” can be flexible and there is no mention of other possible warrantors (see below).
- “Fair shares” clauses. These clauses build on the approach of a basic NCC, further assuming that other key consultants and contractors have entered into similar agreements and that those parties will pay to the beneficiary a sum that is just and equitable given their responsibility for the loss. Such an approach is taken in the ACE, RIBA and RICS standard form professional appointments. “Fair shares” NCCs could be considered to be the most balanced type as they consider other parties that have potentially caused the beneficiary loss.
- Aggressive clauses. These clauses require the beneficiary to show that the warrantor caused its loss (rather than assuming that the warrantor was at least responsible for a proportion of the loss). For this reason, these clauses are the least beneficiary-friendly of those listed.
The wording of the NCC that is settled on will depend on the commercial position of each party when negotiating the collateral warranty.
What are the alternatives to net contribution clauses?
If the parties do not wish to include a NCC in their collateral warranty, they could look to do any of the following:
- Extending the joint project insurance to include consultants and sub-contractors. Many standard form main contracts require the employer or contractor to take out joint insurance policy covering both parties. Under such a policy neither party can sue the other for losses resulting from a specified event. In Co-operative Retail Services v Taylor Young [2002] UKHL 17, the employer, contractor and two consultants were liable for a fire that occurred on site. The joint insurance policy precluded the employer and contractor from claiming and the consultants were held liable for the whole of the loss despite only being partly to blame. Extending the project insurance to include consultants and sub-contractors would therefore reduce their liability for an event also caused by the employer and/or contractor.
- Cap the liability of the warrantor. The warrantor may look to introduce a liability cap into the collateral warranty. For example, if a consultant’s collateral warranty included a liability cap of £500,000, the beneficiary could not claim any more than that even if its losses were higher. In practice liability caps are often used in tandem with NCCs.
- Exclude consequential losses. The warrantor may also look to exclude consequential losses, thereby limiting the beneficiary’s recovery to direct losses only. For example, in a situation where a sub-contractor caused physical damage to another contractor’s work on site, it would be liable to the beneficiary for the cost of rectifying the damage but not any associated costs, such as the time spent organising the remedial works and additional interest incurred on extended project finance.
Practical tips
In practice, the type and wording of a NCC will depend on each party’s commercial position and how much risk it is prepared to accept. Beneficiaries will be keen to keep the principle of joint and several liability intact whereas warrantors will wish to reduce their liability as far as possible.
If beneficiaries to a collateral warranty are minded to accept a NCC, they should ensure this is part of a wider package of security with other consultants and sub-contractors and that there are no “gaps” between all of the warrantors.
Warrantors should seek as far as possible to include their professional body’s standard NCC in any collateral warranty. They should also seek advice on any proposed amendments, including from their professional indemnity insurer where applicable. Alternatively, if the beneficiary will not agree to a NCC, the warrantor may wish to consider one of the alternatives set out above.
