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Published On: 2 September 2014
As defects in construction projects are often attributable to more than one party, construction professionals and their insurers will be heartened by a recent Court of Appeal decision (overturning the first instance decision) which holds that a net contribution clause was effective in limiting an architect's liability against his consumer client. Such clauses seek to displace the common law principle of joint and several liability which can render one party 100% liable for damages, whatever their true share of liability.
The Court of Appeal considered the clause to be fair, reasonable and "crystal clear", and that it did not breach either the Unfair Terms in Consumer Contracts Regulations 1999 nor the Unfair Contract Terms Act 1977.
Construction specialists will also welcome the guidance that assessment of what is a reasonable apportionment under a net contribution clause should reflect what is "just and equitable" under the Civil Liability (Contribution) Act 1978.
In June 2005, the Claimants ("the Wests") purchased a property in Putney for £1.7million with a view to carrying out some major alterations to the lower ground floor. The Defendant architect ("IFA") entered into an agreement with the Wests to provide an architectural service in respect of the works. This Agreement included a Net Contribution Clause ("NCC") which provided that:
"Our liability for loss or damage will be limited to the amount that it is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you."
When the tender prices for the main contract came back at a higher level than the Wests envisaged, IFA suggested that the tender documents be sent to a main contractor, Armour. After negotiations, Armour's tender was reduced to £260,000.
The Wests moved into the completed property in May 2007. However, within a month, the ground floor of the property was found to be affected by serious damp. The Wests moved out of the property for a considerable period of time whilst extensive remedial works were carried out.
In 2010 a compulsory winding up order was made in respect of Armour. A claim was subsequently issued against IFA by the Wests. At first instance, the judge held that IFA was in breach of its professional duties in respect of the damp and M&E works. He also held that the losses were caused to some extent by Armour's breach of contract. However, he held that the NCC did not operate to limit IFA's liability to the Wests. IFA appealed.
The Court of Appeal held that the trial judge had been wrong to conclude that the reference to "other contractors" in the NCC meant contractors other than Armour, which was not appointed directly by the Wests but through the agency of IFA. Despite the trial judge's conclusion that the wording of the clause was ambiguous, the Court of Appeal considered that the "normal meaning of the words" was "crystal clear". There was no limitation on the words "other consultants, contractors and specialists appointed by [the Wests]" which therefore meant any such person including any main contractor but of course excluding IFA.
Having decided that the NCC limited IFA's liability where the other party was Armour, the Court then had to consider the questions of "unfairness" under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) and "reasonableness" under the Unfair Contract Terms Act 1977 (UCTA).
The Court of Appeal applied the test outlined in Director General of Fair Trading v First National Bank Plc  1 AC 481 which provides that a term is unfair "if it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer in a manner or to an extent which is contrary to the requirement of good faith". In deciding whether the requirement of good faith was satisfied, the Court considered that these factors were outweighed by the openness of the presentation of the clause, IFA's fair dealing in relation to it and the reasonable equality of bargaining power of the parties
The Court of Appeal concluded that although the NCC created an imbalance it should not be regarded as significant because NCC's were used in standard RIBA forms, the use of a NCC would not be regarded as unusual in a commercial contract and it was the Wests who had the final decision on the choice of main contractor. The NCC was not so weighted in favour of IFA as to tilt the parties rights and obligations under the contract significantly in IFA's favour. Accordingly, the NCC was not unfair.
The Court of Appeal also concluded that the NCC satisfied the requirement of reasonableness under UCTA. In reaching this conclusion the Court took into account the equal bargaining position of the parties. The Wests could have renegotiated the NCC, gone to another architect or even protected themselves from the risk it posed by taking out insurance or a performance bond. Further, the Wests ought reasonably to have known of the existence of the NCC as it was placed prominently on the third page of the agreement.
As the NCC was a valid and binding clause limiting the liability of IFA, the Court of Appeal remitted the task of assessing the proper apportionment of liability between IFA and Armour back to the trial judge. In doing so, the Court suggested that a court assessing a "reasonable" award under a NCC should take the same approach as it would when deciding a "just and equitable" contribution under the Civil Liability (Contribution) Act 1978.
In this case, the Court described the Wests as "savvy" and "sophisticated and intelligent" and thus in an equal bargaining position with the sole trader architect. It was clear on the evidence that the Wests had negotiated the terms of the agreement with the architect and that IFA had not taken advantage of them as consumers. Whilst each case will depend on its facts, this decision shows that a Court will enforce an NCC against a consumer as long as it is clear and easy to understand, and neither unfair (in the context of contracts with consumers) or unreasonable