Net contribution Clause: Court of Appeal Guidance

The recent Court of Appeal decision in West v Ian Finlay and Associates has confirmed that a properly drafted net contribution clause ("NCC") is a valid and enforceable contractual term.

Without a NCC, two parties who have contributed to loss or damage can be held jointly and severally liable, inevitably giving rise to potentially harsh results.  However, if a valid NCC is included as a clause in the contract, the party with the benefit of the NCC will only be liable to pay an amount that is reasonable having regard to the liability of others.

Background

Finlay had been contracted to undertake some renovation and improvement works to the West's house.  The contract included a NCC limiting Finlay's liability for loss or damage to the amount that it was reasonable to pay having regard to "the contractual responsibilities of other consultants, contractors and specialists appointed by [the Wests]".  Main and specialist contractors were appointed at various stages of the works.  Issues with damp were subsequently discovered and extensive remedial works were required.  The main contractor was wound up.

The first instance decision

The Wests brought a claim against Finlay alleging professional negligence.  The Court found that Finlay had breached its duties and that the losses had also been caused by the main contractor's breach of contract.  The Judge at first instance held that the NCC did not limit Finlay's liability where the other liable entity was the main contractor.  It was held that the phrase "other consultants, contractors and specialists" was not sufficiently specific and that the Court must interpret the phrase in favour of the consumer in light of 7(2) of the Unfair Terms in Consumer Contract Regulations 1999 ("the Unfair Terms Regulations").

The appeal

On appeal, Finlay argued that the NCC should limit its liability where any other party had contributed to the loss.  The Wests contended, as in the first instance, that NCCs are generally ineffective and that the NCC should not operate so as to exclude the principle of joint and several liability because to do so would be to unfairly exclude liability contrary to the Unfair Terms Regulations or the Unfair Contract Terms Act 1977.

Rejecting the first instance interpretation of the NCC, the Court of Appeal found that the wording was "crystal clear" and stated that Judge had "failed to adopt the natural meaning of the words".  Despite their consumer status, the Judge held that the Wests were well aware of the existence of the NCC and were in an equal bargaining position.   As such, it was held on appeal that NCC must operate so as to limit Finlay's liability and the matter was remitted back to the original Judge for evaluation of proper apportionment of liability.  The Court also took the step of reducing the West's damages for inconvenience, distress and comfort from £14,000 to £6,000.

Commentary

The importance of this case should not be understated – it is the first case before the English Courts to offer guidance in respect of the validity of a NCC and, assuming that the parties have equal bargaining power, it will consequently be very difficult for a party to depart from or take issue with a properly drafted NCC incorporated into a commercial or consumer contract.

Whilst this decision will inevitably be interpreted by some as an erosion of the principle of joint and several liability, the long-term commercial implication may be that it will lead to a refusal or reluctance on the part of employers to enter into NCCs in the future.

West v Ian Finlay and Associates