Goldfish escape

Where problems occur on a construction project resulting in a loss, the damage will often be the fault of more than one party involved in the design and construction of the project. The party who suffers the loss will want to recover the entirety of that loss from those responsible.

Requests from consultants and their insurers for the inclusion of net contribution clauses often arise when negotiating professional appointments and collateral warranties. Such requests will often be refused by employers and, if relevant, their funders. So, what are the main issues surrounding net contribution clauses?

The purpose of a net contribution clause is essentially to limit the liability of the person or persons responsible to an amount that would be just and equitable for them to pay based on the extent to which they are responsible for the loss.

However, where there is no net contribution clause, an employer who suffers loss may seek to claim 100% of its loss from one consultant/contractor (responsible in whole or in part for that loss). It is then up to that consultant or contractor to seek to recover a contribution from those other consultants or contractors who are also responsible for that loss.

The issue

This position has been of concern to insurers for some time who, having paid out 100% of the loss, find that other contractors or consultants who are also responsible are insolvent. In essence, by introducing net contribution clauses, insurers seek to reduce or limit their liability.

However, if employers and beneficiaries of warranties are faced with an enforceable net contribution clause, then they will also have to bear the cost and risk of pursuing multiple claims to recover their loss against various parties responsible for the loss when, ultimately, the employer or beneficiary is an innocent party. For this reason, and because of the statutory right to seek a contribution, the inclusion of such clauses is unacceptable to employers and funders.

In the continuing uncertain economic climate, it is likely that more consultants and their insurers will insist on net contribution clauses in order to avoid bearing the risk of others’ insolvency. However, for employers and funders it remains the case that the inclusion of net contribution clauses is institutionally unacceptable. The position may only change where insurers insist as a policy condition  that net contribution clauses are included in appointments and warranties. This, however, may be a step too far.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.