Back to Basics - Net Contribution Clauses

8 minute read
06 July 2015

If you ask any construction lawyer what issue repeatedly comes up when negotiating consultant appointments and collateral warranties, you can almost guarantee that the words 'net contribution clause' (NCC) will appear somewhere in their answer. Although NCCs are nothing new, there is often confusion as to what exactly a NCC is, and its effect in a construction contract. In this article, we set out the basics and address some of the common misconceptions in this area.

So what is a net contribution clause?

In England and Wales, if a person suffers a loss they can sue any one or all of the parties that have caused them the loss, and each party will be liable for the whole of the person's damages (joint and several liability).

Put in to a construction context, if a contractor and a structural engineer are jointly responsible for a design defect in a building, the party that has suffered the resulting loss can bring a claim against either the contractor or structural engineer for 100% of those losses, even though the contractor and structural engineer may both be to blame for the defect.

A NCC however will stop the principle of joint and several liability from taking effect. NCCs are drafted so that if two parties are responsible for the same loss or damage then the liability of each party will be limited to the amount that is fair and reasonable (or just and equitable depending on the language of the clause). So using our example again, if the total loss suffered by Mr New Development is £1 million for which the contractor and structural engineer are jointly liable, then, with a clearly drafted NCC, a tribunal can decide on an equitable basis to what extent each should actually be responsible and therefore what proportion of the £1 million each should pay. In short, a NCC helps to limit a contractor or consultant's potential liability.

I'm appointing an external professional consultant - what will happen if my contract contains a NCC?

The main reason that employers/developers don't like NCCs is because they remove this common law principle of joint and several liability. This means that if a defect does arise, and there are two parties at fault, the employer will have to pursue both parties rather than just one to recoup the entire loss. This in itself can be frustrating and costly, but the problem can become more serious if one of the potential defendants has become insolvent (or is just not worth suing in financial terms). In a worst case scenario, this could leave an employer with irrecoverable losses.

Additionally, most financial institutions are wary of NCCs (for obvious reasons from their perspective) and therefore, if there is an NCC in a consultant's appointment or collateral warranty, an employer may find itself in difficulties if and when seeking to re-finance.

So what should I do if my consultant requests a NCC?

More often than not, consultants will request the inclusion of a NCC as such clauses help them manage their risk profile and simultaneously reduce their insurance premiums. Nine times out of ten, a consultant will have been advised by their insurers (or brokers) to request a NCC, but its inclusion of course remains open to negotiation.

The key question to ask in this scenario is whether the inclusion of a NCC is an explicit requirement of their professional indemnity insurance (ie will they be in breach of policy terms and therefore potentially without cover if a NCC is not included within the appointment or collateral warranty) or is it just something on their "wish list".

Where insurers insist on the inclusion of a NCC, the first step is to ask for written confirmation from those insurers that this is the case. It is then usually possible to agree wording that satisfies that requirement but actually reduces the effects of a traditional NCC for the employer. This balancing of risks can help avoid lengthy debates as to the merits of having/not having a NCC and ultimately help get the contract finalised more quickly.

If you do end up agreeing to include a NCC, then make sure that it is clearly and specifically drafted to cover named parties who owe relevant duties to (in our example) Mr New Development.

I'm a consultant and my contract doesn't have a NCC, should I be worried?

As a consultant, clearly it is desirable to include a NCC in appointments and collateral warranties so that exposure is minimised.

Where this is not possible however and a consultant has to pay 100% of a party's damages despite being only one of several parties at fault, it may still be possible to bring a claim against one or more of those other parties under the Civil Liability (Contribution) Act 1978. Some of the key points to bear in mind here are that:

  1. in order to bring a claim for contribution, liability for the same damage caused to the same entity (in our example, Mr New Development) must be established; and
  2. even if such a claim is demonstrable in principle, if the other party is unable to pay (eg if they are insolvent), then it may prove worthless.

But if I don't have a NCC in my contract, doesn't this mean I will be liable for losses caused by other consultants or contractors, even where I am not at fault?

No, but this is a common misunderstanding. We often hear concerns from consultants who worry that if their contract doesn't contain a NCC, they could be liable even if they have not been negligent or in breach of contract.

Going back to the example of a contractor and structural engineer, if the contractor is 100% responsible for the design defect that has become apparent (and the structural engineer has in no way, shape or form contributed to resultant "damage" suffered), then the structural engineer will not be liable for any losses that have occurred as a result, even if the professional appointment contains no NCC.

As a consultant, however, make sure you know your own position before the commencement of negotiations - check your professional indemnity insurance policy so that you do not risk jeopardising cover for failure to require a NCC.

What sort of compromise position can be reached?

One example of a compromise clause is a "stepped" NCC where the clause will only take effect if the contractor or consultant cannot recover a contribution from the other party or parties at fault. This does require careful drafting but can often unlock an impasse in the negotiations, avoiding protracted and costly delay.

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