Net Contribution Clause: Langstane -v- Riverside Construction

Summing up

Langstane Housing Association Limited -v- Riverside Construction Aberdeen Limited and Others [2009] ScotCS CSOH_52.

The issue:

Whether a Net Contribution Clause would be subject to the Unfair Contract Terms Act 1977.

The implication:

Net Contribution Clauses found within standard terms of engagement as published by professional bodies are not subject to the Unfair Contract Terms Act. Furthermore, Net Contribution Clauses are not unusual or onerous and are therefore considered by the Courts to be fair and reasonable.

Net Contribution Clauses, or proportional liability clauses, are a common feature of consultants' appointments and collateral warranties. Many professional bodies such as the RIBA and the ACE publish standard terms of engagement which incorporate these clauses.

They are relied upon by consultants, and more importantly their professional indemnity insurers, in shifting the risk of insolvency of other liable parties away from the consultant and on to the employer.

In doing so, the consultant avoids being on the receiving end of a claim for damages made on a 'joint and several' liability basis, in which others are thought to be partly responsible. Furthermore, by restricting a consultant's exposure to liability for only his own actions, substantially lower professional indemnity insurance premiums can be obtained.

Helpful guidance

However, despite the fact that these clauses have been in use for many years, the effectiveness of Net Contribution Clauses has yet to be fully tested in the Courts. In the absence of judicial approval, professional indemnity insurers and consultants alike have been unsure if such clauses are legally enforceable. Helpful guidance on the Courts' attitude towards Net Contribution Clauses has been given in the recent Scottish case of Langstane Housing Association -v- Riverside Construction Limited and Others.

In this case, Langstane commenced an action in the Court of Session for the recovery of some £3m in damages from the contractor, architect and the consultant engineers. Langstane's claim against these three parties was made on the basis of "jointly and severally, or severally". The action arose from an alleged breach of contract and/or negligence in relation to the partial collapse of a property in Aberdeen; the collapse having occurred during extensive renovation works.

A preliminary issue that had to be decided in respect of the consulting engineer's appointment was which version of the Association of Consulting Engineers' Conditions of Engagement was applicable. The answer to this question would determine whether the appointment incorporated a Net Contribution Clause or not. The Court decided that a Net Contribution Clause did feature as part of the consulting engineer's appointment.

The follow-on issues which then had to be considered were:

(1) Was an appointment containing a Net Contribution Clause subject to the Unfair Contract Terms Act 1977, and

(2) If so, was it fair and reasonable within the terms of the Unfair Contract Terms Act 1977 to incorporate a Net Contribution Clause?

In regard to the first issue, Lord Glennie said that there was considerable force in the argument that a Net Contribution Clause did not exclude or restrict liability for the consulting engineer's breach of duty.

Full consequences

He reasoned that a Net Contribution Clause ensured that the consulting engineer was only liable for the full consequences of his own breach of duty and would not be held liable, under the doctrine of joint and several liability, for the breaches of duty of others. Consequently, there was no exclusion or restriction of liability which would fall foul of Clause 16(1) of the Unfair Contract Terms Act.

Furthermore, Clause 17(1) of the same Act states that it is not fair and reasonable to incorporate a term into a standard form of contract which excludes or restricts liability to "a customer" in respect of a breach of contract.

Terms of business

The judge said that, for two reasons, this provision equally did not apply in this instance. Firstly, he found that the ACE Conditions were not the consulting engineer's own terms of business but had been published by the Association of Consulting Engineers and were widely used in the engineering profession. Secondly, the ACE Conditions had been proposed by Langstane as a basis of the appointment between them and the consulting engineer.

In conclusion, Lord Glennie decided that, in the circumstances, the ACE Appointment containing a Net Contribution Clause was not subject to the Unfair Contract Terms Act.

In regard to the second issue to be decided, the judge said that even if he was wrong in his conclusion on the first issue, he considered that the Net Contribution Clause was not unusual or onerous and consequently he would hold it to be fair and reasonable.

It was, according to him, neither unfair nor unreasonable for the employer to take the risk of possible insolvency of those that they appoint, a risk which could be adequately covered by insurance.

Although this decision will not allay all of the previously held concerns over the enforceability of Net Contribution Clauses, consultants and their professional indemnity insurers will sleep a little easier as a result.