Equitable contribution clauses

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Scenario: a homeowner decides to have an extension built at his house and employs a consultant and a contractor to carry out work relating to the foundations.  Two months after the work is completed, the roof of the extension collapses because a wall structure was badly constructed and was unstable. The homeowner wants compensation, claiming that both the contractor and the consultant are to blame; he claims that the contractor provided poor workmanship and the consultant failed adequately to assess the ground conditions.

 

But who can the homeowner sue? Can he sue the contractor, the consultant, or both?

 

  1. Why include an equitable contribution clause in a contract?

An equitable contribution clause, sometimes known as a net contribution clause, contract seeks to ensure that where two or more parties (e.g. consultants and contractors in our scenario) are liable for the same damage, the liability of each party is restricted to the amount for which that party is responsible.  Such clauses have been included in professionals’ conditions of engagement and collateral warranties for some time.  They are included in the standard terms of engagement published by various professional bodies such as the Royal Institute of British Architects and the Association of Consulting Engineers.

  1. How does an equitable contribution clause operate?

In our scenario, an equitable contribution clause in the homeowner’s contract with the consultant would state that if the consultant is liable, that liability will be capped at whatever it is just and equitable for the consultant to pay having regard to his and any other person’s fault.  In the absence of the equitable contribution clause, the homeowner is free to sue the consultant for 100% of the damages he has suffered.  The consultant can then rely on the Civil Liability (Contributions) Act 1978 to seek to recover a contribution from the contractor.

  1. The law

If parties have joint liability, then they are each liable up to the full amount of the relevant obligation; the converse is several liability, where the parties are liable for only their respective obligations.  Joint and several liability is a hybrid of both; with respect to our scenario, the consultant and the contractor are jointly liable, but as between themselves, their liabilities are several.

The Civil Liability (Contributions) Act 1978,  s. 1(1) provides that a person who is liable in respect of any damage is entitled to recover a contribution from any other person liable in respect of the same damage.  This means that if the homeowner pursues the consultant for damages, and receives payment in full, the consultant can then pursue the contractor for a contribution to their share of the liability.

  1. Shifting risk and responsibility

Back to our scenario: in the absence of an equitable contribution clause, the homeowner decides to sue the consultant for the damage he has suffered.  By paying all of the damages to the homeowner, the consultant takes the risk that the contractor is solvent and so will be able to meet any claim under the Civil Liability (Contributions) Act 1978.  If the contractor is insolvent, then the consultant will not have a meaningful remedy.

But if the consultant is a party to a contract which contains an equitable contribution clause, the risk of the contractor’s insolvency shifts to the homeowner.  If the consultant is 30% responsible and the contractor 70% responsible, then the consultant will be liable only for 30% of the homeowner’s loss, even though under the joint and several principle he would be responsible for 100%, and even if the contractor is insolvent. The equitable contribution clause means that the contractor’s 70% fault is funded by the homeowner rather than the consultant.

Invariably, developers and investors are not keen on equitable contribution clauses as they can affect recovery of losses.  Insurers, on the other hand, welcome such clauses. For consultants and contractors they have an important role to play in an effective risk management strategy.

  1. Example of an equitable contribution clause

This example is shown for illustrative purposes only and should not be regarded as a substitute for taking legal advice.

Without prejudice to any other exclusion or limitation of liability, damages, loss, expense or costs the liability of [the Consultant] for any claim or claims under this Agreement shall be further limited to such sum as it would be just and equitable for [the Consultant] to pay having regard to the extent of his responsibility for the loss or damage giving rise to such claim or claims (‘the loss and damage’) and on the assumptions that:

  1. all other consultants, contractors, sub-contractors, project managers or advisers engaged in connection with [the Project] have provided contractual undertakings on terms no less onerous than those set out in Clause [ ] to the [the Client] in respect of the carrying out of their obligations; and
  2. there are no exclusions of or limitations of liability nor joint insurance or co-insurance provisions between the [Client] and any other party referred to in this clause and any such other party who is responsible to any extent for the loss and damage is contractually liable to the [Client] for the loss and damage; and
  3. all such other consultants, contractors, sub-contractors, project managers or advisers have paid to the [Client] such sum as it would be just and equitable for them to pay having regard to the extent of their responsibility for the loss and damage.

 

Dr Alan McBride

Steven Francis

Eversheds LLP solicitors