Net contribution clauses: Radius Housing Association v JNP Architects

The Northern Irish High Court has recently applied a net contribution clause in favour of an architect who kept an employer “in the dark” over cost saving changes to a water proofing design. The architect’s liability for subsequent water ingress was therefore capable of being reduced on account of workmanship failings by the contractor.

The decision confirms that net contribution clauses will apply to all of a consultant’s obligations under an appointment and are not limited to allegations of negligent design. Chris Hallam, Shona Frame and Aidan Steensma of leading international law firm CMS take a closer look.

Radius engaged JNP to design and oversee the construction of two blocks of apartments in Newtownards, Northern Ireland. The apartments were to be built off a concrete platform which required water proofing. The original water proofing design called for a full tanking solution using “Hydroguard”, a product which carried a BBA certificate and an insurance backed warranty.

After a contractor had been appointed (on a JCT SBC with quantities contract), a quantity surveying error was discovered meaning that less than a quarter of the required Hydroguard tanking had been allowed for. JNP devised a cheaper, partially tanked design involving the use of a “Famguard skirt” extending approximately one metre above the concrete platform.

Famguard is a hot applied pour and roll sheet membrane and is more reliant on a high degree of workmanship than Hydroguard which is applied as a liquid. Unlike Hydroguard, Famguard did not have BBA certification or offer an insurance backed warranty.

The water proofing failed and water ingress occurred before and after completion of the works. The main cause of the problem was found to be the failure of the Famguard skirt. This in turn was the result of workmanship failings by the contractor but also a lack of adequate supervision by JNP.

Given the vulnerability of the Famguard design to workmanship errors, JNP ought to have built in additional safeguards (such as hose-testing) to ensure an adequate bond with the concrete surface had been achieved.

JNP had also failed to obtain Radius’ consent to the change in design, contrary to the terms of its appointment. Consent could not be implied from the fact that Radius representatives had attended some site meetings and received copies of site minutes. In the court’s view, “a deliberate decision was made to keep Radius in the dark”.

Had consent been properly sought, the court found that Radius would have required assurances and safeguards to ensure that the Famguard skirt would work equally as well as the previous fully tanked Hydroguard design. If sufficiently strong assurances could not be given, money would have been found to keep the Hydroguard solution.

The net contribution clause

JNP was appointed under the RIBA Standard Conditions of Engagement which at the time included a net contribution clause in the following terms:

“In any action or proceedings brought against the Architect under or in connection with the Agreement … the Architect’s liability for loss or damage … shall be limited to … such sum as it is just and equitable for the Architect to pay having regard to the extent of his responsibility for the loss and/or damage in question when compared with the responsibilities of contractors, sub-contractors, Consultants and other persons for that loss and/or damage.”

Such clauses reverse the common law rule that an employer may sue either its contractor or architect/consultant for the full amount of a loss which both can be said to have caused. This rule allows the contractor or architect/consultant to then seek contribution from the other under the Civil Liability (Contribution) Act 1978, but this is dependent on the other being solvent (and if it is not, there will consequently be no prospect of making recovery of the relevant contribution).

The principal effect of reversing this rule through a net contribution clause is to transfer the risk of insolvency of the other party or parties who have caused the loss to the employer. If, as in this case, the contractor becomes insolvent, the employer is limited to a proportionate recovery from the architect (essentially by reference to the extent to which the architect was responsible for the loss) and must itself bear the proportion the contractor would have been responsible for.

Although net contribution clauses have been upheld generally, their precise limits and operation are yet to be fully explored. In the present case, Radius argued that the clause only applied to negligent design by JNP and not to its obligation to obtain consent to a change in design. A failure to obtain consent was said to be something which made JNP wholly responsible for the problems which occurred.

The court disagreed. The clause was drafted widely and applied to all of JNP’s obligations under the appointment. It could not have been intended that some obligations would fall within the clause and others outside of it. The intention was that JNP would not “be responsible for any fault on the part of the Builder [emphasis in original]”. 

Conclusion and implications

This decision follows previous cases upholding the operation of net contribution clauses and emphasises the width that such clauses can have. Although the quantum of JNP’s liability in this case is yet to be determined, the employer is now facing the prospect of a less than full recovery in respect of a “high risk design” which, in breach of contract, it was not given the opportunity to consider and object to.

The findings in this case may encourage employers negotiating professional appointments (and beneficiaries of collateral warranties – where net contribution clauses are more common) to insist that any net contribution clause be limited to liability arising from the consultant’s failure to meet the core services obligation, and not apply to non-professional obligations which, while often contained in terms and conditions, are often outside the scope of a consultant’s services – such as to act in accordance with the client’s instructions and to obtain consent for changes in design. 

That said, consultants generally (and their professional indemnity insurers more specifically) are very much alive to the nature and effect of net contribution clauses, so any attempt to limit the scope of these provisions may be met with an attempt to limit the extent of the consultant’s obligation in the first place – which just goes to show that Newton’s Third Law of Motion is sometimes just as applicable to law as it is to physics: for every action, there is an equal and opposite reaction!

Chris Hallam and Shona Frame (Partners) and Aidan Steensma (Of Counsel) at CMS

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