Construction professionals are in a high risk business. Not only are they engaged in prototype work, but they operate in a litigious culture on tight operating margins. The preponderance of disputes is evidenced by the large and successful construction litigation departments in most major law practices.
Given the litigious and high risk nature of the industry insurers have, rightly, always been concerned to limit the liability of professionals through their retainer. Insurers have also attempted to control the industry standard practice of giving Collateral Warranties to third parties. A recent case indicates the unlucky and unfair consequences that can arise when professionals do not take proper care to protect themselves when drafting and negotiating their appointments.
Standard professional appointments contain a Net Contribution clause. This is a provision under which, if two or more parties are responsible for the same loss, the party with the “Net Contribution” clause pays only a fair proportion. This is irrespective of whether the client can recover, or chooses to recover, the balance from any other party. The clause cancels the common law position which is that if parties jointly cause the damage, they are each liable for the whole loss. Net Contribution clauses are there to prevent cherry-picking by clients choosing the easiest (or insured) party to sue for the whole amount and ignoring other equally culpable, but less attractive parties.
In the construction industry, where almost all of the services that the professional carries out are insured, the Net Contribution clause can be a powerful weapon against the over-litigious client. Although common in professional appointments, the Net Contribution clause is often omitted from Collateral Warranties. As these set up a new contract with the third party, it is just as important that they be incorporated there.
The unfairness that may be caused to professionals should a “Net Contribution” clause not be incorporated is demonstrated by Co-operative Retail Services Limited v Taylor Young Partnership & another, where judgment was given in December 1999.
CRS employed Taylor Young as architect and Hoare Lea as mechanical engineer on a project for the construction of new headquarters. Wimpey were the main building contractors and Matthew Hall the M&E sub-contractor. Prior to completion, while the M&E sub-contractor was commissioning the generator, there was a major fire. The fire caused £670,000 worth of remedial works and additional professional fees together with £300,000 in consequential losses.
Loss not shared
The fire damage was covered by the joint names policy taken out under Clause 22A of the JCT contract and the consequential loss by CRS's separate consequential loss insurers.
CRS then sued the professionals, Taylor Young and Hoare Lea, for negligence. Unsurprisingly, Taylor Young and Hoare Lea brought Wimpey and Matthew Hall into the claim and sought contribution from them, under the Civil Liability (Contribution) Act 1978, on the basis that there was another person liable for the same damage.
Third party proceedings were therefore issued on the basis that Wimpey and Matthew Hall were in breach of contract and liable to CRS for the same damage for which CRS were suing Taylor Young and Hoare Lea.
At this point a preliminary issue on the liability of Wimpey and Matthew Hall to make a contribution was heard. The preliminary issue took place on the assumed facts that the fire was due to a breach of obligation by each of the professionals, Wimpey and Matthew Hall. One would assume that, if all parties were responsible for the damage and were joined in the proceedings, they would all bear the loss. Not so. The reason for the preliminary issue was that both Wimpey and Matthew Hall claimed that they were not liable to CRS for the damage claimed and that therefore no contribution claim lay.
It was argued successfully that, in respect of the remedial costs and professional fees, CRS, Wimpey and Matthew Hall were all insured under the joint names policy. Co-insureds cannot sue each other in respect of loss where the co-insured is entitled to the benefit of the same policy of insurance.
Wimpey and Matthew Hall did not therefore have a liability to CRS as they were co-insured and so could not bring contribution proceedings.
In respect of the consequential losses, the JCT provisions provided that each party to the contract would bear its own losses in respect of fire. Wimpey and Matthew Hall were therefore not liable to CRS for the consequential losses. And so Taylor Young and Hoare Lea could not bring contribution proceedings against them.
If Taylor Young and Hoare Lea had in place Net Contribution clauses, they would face liability only for their portion of the loss, assuming that Wimpey and Matthew Hall were equally liable, and not the entire loss that they currently face.
This case leaves the professional in a disagreeable position and reinforces why professionals must insert Net Contribution clauses into their contracts. After a fire, where there is a joint names policy, the insurer pays out and then seeks recovery. Without a Net Contribution clause the professional who is sued faces bearing the entire loss alone. He cannot, following this case, join the contractors to reduce his loss. He must therefore ensure that he has in place the correct contractual machinery to minimise his loss in the first place.