Negligence – Architect – Net contribution clause – Respondents engaging services of appellant architect for works to house beside river – Net contribution limiting liability of appellant to amount that reasonable in light of contractual responsibilities of others appointed by respondents – Damages awarded against appellant in respect of damp problems and inadequate M&E installations – Main contractor also partly responsible for those losses but insolvent – Whether liability limited by net contribution clause -Whether that clause unfair or unreasonable – Appeal allowed
The respondents engaged the appellant firm of architects, which effectively consisted of a sole principal, in connection with their plans for extensive works of renovation and improvement to a house beside the river Thames in Putney, London SW15, which they had recently purchased for £1.7m. The engagement was on the terms of an agreement for “Normal Architectural Service as per RIBA Conditions” as amended by the agreement. It contained a “net contribution clause”, by which any liability of the appellant for loss and damage was to be limited to “the amount that it is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you”. The intended works to the property included lowering the lower ground floor and replacing the plumbing, mechanical services and electrics (the M&E services). In June 2006, the respondents engaged as the main contractor a company that the appellant had introduced to them. At various stages, the respondents also engaged specialist contractors for the design, supply and installation of a conservatory and the supply and installation of wooden floors, a staircase, and the kitchen.
After the respondents moved into the house in May 2007, they found extensive damp in the lower ground floor. Serious defects were discovered in the floor slabs and the M&E installations. The respondents moved out of the house while remedial works were carried out.
By that time, the main contractor for the original works was insolvent. However, the respondents were successful in a claim against the appellant. The judge held that the appellant was in breach of its professional duties and awarded damages of £649,251, plus interest at 7% pa over base rate on the respondent’s actual expenditure and 2% pa on general damages, totalling £243,688.89. He declined to reduce that award to reflect the fact that the respondent’s losses were caused to some extent by the main contractor’s breach of contract. He held that the net contribution clause was intended to apply only in respect of specialist contractors appointed directly by the respondents and not to the main contractor appointed through the appellant: see [2013] EWHC 868 (TCC); [2013] PLSCS 81.
The appellant appealed. The respondents submitted that even if the clause in principle applied, it was unenforceable as being contrary to the Unfair Terms in Consumer Contracts Regulations 1999 and Unfair Contract Terms Act 1977.
Held: The appeal was allowed.
(1) There was no ambiguity in the wording of the net contribution clause. On its ordinary meaning, the clause limited the appellant’s “liability for loss or damage” to the amount that it was reasonable for it to pay having regard to “the contractual responsibilities of other consultants, contractors and specialists appointed by you”, namely by the respondents. There was no limitation on those words, which should therefore be taken to mean any such persons, including any main contractor ultimately appointed, and excepting only the appellant itself. The judge had erred in placing too much reliance on the context of the agreement, particularly the parties’ knowledge that the respondents would instruct a number of specialist contractors directly, in holding that the clause was intended to refer only to such specialist contractors. That was not an available meaning of the words used; nor was the background sufficiently compelling and obvious as to require the conclusion that the parties used the wrong words. There was no suggestion that the ordinary construction of the words flouted business common sense: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 considered.
(2) The net contribution clause was not precluded from being binding by regulation 8 of the 1999 Regulations. It was not “unfair”, within regulation 5(1), as a contractual term that had not been individually negotiated and which, contrary to the requirement of good faith, caused a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of the consumer. If valid, the clause would limit the appellant’s liability in a similar way to an evaluation of contribution under section 2(1) of the Civil Liability (Contribution) Act 1978, such that the task of identifying what it was “reasonable” for the appellant to pay under the clause was much the same task as identifying, for the purposes of the 1978 Act, what it would be “just and equitable” for a party to pay by way of contribution as between persons liable for the same damage. That exercise did not take into account the financial ability of the persons from whom contribution might theoretically be claimed to satisfy any claim against them.
The net contribution clause did create an imbalance in the parties’ rights under the contract to the detriment of the respondents, since it conferred on the appellant a beneficial limitation of liability and imposed on the respondents a corresponding disadvantage, including the risk, in the case of the joint and several liability of the appellant and one or more other contractors, of the insolvency of those other contractors. However, the imbalance, viewed in isolation, was not significant, in light of the prevalence of such clauses in standard RIBA forms, the fact that the clause would be not regarded as unusual in a commercial contract, and the fact that the respondents would be taking the final decision on the choice of main contractor, while probably being aware that the contractor’s financial stability was a matter of importance. The clause was not, in the circumstances of the case, so weighted in favour of the appellants as to tilt the parties’ rights and obligations under the contract significantly in the appellant’s favour. Even if that were wrong, the clause did not cause a significant imbalance in a manner or to an extent that was contrary to the requirement of good faith. Each case depended on its own facts. Although the clause was so framed as not to alert the reader to its more radical consequences, and did not expressly draw the reader’s attention to the fact that it was shifting the insolvency risk of the other contractors from the appellant to the client, in the instant case the openness of the presentation of the clause, the appellant’s fair dealing in relation to it and the reasonable equality of bargaining power of the parties weighed in favour of finding that the inclusion of the clause satisfied the requirement of good faith. The respondents were well able to understand the clause and its ramifications had they taken the time to do so: Director General of Fair Trading v First National Bank plc [2001] UKHL 52; [2002] 1 AC 481 applied.
(3) Nor was the net contribution clause unreasonable under the provisions of the 1977 Act. The respondents ought reasonably to have known of the existence of the clause. They were in an equal bargaining position with the appellant and could have re-negotiated the clause, gone to another architect or protected themselves from the risk posed by the clause by some other commercial route. Taking those matters into account, along with all the factors mentioned above in relation to the 1999 Regulations, the clause satisfied the requirement of reasonableness within the meaning of the 1977 Act and was therefore an effective limitation on the appellant’s liability.
(4) The net contribution clause was therefore a valid and binding clause. The judge should have considered the amount that it was reasonable the appellant to pay in all the circumstances, having regard to the contractual responsibilities of the main contractor. That exercise would involve an evaluation of the proper apportionment of liability as between the appellant and the contractor in the manner of the 1978 Act. The case was accordingly remitted to the judge to undertake that task.
Patricia Robertson QC and Richard Coplin (instructed by CMS Cameron McKenna LLP) appeared for the appellants; Adrian Williamson QC and Jonathan Selby (instructed by Hewitsons LLP) appeared for the respondent.
Sally Dobson, barrister
