June 2009

Don't pay for the mistakes of others

Net Contribution Clauses

Net contribution clauses are a useful way of reducing your firm’s liability where more than one firm contributes to a loss. An example would be where a sub-contractor carries out defective works under the supervision of a contractor and the contractor should have spotted the defect but does not. Both the contractor and sub-contractor have caused the client loss. In the absence of a net contribution clause the client could choose to sue the contractor only and recover all of its loss from the contractor even though the sub-contractor was primarily responsible. This is because the contractor has also caused the loss by its inadequate supervision. A net contribution clause states that the contractor shall only be responsible for that portion of the loss as would be just and equitable having regard to the extent of his responsibility for the loss, on the basis that others involved in the project have paid to the client such proportion of the loss as would be just and equitable having regard to the extent of their responsibility. The effect of such a clause is to change the contractual responsibility owed by the contractor and to provide him with added protection against a claim.

Indemnities

Contracting parties should avoid clauses whereby they agree to indemnify a loss suffered by the other party. This is because an indemnity provides a greater liability on the party providing the indemnity than would otherwise be the case. Firstly, the party claiming the loss need not worry about its loss being reasonable since the effect of an indemnity is that the party giving the indemnity has agreed to pay the loss - whether it is reasonable or not. Secondly, a party giving an indemnity will be at risk of a claim for longer than a party who has made a simple promise in a contract which is not an indemnity. Normally the claiming party has six years from a breach of contract to issue proceedings claiming the loss suffered whereas when there is an indemnity the equivalent six year period runs from the date the loss is incurred or actually spent rather than from the date of the breach of the contract. So where a contractor carries out defective work in 2000 and remedial costs are incurred or spent in 2006, the six year period in which to issue proceedings will normally start in 2000 for a simple contractual promise but will start in 2006 in the case of a promise to indemnify.

If anyone has any queries arising from this article Stephen can be contacted on 01392 333 883 or by email at s.homer@ashfords.co.uk