Risky business

In a collateral warranty, there are two reasons for a net contribution clause. One is to ensure that other parties that might be jointly liable are also legally responsible to the warrantee. This is the issue addressed by the suggestion that every consultant and contractor confirms in its contract with the client that it is granting third-party rights. Collateral warranties or third-party rights are different mechanisms to achieve the same legal result.

The other reason for a net contribution clause is to transfer the risk of a party jointly liable with the consultant becoming insolvent from the consultant to the client. The proposal put forward in the article does not address this issue at all.

The proposal therefore reflects a certain view of risk: namely, that the consultant will bear the risk of other companies becoming insolvent. Many in the industry do not think that they should bear this risk. Nowadays the first issue, in practice, represents a lesser risk, since clients now appreciate that warranties (or third-party rights – whichever mechanism is used) need to be given by every consultant and contractor.

Incidentally, if net contribution is such a bad idea, why is the government proposing a statutory regime whereby, on certain terms, auditors may contract out of joint and several liability with their clients (DTI consultation on company law reform, March 2005)?