In the construction sector, collateral warranties arose in the 1980s as a way of overcoming the legal difficulties of a claimant recovering economic loss resulting from third-party negligence. In essence, if a building owner could not sue third-party consultants, contractors and sub-contractors (with whom the client may have no direct relationship) for negligence then the answer lay in creating a structure of warranties from those third parties.

One particular problem with negotiating collateral warranties has always been the question of joint and several liability. At common law, the rule is that if two wrongdoers are liable then the claimant can sue either of them, and each will be fully liable for the other’s breach. In practical terms, the importance of this is that it transfers the risk of insolvency of one third party contractor to all the other collateral warranty contractors. Needless to say, those entering into collateral warranties will often assert that this is an unfair rule and they will argue instead for a net contribution clause, which limits the individual warrantor’s liability to a ‘fair and reasonable’ proportion of the loss or damage arising. In effect, therefore, the risk of insolvency of another contractor passes to the client. The question of whether net contribution clauses should be used remains highly contentious, and many clients still refuse to include such clauses in collateral warranties in any circumstances, whereas consultants and contractors will usually request such clauses (eg RIBA has such clauses as standard).

The typical net contribution clause works as a limitation of liability. At first sight, therefore, it would seem to be potentially ‘unreasonable’ under UCTA 1977, and there has been much argument about whether that Act makes net contribution clauses ineffective. Surprisingly, there has been no court decision on this point, so it is therefore interesting to note a Scottish case which has decided that UCTA did not apply (and if it had applied, then the net contribution clause would have been reasonable). However, it has to be said that several commentators disagree strongly with the decision, and thus the uncertainty does still remain.