The important difference between joint and several liability.
The implications of “joint”, “several” and “joint and several” liability are an important consideration in the drafting of contracts, corporate structures and various agreements. A clear understanding of each of these concepts is important before entering into any agreement that gives rise to obligations and / or responsibilities.
These concepts are particularly relevant in cases where two or more parties make a promise to a third party to perform a contract and therefore become responsible for that performance.
As a means of interpretation, we will use a simple example where Part 1 and Part 2 make a contractual promise to repay a loan to a creditor.
Using the example above, the agreement can state that Party 1 and Party 2 are “jointly responsible” for repaying the loan. Here, both parties will be responsible for the full repayment of the loan, although if one party satisfies the repayment, the other party’s responsibility will be fully discharged.
In the event of default, the obligee will have the right to bring an action against Party 1 and Party 2 jointly, but he may have difficulty in bringing an action against one party if the other is not joined as a party. party to legal proceedings.
Conversely, the agreement may stipulate that Party 1 and Party 2 are “jointly and severally liable” for the repayment of the loan. In these circumstances, the responsibility of the parties will be divided among them such that party 1 will be responsible for a certain part of the loan and party 2 will be responsible for the rest. Here the parties will only be liable for the part they promised and if part 1 fulfills its obligations, this will have no impact on part 2’s liability for their part.
The creditor can only bring an action against the parties separately and individually for their respective shares of the loan.
Joint and several liability
Joint and several liability encompasses both scenarios together. Using the same example as above, the agreement may provide that Party 1 and Party 2 are both “jointly and severally” liable. This means that both parties have committed to repay the loan jointly and also have separately committed to repay the full amount individually. If one party fully repays the loan, this will release the responsibilities of both parties.
In the event of default, the creditor will have the option of joining the two parties to the proceedings or suing one or the other of the parties individually for the full amount. This can be advantageous for the creditor as he reserves the right to use all the repayment options.
If Party 1 or Party 2 individually repays the entire loan, then they may choose to recover part of that amount from the other party separately.
Make sure that any contracts that impose obligations and / or responsibilities are clear about the responsibility of each party.
A presumption of joint liability may arise in situations where two or more parties have made a promise to perform under an agreement. If this is not the intention of the parties, this should be expressly provided for by clearly indicating in the agreement that the parties are “jointly and severally liable” or “jointly liable”.
In Western Australia, the Partnership Act 1895 (WA) provides that:
all members of a partnership impose joint liability for all debts and obligations of the partnership;
on the death of one of the partners, the estate of the deceased partners will become jointly and severally liable in due time for these debts and obligations insofar as they remain unsatisfied, but subject to the prior payment of the separate debts of the deceased partners;
the partners will be jointly and severally liable for any reprehensible act committed in the ordinary course of business, or with the authority of the other partners, which will result in loss or injury to any person or a penalty incurred on the partnership; and
when money or property of a third party is received by a partner, acting within his real or apparent authority in the affairs of the company, and is misused by that partner, and when any money or property of ‘a third party, being in the custody of the partnership is misapplied by a partner, the company as a whole will be required to make good the loss.
Anyone intending to enter into a partnership or corporate structure should strongly consider entering into a partnership agreement or shareholders’ agreement that clearly defines the rights, obligations and responsibilities of each partner or shareholder (where applicable). applicable).
Consideration should be given to how the liability will be divided for guarantees, especially in cases where there will be more than one guarantor. Guarantors should be aware of their responsibilities before entering into an agreement.