The important difference between joint, several and joint and several liability.

Startup Series

6 Apr

Written By AGH Law

The difference between joint, several, and joint and several liability

The implications of ‘joint’, ‘several’ and ‘joint and several’ liability are an important consideration for contract drafting, corporate structures and various agreements. A clear understanding of each of these concepts is important prior to entering into any arrangement that gives rise to obligations and/or liabilities.

These concepts are particularly relevant to instances where two or more parties make a promise to a third party to perform under a contract and consequently become liable for that performance.

As a means of interpretation, we will use a simple example of where Party 1 and Party 2 make a contractual promise to repay a loan to a creditor.

Joint liability

Using the above example, the agreement may stipulate that Party 1 and Party 2 are ‘jointly liable’ for repayment of the loan. Here, both parties will be liable for full repayment of the loan, although if either party satisfies the repayment, the other party’s liability will be fully discharged.

If there is a default, the creditor will be entitled to pursue an action against both Party 1 and Party 2 jointly, however, it may have difficulty initiating an action against one party if the other is not joined as a party to the legal proceedings.

Several liability

Conversely, the agreement may state that Party 1 and Party 2 are ‘severally liable’ for repayment of the loan. In these circumstances the parties liability will be divided between them such that Party 1 will be liable for a certain portion of the loan and Party 2 will be liable for the remainder. Here, the parties will only be liable for the portion they promised and if Party 1 fulfils its obligations, this will have no impact on Party 2’s liability for their portion.

The creditor may only bring action against the parties separately and individually for their respective portions of the loan.

Joint and several liability

Joint and several liability captures 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 undertaken to repay the loan jointly, as well as made separate undertakings to repay the full amount individually. If one party repays the loan entirely this will discharge both parties liabilities.

In the event of a default, the creditor will have the option of joining both parties together to the proceedings or pursuing either party individually for the full amount. This may be beneficial for the creditor as it reserves the right to all options for seeking repayment.

If Party 1 or Party 2 makes full repayment of the loan individually, it may then choose to recover some of this amount from the other party separately.

Important considerations

Ensure that any contracts that imposes obligations and/or liabilities are clear with respect to where the liability of each party falls.
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, it should be expressly provided for by clearly stating in the agreement that the parties are ‘severally liable’ or ‘jointly and severally liable’.
In Western Australia, the Partnership Act 1895 (WA) provides that:
- all partners of a partnership are imposes joint liability for any debts and obligations of the partnership;
- upon the death of any partner, the deceased partners estate will become severally liable in a due course of administration for such debts and obligations to the extent they remain unsatisfied, but subject to the prior payment of the deceased partners separate debts;
- partners will be jointly and several liable for any wrongdoings committed in the ordinary course of business, or with the authority of the other partners, that result in loss or injury to any person or a penalty in incurred on the partnership; and
- where any money or property of a third person is received by one partner, acting within the scope of his real or apparent authority in the partnership affairs, and is misapplied by that partner, and where any money or property of a third person, being in the custody of the partnership, is misapplied by any partner, the partnership as a whole will be liable to make good the loss.
Anyone intending to enter into a partnership or company structure should strongly consider entering into either a partnership agreement or shareholders agreement that clearly sets out the rights, obligations and liability of each partner or shareholder (as applicable).
Consideration should be had to how liability will be apportioned for guarantees, particularly in instances where there will be more than one guarantor. Guarantors should be aware of their liabilities before entering into any arrangement.

If you have any queries about this Insight, don’t hesitate to get in touch with our team.

Get in touch

Important

The contents of this publication should not be relied upon as legal advice, but instead as commentary and general information. Specific legal advice about your circumstances should always be sought separately before taking any action based on this publication.