The reasons for this review
The background to the review
1.6We noted in our Issues Paper that discussion of the relative merits of joint and several liability versus proportionate liability has been ongoing for at least 20 years. In 1992, as part of a wider project dealing with apportionment of civil liability, the Law Commission released preliminary proposals that included retaining joint and several liability. The Commission delayed its Final Report on that project to await the outcome of similar work being undertaken in Australia. When the Commission finally reported in 1998, it continued to recommend the retention of joint and several liability. The Commission considered that this recommendation was required to avoid negative impact on plaintiffs and to best achieve the common law commitment to the objective of fully compensating plaintiffs for loss suffered. Similar conclusions were reached by law reform bodies in, for instance, Australia and Canada.
1.7However, these reports did not settle matters. From 2001 Australia suffered an insurance crisis. This was partly influenced by overseas events including the Enron scandal, but was more particularly driven by the collapse of the HIH Insurance Group, previously a dominant provider in the professional indemnity and public liability insurance market. The insurance crisis had a role in influencing economic reforms; in 2002 the Australian Federal Government agreed with all States to move to a proportionate liability regime for property damage and economic loss claims involving failure to take reasonable care, and for statute-based misleading and deceptive conduct claims.
1.8Unlike Australia, New Zealand did not experience insurance difficulties. However, New Zealand did suffer from the rapid development of leaky home and leaky building problems from around 2000, and in due course this served to reignite concerns about joint and several liability.
Leaky homes and liability
1.9As we discussed in our Issues Paper, the leaky homes crisis has been a major liability event for the wider building industry, centred on leaking or weathertightness issues and affecting predominantly new residential homes in both standalone and multi-unit developments. The crisis had multiple causes and cases typically involve multiple potential liable parties.
1.10Leaky homes cases have brought renewed calls to deal with perceived problems with joint and several liability. The large number of participants involved in any significant building project readily translates to a number of potential defendants for a leaky home claim. Each potential defendant will, most likely, have made varying contributions to any lack of weathertightness that is proven, and may eventually be held to bear differing shares of responsibility (based on the secondary contribution rules) while still being jointly and severally liable for the plaintiff’s indivisible damage (primary liability).
1.11The sheer scale of the crisis in the building industry has contributed to an increasing number of liable defendants becoming unavailable because of personal insolvency or corporate collapse. This has left a shrinking supply of solvent liable defendants to meet some or all of the uncollected share left by insolvent liable defendants. This is inevitably perceived as unfair by solvent liable defendants, especially if they bore only a small or very small share of overall responsibility. The impact of uncollected shares also fell disproportionately on certain categories of liable defendants, especially local authorities who cannot become unavailable due to insolvency and have deep pockets funded by ratepayers.
1.12It was as a consequence of the leaky homes situation that the Government asked the Law Commission to take a fresh look at the issues under joint and several liability and make recommendations on whether any change is required. Although the leaky home crisis was the catalyst, our review and this Report is not restricted to considering certain sectors or situations. The Commission has completed a first principles review of the competing liability rules for multiple parties, and has sought in its recommendations to propose rules of general application, while still taking account of conditions that may apply in particular sectors.
The global financial crisisTop
1.13Problems in world financial markets, after Enron from 2001 and again from 2007 as part of the Global Financial Crisis, have contributed to further concerns regarding joint and several liability. The most notable result of the financial crisis in New Zealand has been the failure of numerous non-bank finance companies or investment schemes, from as early as 2005 through to and beyond 2010. Litigation resulting from these failures has been dominated by criminal prosecutions of finance company directors. However, the possibility exists that depositors interested in recovering lost investments may be able to target a finance company auditor, trustee or supervisor, and could benefit from joint and several liability if the party sued has assets or insurance.
1.14More generally, Enron and the Global Financial Crisis raise at least the theoretical prospect of another major liability event causing a catastrophic failure, like that of Enron’s auditors, Arthur Andersen. Large audit firms, in particular, have argued that joint and several liability leaves important economic infrastructure open to unlimited and potentially catastrophic losses that the economy as a whole cannot afford.