Contents

Chapter 3
The appropriate liability system for multiple defendants

Analysis of joint and several liability

3.2The requirement that each liable defendant is liable for the totality of the loss is seen as the key advantage of joint and several liability. Supporters of joint and several liability accept that if one or more liable defendants are not available, then it is appropriate that the remaining available liable defendants should be responsible for compensating the plaintiff. The consistent view of the various law commissions who have examined the question of the appropriate liability regime is that joint and several liability meets the legitimate expectations of plaintiffs who have been harmed by the actions of liable defendants.32 Any shift away from the joint and several liability regime will transfer part of the risk to the plaintiff. The plaintiff, however, is the only party who has not actually caused the loss, unless there is an issue of contributory negligence. This is seen as so advantageous that the law commissions have not recommended major changes.33

3.3An obvious but important point to highlight is that a defendant will only incur the risk of full liability if they have actually contributed to the full loss. A liable defendant who contributed to or caused only some identifiable portion of the plaintiff’s loss has not caused the same damage as other liable parties and should not be jointly and severally liable with them.

3.4The great virtue of joint and several liability is that the plaintiff will in theory receive full compensation for their loss provided at least one liable defendant is present and solvent. The plaintiff has the freedom to choose which defendant they will commence proceedings against. The plaintiff can also choose which liable defendant or defendants they will enforce judgment against and in which order. The contribution issues between liable defendants and third parties joined by them are matters solely for them, and need not concern the plaintiff.

3.5The consistent view of various Law Commissions who have examined the question of the appropriate liability regime is that joint and several liability meets the legitimate expectations of plaintiffs who have been harmed by the actions of liable defendants. Any shift away from the joint and several liability regime will transfer part of the risk to the plaintiff.

3.6The central feature of joint and several liability, that so long as there is an available liable defendant an innocent plaintiff34 will not have to bear any proportion of the loss, is also the feature most objected to by its critics. The question from potential defendants and other critics is whether it is appropriate, reasonable or fair that a liable defendant who has the financial capability to pay should have to bear the full loss if other defendants are not present or are insolvent. The objection is especially strong if the solvent liable defendant, compared to other defendants, was judged to bear only a small share of fault or responsibility for the loss.
3.7The argument also has aspects other than fairness. It has been asserted that the joint and several liability rule is likely to contribute to excessive caution by some parties.35 An example where this may occur is a building project where there are many parties who contribute. All parties naturally have incentives to avoid risk and minimise their exposure to liability. However, the argument suggests that fear of 100 per cent liability from joint and several liability provides strong incentives for parties to take excessive steps to reduce or eliminate their risk of liability. The overall effect is to increase costs and potentially reduce innovation, since with innovation there is likely to be greater risk.

3.8It is by no means clear how far these suggested negative effects can fairly be traced back to joint and several liability. Simple fear of any liability may be enough to encourage parties to exercise excessive precaution, especially if the consequence of liability is high. Levels of precaution may also depend on how well defined the required standard of care is, achievement of which would avoid liability. If the standard of care is not clearly defined or regulatory or judicial decisions are unpredictable, parties may react by either abandoning all efforts to exercise care or taking excessive steps “just in case”. Fear of joint and several liability may add to the mix, but it is not the only, nor necessarily the decisive, factor affecting parties’ decisions about how much care to exercise.

3.9A further effect of joint and several liability in the building industry is that local authorities are often the only solvent and available liable defendant, and are effectively acting as insurers for homeowners. This means that ratepayers are acting as insurers of last resort when a building fails as a result of wrongdoing by multiple insolvent wrongdoers. It must be doubtful that this arrangement is either efficient or fair.

3.10The fact that joint and several liability is the current liability regime for multiple defendants in New Zealand, as well as the most common regime used internationally, is also important. Any case for proportionate liability would need to be strong enough to outweigh the current benefits to plaintiffs under joint and several liability that would be lost. A convincing case for proportionate liability would need to demonstrate that a switch would better support industry or commerce by being more economically efficient. If such a benefit were demonstrated this might justify a change, even if it involved transferring some risks to plaintiffs. However, as we indicated in our Issues Paper, the economic evidence to support proportionate liability is lacking.36 Nor have we been able to locate any empirical evidence to show that proportionate liability may achieve economic efficiencies. From the limited evidence available, moving to proportionate liability is likely to cause economic disbenefits.37
32New South Wales Law Reform Commission Contribution between Parties Liable for the Same Damage (Report 89, 1999); Law Commission of Ontario Joint and Several Liability under the Ontario Business Corporations Act (2011).
33Thus in 1999, the New South Wales Law Reform Commission did not consider that the problems with joint and several liability warranted a change, above n 32. But, note that this view did not convince policy makers at both the state and commonwealth level. They have made the decision to shift to proportionate liability for property and economic losses, excluding personal injury. Australia is so far the only complete national jurisdiction to make this change.
34That is, where there is no question of contributory negligence on the part of the plaintiff.
35New Zealand Productivity Commission Housing affordability inquiry (New Zealand Productivity Commission, Wellington 2012) at 161. See also Law Commission Review of Joint and Severable Liability (NZLC IP32, 2012) [Issues Paper] at ch 8.
36Issues Paper, above n 35, see generally ch 8.
37MA Geiger, K Raghunandan and D V Rama “Auditor decision-making in different litigation environments: The Private Securities Litigation Reform Act, audit reports and audit firm size” (2006) 25 Journal of Accounting and Public Policy 332. Geiger, Raghunandan and Rama found that after law changes that introduced proportionate liability big firm auditors were significantly less likely to issue qualified audit reports regarding clients that went into bankruptcy shortly afterwards. The change to proportionate liability was not the only change affecting litigation risk; changes in the same Act made it harder for third parties to join in class action lawsuits. But it is clearly arguable that both changes to perceived litigation risk and cost affected auditors and contributed to reduced and insufficient precaution.