Contents

Summary

1The question of how to allocate liability for damages among two or more parties who are liable to pay for the same damage is controversial in New Zealand and in other common law countries. Difficulties arise when at least one of the liable parties cannot or does not pay. Should other liable parties be made to pay the plaintiff all the damages, including any amount left unpaid by a missing defendant?1 Or is it fairer to for each defendant to be liable only for their proportionate share of responsibility for the plaintiff’s loss (as determined by a court) with the plaintiff having to bear the cost of any uncollectable share? In effect, the key choice that must be determined is: who bears the risk of an uncollectable share – the plaintiff or defendants?
2In New Zealand where more than one party is in breach of obligations imposed through tort, equity or contract, and these breaches together cause the same loss or damage,2 the present basis of liability is joint and several liability. That is, each defendant is liable for the whole of the plaintiff’s loss. This is the case regardless of how many other defendants are also liable, although contributions from other defendants may be sought. This liability regime protects the plaintiff. If one liable defendant is not available or is insolvent, the plaintiff can enforce judgment against the remaining liable defendant(s) for any part of the damages that remain unpaid. The risk of a liable defendant not paying their share is borne by the other liable defendants.

3The most common alternative regime to joint and several liability is some version of proportionate liability. Under a pure proportionate liability regime, each liable defendant is liable only for the proportion of loss or damage that a court determines is just, taking into account each defendant’s relative level of fault or comparative responsibility. This liability regime protects defendants from having to pay any more than what the court determines is their share of responsibility or blame, and the risk of a defendant not paying their share is borne by the plaintiff.

4In 2011, following Cabinet deliberations on the impact of the leaky homes crisis on the building sector, the Minister Responsible for the Law Commission referred a request to the Law Commission to conduct a review of what rules should govern the situation where two or more civil defendants are held liable to a plaintiff for the same indivisible damage.

The most appropriate liability system for multiple defendants

5The terms of reference for this project state that:

The Law Commission will consider whether the rule [of joint and several liability] should be retained, replaced or amended, either generally, or in relation to particular professions or industries, including the building and construction industry, auditors and accountants.

The Commission will consider the key advantages and disadvantages of different forms of liability, including:

– joint and several liability;
– proportionate liability;
– liability capped by statute; and
– contractual limitations on liability.

6We began this project by publishing an Issues Paper in November 2012.3 In response to the Paper, we received submissions from a number of groups, including local government, the building sector, members of the accounting and legal professions, homeowners, insurance firms and other professional advisers. We also met with many people who have significant interest or experience in the operation of the joint and several liability rule.

The Commission’s conclusions

Joint and several liabilityTop

7In assessing the merits of civil liability regimes where there are multiple defendants, we are of the view that the policy issue fundamentally comes down to a choice between a liable defendant having the risk that a co-liable defendant will not be able to pay their share, or the plaintiff bearing that risk. We have concluded that protection should continue to be afforded to the innocent party. Liable defendants who have actually caused the harm should bear the risk of uncollectable shares.

8A convincing case for proportionate liability would need to demonstrate that a switch would better support industry or commerce by being more economically efficient. This might justify a change, even if it involved transferring risks to plaintiffs. However, we could not locate any empirical evidence to show that proportionate liability can achieve such efficiencies.

9Therefore, our primary recommendation is that joint and several liability should be retained where more than one party is in breach of obligations imposed through tort, equity or contract, and these breaches together cause the same loss or damage. However, we make further recommendations to allow for some relief from the full effects of joint and several liability where the effects on liable defendants may be extreme.

The minor defendantTop

10Many submitters and consultation participants argued that joint and several liability is unfair because it can result in a party whose breach has contributed the plaintiff’s loss, but is minor compared to the other liable defendants, bearing the full amount of the loss. While we found it difficult to assess how often this occurs, we nevertheless can conceive of circumstances that could produce a clear injustice if a truly minor party was required to meet significant damages left unpaid by other parties.

11We have therefore recommended giving the courts power to make orders that would mitigate the full application of joint and several liability to defendants who have only a minor responsibility for a plaintiff’s loss, in a case where joint and several liability would produce a clear injustice. Nevertheless, we expect joint and several liability to remain the norm. In a case where a court decides that relief is warranted, the court must balance the interests of the plaintiff and minor liable defendant, and ensure that the plaintiff will still receive an effective remedy.

Contributions by co-liable defendants towards uncollected sharesTop

12Even where there is more than one available and solvent liable defendant under the joint and several liability rule, one liable defendant can be required to pay the full loss or a disproportionate amount of the loss to the plaintiff. It is then up to that defendant to pursue the other solvent liable defendants. However, under the rules of contribution, those other liable defendants cannot be required to pay more than their allocated contribution to the defendant who has already paid the plaintiff in full. Accordingly, one liable defendant (the defendant first pursued by the plaintiff) will bear either the full amount or a greater proportion of uncollected shares of insolvent or missing liable defendants.

13In our view available and solvent liable defendants should share the cost of uncollected shares, in direct proportion to their shares of responsibility. We therefore recommend an addition to the rules of contribution that will permit an application for supplementary contribution, to spread the cost of an uncollected share proportionately among remaining solvent liable defendants.

Specific sectorsTop

14It was clear from our consultation and our own research that two sectors are likely to suffer disproportionately from “deep pocket” issues, or as a result of a major or catastrophic liability event.

15The first sector was residential construction, particularly local authority participants who act as building consent authorities. As a result of the leaky building crisis, local authorities have frequently been “deep pocket” defendants, to the point where they have been unable to insure for weathertightness-related liability. Building consent authorities are also unusual in that they do not enter a market to make a profit, cannot withdraw from providing mandated services and usually have no choice other than to pass on incurred liabilities to ratepayers.

16We considered the practicality of introducing proportionality in the residential construction sector. Without evidence of the deep pocket issue being a systemic problem beyond local authority participants, we could not recommend the introduction of proportionate liability in this sector. This conclusion was bolstered by some specific legislative steps that have been taken over the past decade to help resolve the leaky home crisis, as well as more general changes and improvements to building legislation and regulations.

17However, we recognise that the deep pocket problem will remain after leaky homes have been dealt with, especially if another major liability event occurs. We therefore recommend the introduction of caps on liability for building consent authorities, for new liabilities arising after leaky homes claims have been dealt with.

18In their submissions, many professional service providers and advisers argued that, like local authorities, they were at risk of being or becoming deep pocket defendants. This is because it is common in this field to have public liability or professional indemnity insurance and to have strong incentives to minimise reputational risk by settling a claim or threatened claim. These factors, it is argued, may lead to professionals paying more than their fair share of responsibility. These submitters argued for proportionate liability and capped liability, both of which are in operation in Australia.

19We find that, in the absence of trans-Tasman markets for professional services, the risk of being the liable defendant first sued by the plaintiff is one which must be borne by the defendant. In so far as is practical, professionals can often still reduce the potential scale of liability through indemnity insurance and by negotiating contractual limitations of liability.

20However, where a trans-Tasman market for particular services does exist we find the argument to better align liability systems more compelling. We are satisfied a trans-Tasman market for audits of large firms already exists, and it will continue to expand. With capped liability schemes for auditors applying in all or nearly all States in Australia, we have recommended that New Zealand auditors conducting large audits have a capped liability scheme in broadly similar terms to Australian models. We expect that such a scheme should be structured so that most normal liability events will be unaffected. But, should a very large audit firm be exposed to a catastrophic loss, their liability would be capped at a known level, set by the scheme.

1Usually described as an “uncollected share” or “uncollectable share”.
2Parties may however agree in contract the extent to which they will be liable to one another for breaches and, if applicable, how liability may be apportioned between multiple parties.
3Law Commission Review of Joint and Several Liability (NZLC IP32, 2012) [Issues Paper].