IT IS IMPORTANT for lawyers to understand the circumstances in which liability is shared and the potential impact of the law governing proportionate liability, whether they practise in the area of transactions or dispute resolution. Proportionate liability is often the subject of one of the provisions in the engagement terms that law firms enter into with their clients.
This column discusses proportionate liability and the written law that governs the concept in common law jurisdictions and the Chinese mainland.
Liability in common law jurisdictions
Proportionate liability legislation affects or interferes with the operation of both joint liability, and joint and several liability. The terms “joint lability”, “several liability” and “joint and several liability” are often seen, but what is the distinction between the three concepts?
A key point of distinction is whether the obligations that give rise to liability are separate or the same. Several liability describes the situation where two or more obligors (i.e. parties who owe obligations to other parties) undertake separate obligations to another party, and each obligor is liable only for its own obligations. As a result, if one of the obligors cannot meet its obligations, the other obligors are not liable.
An example of a transaction in which several liability arises is a syndicated loan, where each lender is only responsible for lending the amount that it has agreed to lend, and there is no liability on the part of the other lenders if it fails to do so.
Joint liability, on the other hand, describes the situation where two or more persons undertake the same obligation in favour of another party. Each obligor is liable in full for the performance of the relevant obligation. If one obligor pays the liability in full, it can require the other obligors to pay their share of the liability by way of contribution.
An example of joint liability is the liability that partners in a partnership share for the debts and contractual obligations of the partnership. The reason the nature of the liability is joint liability, and not joint and several liability, is that when a partner enters into a contract on behalf of the partnership, the contract is treated as binding the partners jointly, and not each partner individually. This concept is based on principles of agency law and was recognised by the common law before the partnership legislation was first enacted in England.
Partners, however, have joint and several liability in relation to any tortious acts committed by a partner in the ordinary course of the business of the partnership. This is because this liability arises independently of contract and on the basis of the general law.
For previous columns that discuss the distinction between “joint liability” and “joint and several liability”, see China Business Law Journal, volume 4, issue 4: Joint and several, and CBLJ, volume 4, issue 6: Partnership.
So how does one distinguish joint liability from joint and several liability? Traditionally, there have been two important features of joint liability that distinguish it from “joint and several” liability:
(1) Under joint liability, all obligors should be sued (i.e. they should all be joined as parties to the action). This means that the party, referred to here as the creditor, who benefits from the obligation, has only one opportunity to sue. Failure to include all obligors precludes subsequent action against the other obligors. In the case of a partnership, plaintiffs usually sue a partnership in the name of the firm, which means that all the partners are deemed to be sued; and
(2) If the creditor releases one of the obligors from its obligations, the other obligors will also be released unless the creditor expressly reserves its rights against the other obligors.
As the term suggests, joint and several liability is a combination of several liability and joint liability. This means that the creditor may take action against one or more of the obligors. If the creditor does not receive payment in full from one of the obligors, it can then take action against the other obligors (it is always possible for an obligor who is sued to apply to add other obligors as parties to the proceedings, and for a court to order that the other obligors be added).
Note that joint liability can arise in a contract, a tort, or under statute. An example in a contract is a guarantee. A guarantee can give rise to joint and several liabilities on the part of two or more guarantors. It can also give rise to several liability in circumstances where the guarantors guarantee different debts or different percentages of the same debt.
An example of a tort is where an agent commits a tort, and the agent and the principal are jointly liable for the tort. This also applies between an employee and an employer, where a tort is committed by an employee. Employees often enjoy rights of indemnity against the employer.
Joint and several liability in tort is most relevant to negligence cases. An example is where two professional advisers owe a duty of care to a client and breach that duty of care.
Policy rationale for legislation
The underlying policy rationale of the proportionate liability legislation is that liability for loss should be apportioned between each wrongdoer according to its respective responsibility for the loss, and each wrongdoer’s liability should be limited to the amount apportioned to it. The legislation, therefore, has an impact on the operation of joint liability, and joint and several liability.
In Australia, the proportionate liability legislation was first advocated in the early 1990s, as concerns were voiced by professionals about the extent of their potential liability and the impact that this had on the cost of insurance. This was particularly acute in the case of auditors who would end up being the target of negligence claims, and being sued for the entire damages claim, even though their responsibility may have been relatively small. This led to an enquiry in 1994 by the Commonwealth and state of New South Wales governments.
Ultimately, the question is who should bear the risk of an insolvent wrongdoer or an untraceable wrongdoer – the plaintiff or the defendant with the deep pockets? The argument behind the proportionate liability legislation is that, in the case of financial loss or property damage, this risk should lie with the plaintiff.
It is relevant to note that claims arising out of personal injury are excluded from the proportionate liability legislation in Australia, as this would be unfair to plaintiffs who had suffered personal injury.
Proportionate liability is said to encourage earlier settlement of disputes, as insurers in particular are more willing to admit liability and settle if they know that they will only be liable for a proportionate amount of the damages.
There are, of course, arguments against proportionate liability. One argument is that plaintiffs have less flexibility when determining their strategy for suing defendants. Another argument is that plaintiffs incur time and cost in working out the impact of proportionate liability on their claims against defendants.
Proportionate liability legislation in Australia came into force in 2001. Relevant provisions in the legislation in the state of Victoria under the Wrongs Act are set out below:
24AI. Proportionate liability for apportionable claims
In any proceeding involving an apportionable claim:
(a) The liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the loss or damage claimed that the court considers just, having regard to the extent of the defendant’s responsibility for the loss or damage; and
(b) Judgment must not be given against the defendant for more than that amount in relation to that claim.
24AJ. Contribution not recoverable from the defendant
Despite anything to the contrary in part IV, a defendant against whom judgment is given under this part as a concurrent wrongdoer in relation to an apportionable claim:
(a) Cannot be required to contribute to the damages recovered or recoverable from another concurrent wrongdoer in the same proceeding for the apportionable claim; and
(b) Cannot be required to indemnify any such wrongdoer.
In contrast, the Civil Liability (Contribution) Act, 1978, (UK) provides that where there are concurrent wrongdoers, the plaintiff can recover the full amount from any one wrongdoer, on a joint and several basis, and the wrongdoer can then seek a contribution from the other wrongdoers. The UK does not yet have proportionate liability legislation.
In a decision on Barker v Corus (UK) (formerly Saint-Gobain Pipelines) (2006), the House of Lords introduced the concept of proportionate damages in relation to asbestos cases. This trend, however, was cut short by legislation stating that employers are jointly and severally liable in such circumstances.
Professional advisers
In the above-mentioned section, law firms often include in their client engagement terms a proportionate liability provision. In jurisdictions where proportionate liability legislation exists, this provision may not be so necessary (at least in a domestic context).
However, even if proportionate liability exists in the jurisdiction in which the services are being provided, it may still be necessary to include such a provision to mitigate the risks and uncertainties that arise in relation to the cross-border supply of services.
A simple example of such a provision is as follows:
“Our liability to you in relation to the services (if any) is limited to that proportion of the loss (including interest and costs) suffered by you, which is agreed between us or ascribed to us by a court allocating proportionate responsibility to us having regard to the extent of our responsibility for the loss and the contribution to the loss in question by you and any third party.”
In some cases, the provision explicitly provides that, in determining the existence and extent of the responsibility of any third party, no account shall be taken of any agreement limiting the amount of damages payable by the third party, or of any actual or possible shortfall in recovering an amount from the third party.
A related provision – one that is very important in circumstances where proportionate liability may not be effective – is the liability cap provision (for a discussion about liability caps, see CBLJ, volume 5, issue 5: Liability caps).
Chinese mainland
On the Chinese mainland, the following articles in the Civil Code make provision for allocating liability in tort cases.
(1) Article 1168. If two or more persons jointly commit an infringement act and cause damage to others, they shall bear joint and several liability.
(2) Article 1171. If two or more persons commit infringement acts separately and cause the same damage, and each person’s infringement act is sufficient to cause all the damage, the perpetrators shall bear joint and several liability.
(3) Article 1172. If two or more persons commit tortious acts separately and cause the same damage, and the degree of liability can be determined, each shall bear the corresponding liability; if it is difficult to determine the degree of liability, the liability shall be equally borne.
(4) Article 1173. If the infringed party is at fault for the occurrence or expansion of the same damage, the liability of the infringer may be reduced.
Article 1172 makes provision for proportionate liability. Article 1173 makes provision for contributory negligence.
In September 2024, the Supreme People’s Court issued the Interpretation on the Application of the Tort Liability Section of the Civil Code of the People’s Republic of China. Although it does not deal specifically with proportionate liability, it clarifies many related concepts.
Andrew Godwin previously practised as a foreign lawyer in Shanghai (1996-2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law. Andrew is currently Joint Associate Director of the Corporate Law and Financial Regulation Research Programme at the Melbourne Centre for Commercial Law and Honorary Associate Director (Commercial law) of the Asian Law Centre. Andrew has acted as a consultant to a broad range of organisations, regulators and governments in Australia and abroad. He served as Special Counsel and Acting General Counsel of the Australian Law Reform Commission between 2020 and 2024.
