Principle and efficiency in joint and several liability

The Department of Trade and Industry is expected shortly to reach a decision on the issue of joint and several liability. This follows consultation on a Law Commission study of the feasibility of reforming the legal principle on which this is founded. The Association of British Insurers has considered the issue from first principles, and from its unique position as the trade association representing insurers who manage some u635 billion of invested funds.

The Association believes that joint and several liability is a means of protecting the interests of investors. Moreover, with some relatively minor changes it can also operate in a way which is fairer to defendants.

Co-defendants can be found jointly and severally liable for the loss only if it can be established that each is responsible for the entire loss. Accordingly, it seems right that the plaintiff should be able to claim his entire loss from any one of the co-defendants, even if each defendant’s responsibility is less than complete in comparison to his co-defendants.

Any joint and severally liable defendant has the right to seek a contribution from other parties who are also held to have contributed to the plaintiff’s loss. This raises the unsatisfactory possibility that a co-defendant might have to bear the entire risk of another co-defendant’s insolvency or impecuniosity when taking contribution action. It would be more unsatisfactory, however, were the blameless plaintiff required to bear the whole of this risk because of a system of proportionate liability.

The Association understands the argument that joint and several liability, while sound in principle, is not always economically efficient. A more appropriate balance between principle and economic efficiency could be attained through modified proportionate liability, with some reallocation of an uncollected share. The Commission identified this type of modified proportionate liability as the most attractive solution to this thorny problem.

Under this method, the court would initially determine the proportionate shares of liability attributable to each co-defendant who would remain jointly and severally liable, but with an important modification. In the event of the inability of one of the co-defendants to pay, the liability of the other co-defendants would be increased only to the extent of their proportionate share of the total liability as determined by the court, multiplied by the amount of such liability attributable to the defaulting co-defendant. It follows from this that any shortfall would then represent a loss to the plaintiff. This is probably fair because investing is a commercial decision and it is perhaps unrealistic for investors to expect to be totally sheltered from the adverse consequences of unwise investment decisions. However, complete proportionate liability tips the scales too far in the other direction. This is because the co-defendants would be responsible only for their proportionate share of the liability even where some or all of the other co-defendants were unable to pay.

Section 310 of the Companies Act provides important protection to shareholders in respect of the liability of auditors and directors. It would be difficult to devise adequate safeguards for shareholders to substitute for the Section in the event of its abolition.

However, it is possible that its modification, permitting liability to be limited to the auditors’ proportionate share or, better still, twice the proportionate share, could be acceptable. This might be an appropriate way forward if the wider review of the law pertaining to this is not to be pursued.

Other solutions, such as the capping of liability, are bound to be arbitrary.

Incorporation is the appropriate route for any auditing entity which wishes to conduct its business activities on a limited liability basis. It is also important that, given the importance of the audit to business activities, auditing firms should remain firmly within the jurisdiction of the UK authorities.

David Leighton is Head of Legal and Fiscal at the Association of British Insurers.