The Law Commission has released a paper on the "Joint and Several Liability Rule". The paper looks at the current rule in the context of leaky buildings and the global financial crisis and considers the alternatives (including proportionate liability). A final report is expected to be released in June this year.
This Alert looks at the issues raised by the Law Commission and argues that a change to proportionate liability would be a good thing for New Zealand companies.
What is the joint and several liability rule?
Where two or more persons have caused loss, each person will be liable for the full extent of the loss. This allows the injured party to recover full compensation from any of the persons who have caused the loss. In short, each defendant will be jointly and severally liable for the entire loss.
The rule is central to the concept of civil liability in New Zealand and allows an injured party to receive full compensation for the loss that they have suffered. However, the rule results in some defendants paying damages which are disproportionate to the loss that they have caused and this is clearly unfair on the defendant.
Why is the Law Commission looking at this now?
The Law Commission last considered the joint and several liability rule in 1998 and gives three main reasons for a further review:
- Leaky Buildings Crisis: There are concerns in the building and construction sector around the apportionment of liability with regards to leaky buildings. Absent or insolvent defendants can have their share of damages reallocated to parties with "deep pockets". The recent receivership of Mainzeal brings further scrutiny to this issue.
- Global Financial Crisis: A number of New Zealand finance companies have collapsed in recent years due to the GFC. Professionals who operate in the financial sector, such as auditors and accountants, have increasingly become the targets of depositors and investors who cannot claim against a collapsed company.
- Closer Relations with Australia: New Zealand's position sits at odds with the majority of proportionate liability schemes in Australia. This is perhaps an unnecessary difference in the context of New Zealand's wider relationship with Australia and the Closer Economic Relations Trade Agreement (CER).
What are the alternatives?
There are a number of alternatives to the joint and several rule - here are a few that the Law Commission considered:
- Proportionate Liability: Proportionate liability means that each defendant is only held liable for their proportionate share of the loss. If you have caused 10% of the loss, you will only be liable for that 10%.
- Hybrid Schemes: E.g. a major/minor distinction where major defendants would continue to be governed by joint and several liability while proportionate liability would apply to minor defendants.
- Statutory Caps on Liability: The liability of certain categories of defendants (e.g. architects) could be capped by statute. This option has been used in Australia where professional bodies are permitted to have limitation of liability schemes in return for compulsory professional indemnity cover.
What will the Law Commission recommend?
Clearly, we will have to wait for the final report to see which way the Law Commission will go on this. However, the paper does seem to indicate a possible shift towards proportionate liability which we think would be a sensible move.
The paper states that any change in the law should apply to all industry sectors although if proportionate liability was to apply to the building and construction sector, certain safeguards would need to be introduced in order to protect consumers (e.g. a home warranty scheme).
Would a change to proportionate liability be a good thing for New Zealand companies?
In our opinion, proportionate liability is a fairer system than the current joint and several liability rule. Defendants will still be liable to the extent of their fault but will not be responsible for other defendants. This provides greater certainty for defendants and would avoid them picking up the bill if the other defendants are unable to pay (e.g. due to insolvency).
Many key players in the building and construction sector as well as professional advisors in the financial sector would welcome a shift towards proportionate liability.
A greater harmonisation with the rules in Australia would also be welcomed by those companies that operate on both sides of the Tasman. Proportionate liability has now become the standard rule for negligence liability in most Australian states.
A key consideration for the Law Commission is what is an appropriate allocation of risk. If there is a change in law, companies would need to adapt and review their insurance positions accordingly.