Who should bear the risk and ultimately the financial burden of insolvent wrongdoers when determining the liability of defendants to a plaintiff? The defendants, or the plaintiff?
The Law Commission revisits this question in an Issues Paper, published last week, after recommending in 1998 to retain the traditional position.1
Submissions are due by 31 January 2013.
The Issues Paper prefaces a final report by the Commission expected to be released next year. At this stage, the Commission is not indicating a preference but says the choice must be based on an overall assessment of who should bear the risks of absent or insolvent defendants and that the test must be which rule or combination of measures is most likely to produce results that are efficient and fair to and between the parties.
The Commission is faced with a difficult task as the two main competing options each involve an inevitable measure of unfairness.
Joint and several liability
Under the current joint and several liability rule, each defendant is liable for the whole of the plaintiff’s loss or damage regardless of how many other defendants are also liable for that same loss. A plaintiff can pick and choose which defendant to sue, and can recover the whole of their loss from that defendant, but may not recover in total more than the amount of their loss.
The chosen defendant can then seek a contribution from other wrongdoers. However, this will depend in practice on whether the other wrongdoers are solvent and/or have insurance that will cover their share of the liability.
This places the burden of insolvent or uninsured defendants on the shoulders of those defendants with strong capital positions and deep pockets (e.g. local government authorities).
Why the need for change?
There has been longstanding concern by well-resourced defendants that the rule leaves them ‘carrying the can’, at least in a financial sense, when their actual contribution to the claimed loss is proportionately very small. But the issue was brought into sharp relief by the leaky building crisis, where a large number of property development and construction companies were insolvent and beyond the reach of liability claims.
Particular concerns are that the rule:
- is fundamentally unfair because it imposes financial liability above degree of fault
- creates overly risk averse, defensive behaviours from cautious defendants
- gives rise to risk avoidance practices (such as the use of limited liability companies), and
- affects the availability and cost of insurance because defendants with comprehensive insurance inevitably become a ‘deep pocket’ and therefore a risk to insurers.
Alternatives to joint and several liability
The main alternative is proportionate liability, which is the regime in place in most Australian states.
Under this system, each liable defendant is liable only for the proportion of the loss or damage that a court determines is just, taking into account that defendant’s relative level of fault or comparative responsibility. The plaintiff must sue each responsible party to get full compensation and, if any of those parties cannot pay, the plaintiff bears the cost.
Proportionate liability appeals to equity and fairness between defendants but creates situations where a plaintiff cannot recover fully.
To mitigate against this, the Australian model relies on mandatory home insurance. But this is not a “silver bullet” because, if cover is a “last resort” (as it is in Australia), plaintiffs have to sue every available party to demonstrate that there is no other avenue for compensation. This is a costly process, and policy exclusions and caps limit the amount of compensation recoverable.
It is also questionable whether the New Zealand insurance market would have the appetite to provide such insurance given the risks involved, particularly in light of widespread concern about building standards and practices following the leaky building crisis and Canterbury earthquakes.
An amended form of proportionate liability in the British Columbian Negligence Act 1996 attempts to strike a middle ground. Under that Act, a plaintiff found contributorily negligent can only recover “severally” against defendants. This means defendants are only responsible for the portion of the damage equal to their degree of fault. Where the plaintiff has not contributed to the loss/damage, they can recover from all defendants jointly and severally in the ordinary way.
Chapman Tripp comment
Proportionate liability is an attractive alternative because it goes further than simply reallocating liability and takes a step toward redistributing accountability. The theory is that if defendants only have to worry about liability for their own actions, they are more likely to want to be more involved in projects and to work together with other parties to produce quality work.
In our view, the British Columbian approach is preferable as it achieves a fairer middle ground where defendants and plaintiffs share the burden of absent wrongdoers depending on their respective culpability. It is also more consistent with the general approach to damages for torts, which places the plaintiff in the position they would have been had it not been for the defendant’s wrongdoing.
Although previously rejected by the Law Commission, and more recently in a report prepared by Buddle Findlay in connection with the Sapere Research Group2, the Issues Paper does not rule out proportionate liability but says that, if it is to be applied, it should be applied universally across all industries rather than being confined to specific sectors, such as construction.
There are obviously competing advantages and disadvantages with each set of rules, and a shift in how liability and risk is allocated needs to be carefully considered. The final recommendation could have wide ranging consequences for both defendants and plaintiffs and we look forward to the Commission’s final recommendations.