Joint And Several Liability Meaning Example Why Does It Exist

Joint and Several Liability Meaning

In other words, in the case of any breach of contract conditions, the grieved party to the contract can sue the other party (comprising two or more persons) either individually or jointly for discharging the Contract’s obligations.

Explanation

Joint and several liability results in the claimant suing for discharging liability arising from the contract from the other party (two or more persons) individually or jointly. Let’s explain this with the help of a hypothetical example.

ABC LLP firm comprising three partners, Mr. A, Mr. B, and Mr. C, agreed with Mr. Black to handle exclusive event management. The Agreement entered into between ABC firm and Mr. Black clearly states that in the event of any damages arising during the conduct of the said agreement, ABC LLP firm and its partners will be jointly and several liable to discharge the damages.

While executing the event management for one of the events of Mr. Black, a large fire took place, resulting in damages to the backstage artists as well as to Mr. Black, resulting in total claims of $100000. Mr. Black filed a claim against ABC LLP and its partners for the same. In this case, ABC LLP and its partners individually and jointly will be held liable, and Mr. Black can individually also claim damages from any of the partners.

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Purpose

It allows the plaintiff to recover the dues and increases settling claims.It makes dormant or inactive partners vigilant as their assets will be held liable despite the fact the partnership firm ( in which they are a partner) is a limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners’ or investors’ personal assets are not at stake. Their accountability for business loss or debt doesn’t exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read more one.Joint and several liabilities help the plaintiff ( the party that suffered from breach of contract terms) avoid the hassle of fixing responsibility as all partners. The firm can be held jointly and several liable.

Why do Joint and Several liability Exist?

Joint and Several Liabilities exist because it has been observed in many instances that it is difficult to hold any particular person liable for the non -fulfillment of agreement terms in certain contracts. Also, it has been observed many times one of the parties files for bankruptcy, leaving the plaintiff without an adequate claim and other members get a shield. With this, the plaintiff can file suit against that member who can meet the claim, and subsequently, the member can claim the share of the other members, and the plaintiff receives the adequate claim and is not left in the lurch.

Example of Joint and Several Liability

Ray and Sherry married each other and took a Housing Loan from True Value Bank for $100,000. The Loan Agreement clearly states that both are jointly and severally liable for the said liability. At the time of Loan’s ailment, Ray worked full time, and Sherry studied for her Masters.

After two years, due to the financial crisisFinancial CrisisThe term “financial crisis” refers to a situation in which the market’s key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more, Ray lost his job while Sherry started her venture through the huge amount she received from her grandparents as part of their family wealth distribution. Due to Ray’s non-payment of Housing loan dues, the Bank filed its claim, and the court decided to recover the same from Sherry as Ray was completely bankrupt and Sherry had meaningful resources to repay the debt.

Thus we can see how it facilitates the plaintiff (Bank) to pursue recovery quickly and most effectively.

Advantages

One of the most important reasons that strongly goes in favor of this clause of Joint and Several Liability is that it enables Plaintiff to get justice and compensation for the loss suffered. Normally it is observed due to the Limited Liability company structure, and partners shield themselves from negligence done due to the non-fulfillment of Agreement terms. Through it, the Plaintiff can ensure that the claims are made good by making those parties to the contract individually liable who have deep pockets and the ability to pay compensation.It results in speedy dispute resolution between parties. Once liability is determined, it can be claimed proportionately or outright from a partner who is competent to pay in full ( in the case where other partners are insolvent or lack financial means).

Disadvantages

One of the most important reasons Joint and Several Liability is criticized is that it doesn’t lead to liability proportionate to the parties’ fault. In other words, in a dispute, suppose there are three defendants, and one of them is majorly responsible for the damages suffered by the plaintiff but doesn’t have financial means to make a good Plaintiff suffer the loss. There is another defendant with no involvement but with good financial capacity.Due to Joint and Several Liability clauses, Plaintiff can directly sue the defendant with the good financial capacity to make good all the losses suffered by the Plaintiff.

Conclusion

Every contractual agreement between two parties involves discharging certain terms as part of the Agreement, and no discharging of the same gives rise to Liabilities. It is a double-edged sword. In a way, it helps Plaintiff recover the damages from any partner or all depending upon the parties’ financial capacity. Also, at the same time, it makes the other party well aware that Agreements entered into should be taken seriously, and non-fulfillment cannot be rescued under the aegis of Entity structure. Personal accountability will make good any loss incurred to the other party.