Joint Liability

Joint Liability, in simple terms defined as a shared liability. In Joint liabilities, the risk associated in case of default will be shared between partners. If the business defaults, then all the partners are responsible for paying off the due. However, it is important to understand that the liability of each partner would correspond to their percentage of ownership.

Joint liability company is a popular method for setting up partnership companies. It helps creditors extract their dues in full and acts as a safe tool for them. It helps to share the risk and reward. Moreover, the risk is also diluted among the owners, which makes doing business an easier task to perform as the risk is mitigated.

• Joint liability can be defined as a shared liability. In this, the risk involved in default is shared between partners. As a result, all partners are liable for paying off the due when the business defaults.
• Joint liability trials are more straightforward in court and are not complicated as several liabilities. In addition, total compensation is provided to creditors when charges are proven right.
• It is a prominent approach for creating partnership companies. In addition, it helps creditors remove the dues entirely, acts as a secure mechanism for them, and enables them to share the risk and reward.

Joint liability is an amount owed by two or more partners or parties. The partners are equally responsible or responsible in the percentage of their ownership as per the agreement. The joint liability group allows both the lender and borrowers to mitigate risks as the chances of default of an amount reduces drastically when more than one person is liable.

However, in case of a default or some sort of damages are filed, all partners would be equally liable to pay for damages. Therefore, it comes under tort law where all the parties involved could be held liable.

The profits are also split in the ratio of the partnership or the ownership within the partnership. Hence, to sum it up, profits or losses, all partners would divide them equally or in percentage of their ownership.

Let us understand the concept of a joint liability company in detail with the help of a couple of examples.

Example #1

Mr. A and Mr. B plan to set up a company with money borrowed from the bank. They applied for a loan of $2M under the joint liability scheme. What happens if they default?

Solution:

Joint Liability allows parties to apply for a loan as co-borrowers jointly. This rule is mentioned in General Partnership, where any partner who enters into a contract with or without the other partner's knowledge automatically binds all partners to the contract.

So both Mr. A and Mr. B will be held guilty if they fail to pay the bank's payment. So one must be aware that in case of joint liability, the liability is joint, so it is the responsibility of both the parties that the obligation is met, or else both the parties will be convicted guilty. They can’t shift the blame on each other. If one partner dies, the other partner will have to pay off the loan.

Example #2

Two partners operate the company ABC. If the company runs under a joint liability scheme, what action can creditors take in case of payment failure?

Solution:

Creditors can sue any partner or both if he wants to. Joint liability binds both partners to clear debts. If one partner is weak financially between two partners, creditors may target the partner with a strong financial base and can sue him to extract the money. Once the creditor gets back his money from partner A, he can’t recover additional amounts from the rest of the partners.

Example #3

The Czech Republic filed a case against two investors before the Permanent Court of Arbitration (PCA) in Switzerland in September 2022.

The two investors were instructed to pay 1.75 million in USD and 178,125 in GBP. However, when one of the investors pointed out that the contract does not say “joint liability” or any term referring to something of that nature, they were not liable. They went on to appeal at the Swiss Federal Supreme Court (SFSC).

The SFSC denied their enforceability to pay the claimant due to unavailability of concrete evidence of their liability.

Let us understand the advantages of a joint liability group’s choice to adopt this strategy through the points below.

• Joint liability is termed fair because if two or more people have caused financial loss, then it is fair that both of them should take responsibility for the complete loss. If one partner has made a loss in the supervision of the other partner, then it is the other partner's mistake, and he should also be fully responsible for paying back losses.
• As it will always be in the minds of partners that in default, all partners will be held responsible, so they start working more efficiently and try to prevent the rise of liability as a whole.
• Joint liability trials are simpler in court and are not complex like several liabilities. Full compensation is provided to creditors when charges are proven right.
• One partner should be responsible for full loss, but in several liabilities, only his portion will be charged from him, but in joint liability, he may have to pay the whole damage, which is right.

Despite the significant advantages, some joint liability companies find it a hassle to operate with this structure. Let us understand why through the explanation below.

• Many argue that it is not fair to hold a particular partner responsible for the whole loss, while it may be that it was not his fault for the loss.
• It has been found that the partner with wealth is always targeted in Joint Liability schemes. This is not fair, and it makes the other partner with less wealth run the business more riskily as he knows that the wealthy partner will be sued during a lawsuit.
• This scheme prevents new talents from entering a partnership business as they are worried about paying the full loss if their partners make mistakes.

Both these terminologies are often uttered or written in a legal document together. However, the differences in their fundamental and implications are important to understand. Let us do so through the discussion below.

• In several liability schemes, all the parties are responsible for their respective obligations. So if one partner defaults, then the rest of the partners will not have to bear its obligation.
• The default risk lies in all the partners in full joint liability. So if there is a default, then any of the partners will have to settle the 100% liability.
• In the case of several liabilities, say there are five partners, and they have the liability of $5 Million. So each partner has a liability of $1 Million.
• In case of default, no one can ask one partner to pay the entire liability of $5 Million. Each partner is only liable for their particular share in several liabilities, unlike joint liability, where the entire $5 Million liability lies on all the partners.

Example #1

5 Partners jointly took a loan from the bank for business under several liability schemes. What will happen if one party defaults?

Solution:

Under several liability schemes, the bank will have to sue the particular partner defaulted. The rest of the partners can’t be held responsible for extracting full dues. So, several liability schemes protect other partners.

Example #2

Syndicate loan agreements are common types of several liabilities. In Syndicate Loan, several banks give loans to a borrower. If one bank in the syndicate fails to provide its agreed part of the loan, the borrower can sue only that particular bank, not all the banks.

This has been a guide to Joint Liability and its meaning. Here we explain examples of Joint Liability companies and differences from several liabilities. You can learn more from the following articles –

• Asset Liability Management
• Joint and Several Liability
• Unlimited Liability
• Limited Liability Definition
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