THE PRICE OF BLAME
looks at the legal position on joint and several liability
and how mooted changes to the law will not be enough
to solve the problem for contractors

Where two or more contractors form a joint venture to carry out a contract, it is normal for the purchaser to require that they accept joint and several liability for the performance of the entire contract. Each becomes responsible to the purchaser for the correct completion of the whole works. If the works are late or defective the purchaser can choose which firm they will proceed against, since each is liable for the whole of the default regardless of personal responsibility.

From the purchaser's viewpoint the arrangement is ideal. From the contractors' perspective it is less so, particularly if the firms' financial strengths are unequal. That is why major electrical manufacturers have been reluctant to enter into ventures with civil engineering contractors. The greater risk lies with the civil works, but if there is a claim it is likely to finish up with manufacturers because they have greater assets than civil engineering firms.

But with a contractual joint venture of this sort the parties do have the choice of whether or not to take on the risk of others and of structuring their arrangements between themselves with cross indemnities supported by bonds. This provides them with some protection if one of the parties becomes insolvent.

The bigger problem for contractors and for professionals, such as architects and consulting engineers, is a situation where there is no joint venture contract. The parties involved say, a main contractor and a consultant each have separate contracts with the purchaser. But if both have contributed independently to the same damage the contractor by defective work and the consultant by failing to notice it the two will be held in law to be jointly and severally liable to the purchaser. It makes no difference if the liability of one was in contract and the other "in tort".

The purchaser may proceed against either or both of them and recover from either the total loss, leaving the two of them to sort out their respective shares of the loss. If, in the example, the contractor was insolvent at the time of the legal proceedings and the consultant had professional indemnity insurance which covered the loss, the purchaser would be able to recover the whole of the loss from the consultant's insurers, who would be left with a valueless contribution claim against the insolvent contractor.

In recent years it has been argued that the rule is both unfair and leads to the limitation of insurance cover for professionals. As a result, because they are unincorporated, the partners in professional firms face the potential loss of personal assets. Some accountancy firms are considering incorporation, at least for their audit function, and seeking to limit their liabilities.

In the construction industry the argument for abolition of the joint and several rule for all but personal injury claims was put forward in the Department of the Environment's consultation paper, Latent Defects Liability and Build Insurance and endorsed in Sir Michael Latham's report Constructing the Team. The recommendation was that, for other than personal injury cases, the rule should be replaced in the construction industry by proportionate liability the purchaser would only be able to recover from each defaulting party damages proportionate to their share of liability.

Proportionate liability is no solution. However attractive the argument for proportionate liability may appear at first sight, it is logically flawed. This has been shown by the Law Commission's recent feasibility study Investigations into Joint and Several Liability. A company is liable if its fault can be shown to have been a necessary cause of the loss put another way, but for that company's fault the loss would not have occurred.

Certainly the contractor's defective work was a cause of the loss, but the purchaser would not have suffered that loss if the consultant had discovered it. Both are liable to the purchaser for the whole loss (although only recoverable once) but between themselves a court might apportion liability 70 per cent to the contractor and 30 per cent to the consultant. The fallacy is to say that the contractor was only 70 per cent at fault. The fault of each as regards the purchaser was 100 per cent.

The insolvency argument is equally flawed. If in the above example the contractor became insolvent, why should this affect the right of the purchaser to claim the damages from the architect? The only possible reason is that the purchaser appointed the contractor and so had responsibility for appointing a firm which would remain solvent. But to argue that the purchaser owes a duty to the others involved on the project, that each firm engaged will have sufficient resources to support any claim which may be made, is absurd.

The Latham report proposed proportionate liability in the construction industry as part of a package, other parts of which would have given clients substantial benefits. As an industry reform package it might have been acceptable if it was a problem peculiar to that industry. But it isn't. The problem is a general one which affects auditors and solicitors across the board. If a long- established common law rule is to be changed, it should be so for everyone.

The Law Commission study is logically persuasive but it does not solve the problem of plaintiffs looking for "deep pocket" defendants to sue in building litigation, or professional firms which are unable to obtain the insurance cover they need to remain in business. It is hoped that the responses invited by the DTI to the Law Commission study will be both imaginative and practical. The problem will not go away.

SM

Peter Marsh and Frank Griffiths are associates at project strategy and contract management consultancy FGA Ltd, tel: 0116 279 3383