Chapter 3
Alternatives to joint and several liability

Contracting out

3.28It is a normal feature of commercial and consumer contracts for one or both sides of a bargain to seek to limit or exclude their liability to the other party using an express term of the contract. These efforts are usually contained in exclusion or limitation clauses, and can, if worded clearly enough, provide for limitation or exclusion of liability in tort, including negligence, as well as under the contract itself.36

3.29It is likely that many parties who are concerned at the prospect of joint and several liability if a contract goes wrong will protect themselves through the contract. They could perhaps even agree that any liability between the parties will be determined proportionately, not jointly and severally. More likely, parties will seek to limit liability to a maximum, for instance the value of the consideration in the contract or some multiple, or to direct but not consequential losses.

3.30It will not always be straightforward or possible to contract out of liability in particular cases. First, a relatively wide range of statutes prohibit contracting out of various statutory obligations. The Consumer Guarantees Act 1993, Fair Trading Act 1986, Building Act 2004 and Companies Act 1993 all contain important express or implied prohibitions on contracting out. The statutory warranties included in the Building Act 2004 mean that builders of residential homes covered by that Act cannot contract out of their most significant obligations to clients and subsequent building owners.37 The prohibition on contracting out of liability under section 9 of the Fair Trading Act for false or misleading conduct in trade is likely to leave professional advisers with potential for statute-based liability, even if they exclude or limit their liability in contract, for instance for misstatement. These well-known prohibitions are policy choices that Parliament has already made, and are beyond the scope of this review.
3.31There are some areas where the ability to limit liability by contract is uncertain. For instance, section 61 of the Securities Act 1978 prohibits issuing companies “indemnifying” their directors, employees or auditors against liability, for instance for their negligence, except for some very limited situations prescribed in the Act. It is not clear whether this provision prohibits companies relieving their auditor of liability at all and to any extent. An alternative reading is that a company and auditor may agree as required by the Act that the auditor remains liable for any fault; but that should any such liability occur it will be proportionate not joint and several; or will be capped at some level; or some combination of these options. The argument is that the prohibition against indemnity does not exclude the parties defining and limiting how liability will be applied. If parties are free to define and limit liability by contract in this situation they would have at least a partial answer to concerns about uncertain or excessive liability.38 But, given the uncertainty of the law, some clarification or reform of the law would most likely be necessary to facilitate such contracting out.

3.32Apart from statutory limitations and uncertainty, the other practical limit to using contracts to address liability issues is that any effect will normally be limited to the contracting parties. The parties can agree to limit their liability to each other in various ways – but any limitation will not apply to a non-party who may nevertheless be able to bring a successful claim in tort (for example negligence) or in equity.

3.33This means that contracting out will normally be limited to arrangements covering liability between the contracting parties. It is possible to conceive of statutory assistance to enable contractual limitations to have effect against third or non-parties. But it would be very difficult to conceive of contractually-imposed limitations having effect against non-parties without at least obtaining their consent. In this sense, the United Kingdom Companies Act provision allowing auditors to limit liability by contract is a recognition of this necessity. Of course, professional advisers can and frequently do issue disclaimers of responsibility to third parties. Disclaimers in the auditor’s report attached to publicly available financial reports for a company are a common example. Such disclaimers are usually aimed at denying responsibility to third parties and thereby precluding liability arising, rather than limiting liability should it arise. Nevertheless, disclaimers are another tool that professional advisers and others may employ to restrict and control their future liabilities to both contracting parties and third parties.

36DHL International (New Zealand) Ltd v Richmond Ltd [1993] 3 NZLR 10 (CA) at 18.
37Sections 396 to 399.
38The Law Commission of Ontario, above n 24 at 17, has pointed to changes enacted in the United Kingdom, where under UK Companies Act 2006 auditors may limit their liability with company clients, subject to approval of shareholders (to address tort liability). In return, auditors are subject to the risk of an additional criminal penalty and other procedural requirements, making the UK provision something between a statutory cap regime and straight contractual limitation.