Chapter 8
Economic arguments

Other contributions

8.17Consideration of the efficiency of liability rules began in the United States in the early 1980s, starting with some of the founders of the law and economics school. Two writers who have written extensively since 1990, Lewis Kornhauser and Richard Revesz have produced conclusions that match the New Zealand trend; that there is no clear “winner”, in efficiency terms.135 The authors have studied the operation of the liability rules in a range of situations and examined their efficiency both where matters go to trial and where cases are settled. Not surprisingly joint and several liability sets a higher price on wrongdoing, but this is not necessarily less efficient than proportionate liability given the likely higher deterrent effect. As the Sapere Report notes, the degree to which one liability rule is more effective than the other will be specific to an industry, case or jurisdiction.136
8.18An important point, applicable to virtually all of the analysis and economic argument emerges from an Australian contribution from Megan Richardson.137 All of the contributors are working from an identified base of economic theory, and applying it to actual or potential conditions to predict how the two liability rules may perform or produce more or less efficient results, in reality. Professor Richardson has moved from theory to reality and attempted to look for empirical data to test whether predicted effects actually occur. The presence of a perceived insurance crisis in Australia in the 1990s and the shift to proportionate liability in the construction industry provided opportunities to study whether joint and several liability did lead to higher or unaffordable insurance costs and whether proportionate liability made any difference. Her research suggested that although insurance companies indicated that joint and several liability may have led to increased premiums in the order of 20 to 30%, uncertainties in the evidence made it difficult to conclude that proportionate liability would lead to net benefits in insurance costs.138
8.19One reason that led Richardson to infer a lack of net benefits in insurance terms is what she calls the “Gatekeeper” effect. Professionals and other potential deep pockets who face potentially higher costs under joint and several liability, including through increased insurance costs, may naturally tend to act as the “cops on the beat”, to discourage and prevent primary wrongdoers from causing harm and liability. Richardson argues that the Gatekeeper function may be efficient, because it reduces the risk of inefficient deterrence, and may lead to more efficient activity levels. For instance, a major firm auditor who refuses to take on an audit of a particularly risky client may actually be exercising the most efficient level of precaution.139

8.20Professor Richardson’s discussion of the Gatekeeper effect is itself theoretical, because the data does not exist to examine it empirically. Her work nevertheless adds to the consensus, that there is no clear case for proportionate liability, and certainly not as a rule that will be efficient in all situations.

135L Kornhouser and R Revesz “Joint and Several Liability” in P Newman (ed) The New Palgrave Dictionary of Economics and the Law (Palgrave MacMillan, London, 1998).
136Sapere Report, at 136.
137M Richardson, above n 132.
138At [2.10].
139At [2.10] and [2.12].