By Paisley Simonnet, Nadine Nassef, Sabridass Ponnou, Charlotte Robin, University of Montpellier, Centre du Droit de l'Entreprise, Program of Master 2 "Droit du Commerce International"
Overview
When more than one person takes on an obligation under a contract, they may be bound:
- Jointly; or,
- Severally; or,
- Jointly and severally.
The definition of joint and several obligations is somehow confusing. On the one hand, this confusion can arise from the variety of relationships involved between co-debtors and with respect to creditors. On the other hand, plurality of meanings of such formula may arise in different legal systems.
These difficulties can be limited by a definition of the legal environment of a "joint and several" clause (I) and some drafting advice (II).
I - Defining the legal environment of a "joint and several" clause
In order to define the legal environment of a "joint and several" clause, general (1) and national (2) considerations may be studied.
1 - General considerations
1.1 - "Jointly" bound
Being jointly bound refers to the situation in which, with respect to the creditor, the latter may claim performance of the obligation from one or more of the joint co-debtors until full performance has been reached. Performance by one co-debtor discharges the others.
Among co-debtors, if one of them has paid more than his or her share to the creditor, will he or she be entitled to claim reimbursement from the other co-debtors? It is not clear and it calls for contractual clarification.
1.2 - "Severally" bound
Being severally bound refers to the situation in which, with respect to the creditor, the latter may only claim, from any co-debtor, the part of the performance for which he or she is bound.
When a co-debtor has exceeded his or her personal obligation, the latter will have the right to claim from the co-debtors who have not paid their share, a contribution corresponding to the amount that has exceeded his or her share.
1.3 - "Jointly and severally" bound
With respect to the creditor, the latter has the right to claim the execution of the obligation from any co-debtor. This relieves the creditor from pursuing all the co-debtors.
Between themselves, co-debtors are severally bound, held separately.
2 - National considerations
2.1 - French particularities since the Ordinance of February 10th, 2016
The Reform of contract's law in France has transformed the regime of plural obligations. As a consequence of this reform, two main issues arise:
2.1.1 - First issue: Presumption of joint and several liability in commercial law
According to article 1309 of the French Civil Code, the regime of joint and several liability is an exception. In addition, article 1310 of the same Code provides that "joint and several liability results from the law or a convention; it cannot be presumed.
However, in commercial law, pursuant to a customary rule and regardless of the fact that co-debtors are merchants or not, joint and several liability between them is presumed.With the new legislative context, is the custom of joint and several liability in commercial contracts maintained?a - Arguments in favor of the extinction of joint and several liability in commercial mattersArticle 1310 of the French Civil Code provides that joint and several liability emerges either from the law or a convention, and cannot be presumed. As a consequence, the custom of joint and several liability in commercial law is contra legem. So, one could argue that the custom should not be applied in presence of a contrary provision in the Civil Code.In the absence of a "legal provision or of contractual stipulation," the French Cour de Cassation denied that the consent of joint and several liability by two shareholders could lead to the joint and several liability of all the shareholders.b - Arguments in favor of upholding the custom of joint and several liability in commercial mattersOne could argue that the French Civil Code should not apply to commercial matters concerning liability between co-debtors. However, the French Commercial Code remains silent on this topic.Before the Ordinance of 2016, the French Cour de Cassation had already disregarded the former article 1202 of the French Civil Code in commercial contracts, which also stated that joint and several liability could not be presumed. Joint and several liability between co-debtors in commercial contracts was maintained despite the former article 1202 of the same Code.Consequently, the reform of French contract law should not put an end to such custom.
2.1.2 - Second issue: Contribution to the debt among co-debtors
a - Article 1317 of the French Civil Code: General rule
Once the creditor is paid by one of the co-debtors, can the latter demand execution from the remaining co-debtors? It depends on the importance of the debt incurred by each of them. The one who paid more than his or her share can claim reimbursement from the others, for their own share of the debt. Under article 1309 of the French Civil Code, the obligation is to be divided equally among co-debtors.b - Article 1319 of the French Civil Code : LimitationOne limitation to article 1317 can be underscored. Article 1319 of the French Civil Code provides that in the event that a breach of an obligation is attributable to only one co-debtor, the responsibility relies on him or her.
2.2 - English law
The general definition of joint and several liability has been recently examined in the Marlbray Ltd v Laditi case. In this case, it was ruled that when one of the co-debtors proves that he did not authorize his co-debtor to act on his behalf and that he was not aware of the existence of a binding contract, then the contract was only binding between the creditor and the co-debtor who actually signed, even though the terms of the contract provided for joint and several liability.
2.3 - Spanish law
Article 1138 of the Spanish Civil Code expressly states as a matter of principle, the division of the obligation: "The debt shall be presumed divided in as many equal shares as there are creditors or debtors." However, according to article 1139, if the division is not possible, the creditors have to initiate proceedings against all the debtors. "If one of them should be insolvent, the others shall not be obliged to make up for his failure" of this co-debtor.
II - Drafting a "joint and several" clause
Contractual provisions may bring light to several issues (1), which allow us to suggest a clause (2).
1 - Issues to be addressed in a "joint and several liability" clause
When drafting or reviewing such a clause, the following elements should be taken into consideration:
1.1 - Explicit reference to the existence of "joint and several liability.
In the absence of an express joint and several liability provision, courts have held that joint and several liability could be deduced from the factual elements of the situation.
However, court decisions are not binding. Therefore, it may be advised to provide in advance an express clause or
provision determining the precise type of liability between the co-debtors and in respect to the creditor.
1.2 - Duty to notify co-debtors
When the creditor notifies one of the co-debtors to have the obligation performed, the clause could provide that the creditor should also send a copy of this notification to the other co-debtors, who are jointly and severally liable. The benefit of this notification is to allow the other co-debtors to be aware that the payment is due by a chosen co-debtor.
1.3 - Proportionality
Proportionate liability means that each co-debtor is only held liable up to a predefined share.
For example, regardless of the situation, whether it is in respect to the creditor or among co-debtors, the co-debtor bound up to 10% will only be liable for that 10%.
This specific feature must be distinguished from "caps" on liabilities, pursuant to which a debtor can only be held liable up to a certain level.
2 - Suggested drafting
In a contract in which there is a plurality of debtors, a "joint and several" clause such as the following can be encountered.
"Between the following parties:
A, the creditor, on the one hand;
and
B, C and D, the co-debtors, on the other hand;1. Joint and several. B, C and D acknowledge that they are being jointly and severally liable for the whole obligation resulting from the contract as well as for the costs relating to it.
2. Obligation to the debt. A will be entitled to claim the entire payment of the debt from B and/or C and/or D.B and/or C and/or D will be entitled to oppose an exception inherent to the debt. However, should the exception be purely personal, only the co-debtor concerned by this exception will be authorized to invoke it.3. Contribution to the debt. Contribution to the debt will be divided between the co-debtors as follows:B shall be held liable for 25 % of the obligation.C shall be held liable for 35% of the obligation.D shall be held liable for 40% of the obligation.If B is relieved from the debt owed to A, B will be entitled to claim repayment from C and D. If B has executed more than his obligation, he will be entitled to claim from C and D, each one up to their contribution initially agreed upon. The same rule will apply to C and D in case they are relieved from the debt owed to A.4. Duty to notify co-debtors. When A will claim the payment of the debt from either B, C, or D, he or she shall notify his claim to the other co-debtors from whom he does not claim direct payment."
Conclusion
In international agreements, two main issues may arise regarding joint and several liability clauses.
First, it is important that the drafting limits and defines precisely each and every term of this formula in order to insure that they are understood in the same way by all the parties.
Second, parties should verify before hand if mandatory rules exist. For example, tax law might affect the efficiency of these terms or even worse, declare such clauses null and void.
Additional Resources
CASES
LEGAL BASIS
-Article 1309 to article 1319 of the French Civil Code, Dalloz, Edition 2017
-Article 1202 of the French Civil Code, Dalloz, Edition 2016
-Article 1138 to article 1139 of the Spanish Civil Code, approved by Royal Decree of July 24th, 1889
DOCTRINES
-Nicolas Dissaux, Christophe Jamin, "Réforme du droit des contrats, du régime général et de la preuve des obligations", Dalloz, 2017:
-Bruno Dondero, "La présomption de solidarité en matière commerciale: une rigueur à modérer" D.2009.1097
Region:
France, Spain, United Kingdom, Global
The information in any resource collected in this virtual library should
not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.