What Is Joint Liability?
Joint liability denotes the obligation of two or more partners to pay back a debt or be responsible for satisfying a liability. A joint liability allows parties to share the risks associated with taking on debt and to protect themselves in the event of lawsuits. An individual subject to joint liability may be referred to as "jointly liable."
Key Takeaways
- Joint liability means that more than one party is responsible legally for paying back a debt or otherwise covering a liability.
- Joint liability results from two or more parties applying together for credit, often in a general partnership.
- If any of the parties in the general partnership enter into a contract, then all of the parties are responsible.
- When there's a joint liability agreement, a creditor can sue any partner; most typically, they sue the one who is perceived as being the most financially solvent.
Understanding Joint Liability
Joint liability for a debt results from two or more parties applying jointly for credit as co-borrowers, which is implied in a general partnership. Under the regulations of a general partnership, any partner entering into a contract with or without the knowledge of other partners automatically binds all partners to that contract. If a court finds that a partnership is at fault in a lawsuit, then every partner is responsible for paying any monetary legal liability or compensation. As such, any partner entering a joint liability agreement should be aware that they too are liable for the actions of each and every other partner as it pertains to the partnership.
Joint Liability Example
An example of joint liability would be when spouses both sign for a loan. If one spouse should die, the other remains liable for the balance of the loan as a co-signer. However, this is contingent upon default by the borrower.
With joint liability, creditors may sue once for any debt. In the case of partnerships, creditors tend to choose the one with the deepest pockets or the most likely to pay, as they cannot pursue additional amounts from other partners.
Joint liability is essentially the opposite of several liability, in which all parties are responsible for their individual obligations only.
Joint Liability vs. Several Liable
Several liability (or proportionate liability) is when all parties are liable for just their own respective obligations. In effect, it is the opposite of joint liability. An example would be if several business partners took out a loan for their business under the arrangement that each partner was responsible for their own share (severally liable). In such a case, if one partner did not meet their obligation under the loan, then the lender would only be able to sue the one partner for failure to meet their obligation. Several liability is often used in syndicated loan agreements.
Joint Liability vs. Jointly and Severally Liable
When partners have joint and several liability for a debt, a creditor can sue any of the partners for repayment. It is a variation of joint liability.If one partner pays the debt, then that partner may pursue other partners to collect their share of the debt obligation. In short, it is the responsibility of defendants to sort out and reconcile their separate shares of liability and payments.
