Joint and Several Liability
Joint and several liability is a legal concept found in various areas of law, from contract law to corporate law and family matters. When multiple parties are jointly (or severally) liable for a debt or damages, the creditor can hold them individually responsible for the full amount. This offers advantages for the creditor, as it provides greater certainty that they will be able to collect the debt. For the liable parties themselves, this is more complex and, for that reason alone, less desirable.
On this page about joint and several liability:
What is joint and several liability?
Joint and several liability means that two or more persons can each be held liable for the entire debt. This is an exception to the general rule that debtors are only liable for their own share of the debt. As soon as one party has paid the full debt, the other co-debtors are released from their obligation toward the creditor. However, a new obligation then arises toward the party who paid: each co-debtor must pay their share to the party who paid on their behalf. This party then possesses what is known as the right of recourse (regresrecht).
Statutory or contractual basis of joint and several liability
Joint and several liability is the exception, not the rule. It often originates from an agreement. For example, this is frequently the case in financing agreements. A lender will want to be certain they can collect the debt and will, as a rule, insist on a joint and several liability arrangement. Additionally, joint and several liability can follow from the law. This is the case, for example, for the liability of partners in a general partnership (vennootschap onder firma, governed by Article 18 of the Dutch Commercial Code). Regarding group liability, the law also stipulates (Article 6:166 of the Dutch Civil Code) that joint and several liability applies.
Advantages and disadvantages of joint and several liability
Joint and several liability primarily offers advantages to the creditor, as they can approach any debtor individually for the full amount. This increases the chance that the debt will actually be paid and reduces the risk of bad debt. Furthermore, the creditor can choose whom to hold accountable, providing a strategic advantage when recovering claims. For instance, if someone disappears, the creditor will target the party that can still be found.
For the debtors themselves, however, joint and several liability can impose a heavy financial burden, especially when a co-debtor fails to meet their payment obligations. This can result in one party bearing the full debt and subsequently having to try to recover the remainder from the other debtors through the right of recourse. This can be complex and expensive. Sometimes, it is simply impossible to get the money back.
Advantages for the Creditor, disadvantages for the Debtors
Higher probability of full payment
Can choose which debtor to approach
Less risk if one debtor becomes insolvent
Can lead to disproportionate financial burdens
Recovery options can be problematic
Right of recourse may need to be enforced legally
Situations where joint and several liability occurs
Joint and several liability can arise in various legal contexts, both business and private. In corporate law, partners and directors can be held liable for company obligations, while in financial obligations such as mortgages and loans, multiple parties may be jointly bound. In cases of tort (onrechtmatige daad), a group of perpetrators can be held jointly liable for damages. Within family and matrimonial law, partners may be jointly and severally liable for joint debts under certain circumstances.
Joint and several liability in corporate law
Entrepreneurs can encounter joint and several liability in several ways. In a general partnership (VOF), partners are jointly and severally liable for the company's debts. This means creditors can turn to each partner individually for the full debt. Additionally, directors of a private limited company (BV) can be held jointly and severally liable in certain cases, such as manifest mismanagement. Joint and several liability can also arise within corporate structures, such as when a parent company issues a "403 declaration," thereby assuming the debts of its subsidiaries. By doing so, the parent company indicates it is jointly and severally liable for the subsidiary's debts.
Joint and several liability in financial obligations
Joint and several liability plays a major role in the financial sector, particularly when entering into credit agreements and establishing mortgages. When two partners buy a home together and take out a mortgage, they are, in principle, jointly and severally liable for the entire mortgage debt. This means the bank can hold them individually responsible for the full debt, regardless of their internal arrangements. In other credit agreements, such as business loans, multiple parties can be held jointly and severally liable if they enter into a loan together. This provides the lender with more security and reduces the risk of non-payment.
Joint and several liability in tort
In the event of a tort (onrechtmatige daad), multiple perpetrators can be jointly and severally liable for the resulting damage. This applies, for example, to individuals who jointly commit a crime, such as a group involved in an assault. As previously stated, Article 6:166 of the Dutch Civil Code stipulates that if someone is part of a group and there is an increased risk of damage, all members of that group can be held jointly and severally liable for that damage. This means the victim can turn to any involved party to receive full compensation. This provides the victim with more certainty, especially when not all members of the group can be identified.
Joint and several liability within family and matrimonial law
In some cases, spouses or registered partners may be jointly and severally liable for debts. Until 2018, a spouse in a marriage with a "community of property" automatically became co-owner of both assets and debts. This meant both were jointly and severally liable for all debts. Since the introduction of "limited community of property," this is no longer the case unless partners explicitly agree otherwise. However, it remains different for joint financial obligations, as discussed earlier.
How the right of recourse works
The right of recourse (regresrecht) means that a debtor who has paid the full debt can claim back the portion they overpaid from the other debtors. This is regulated in Article 6:10 of the Dutch Civil Code and is also referred to as the "contribution obligation." Generally, when exercising the right of recourse, one will first try to settle this mutually. If necessary, legal steps will be taken.
Satisfaction of the debt
One of the jointly and severally liable parties pays the full debt to the creditor.
Determination of internal liability
The debtor who paid calculates which portion of the debt the other debtors should have borne.
Request for reimbursement
The paying debtor requests the co-debtors to repay their share of the debt. This request is preferably made via a registered letter.
Negotiation or alignment
In some cases, an amicable settlement can be reached regarding the internal distribution of the debt, for instance, if there are still disputes about who should bear which part.
Legal action upon refusal
If the co-debtors refuse to pay, the paying party can take recourse through a legal procedure (summons) and demand the amount due.
Termination of joint and several liability
Ending joint and several liability usually requires the consent of the creditor. In some cases, this can be done through contractual agreements, such as a debt assumption where another party takes over the obligations. In mortgages, a partner leaving the home can try to obtain a "discharge from joint and several liability" (ontslag uit hoofdelijke aansprakelijkheid), but this again requires approval from the bank. Joint and several liability can also be contractually terminated in business settings.
Frequently asked questions about joint and several liability
Joint and several liability can be complicated and often raises many questions for both creditors and debtors. Because it can have far-reaching financial consequences, it is understandable that people want to know their rights and duties. In this FAQ, we answer common questions to provide more insight into how it works.
What is the difference between joint and several liability and a guarantee (suretyship)?
In the case of joint and several liability, all debtors can be held directly accountable. In the case of a guarantee (suretyship), the guarantor can only be held liable if the principal debtor defaults on their obligation.
Can a creditor demand the full amount multiple times?
No, the creditor can only collect the full amount once, but they have the right to choose which debtor they collect it from.
What happens in the event of bankruptcy of one of the jointly and severally liable parties?
The other debtors remain jointly and severally liable for the debt and generally cannot successfully recover their share from the bankrupt party.
Is a director automatically jointly and severally liable for a private limited company (BV)?
No, a director can only be held jointly and severally liable in exceptional cases, such as mismanagement or manifest improper performance of duties.
What happens if a mortgage holder fails to pay and there are multiple borrowers?
The bank can hold each individual party fully accountable for the entire outstanding debt.