Joint and several obligation

What it means

A joint and several obligation is an obligation in which several debtors are bound to the creditor in such a way that each is liable for the whole debt. The creditor can choose whom to claim from, demanding the whole from one debtor or parts from several. Performance by one debtor extinguishes the debt for all.

Joint and several liability can arise by contract, for example through accession to a debt, or directly by law. The Commercial Code provides that if several debtors undertake the same performance in a business relationship, they are bound jointly and severally unless their agreement says otherwise. Partners in a general partnership, for example, are also jointly and severally liable.

Within the group of debtors there is a settlement. Whoever paid more than their share can claim the rest from the others, usually in equal parts unless agreed otherwise. The risk that one debtor is insolvent is therefore borne by the others, not by the creditor.

How it works in practice

In business practice joint and several obligations arise in joint contracts where several companies act as one supplier, such as a consortium or joint venture, in joint leases, in loans with several borrowers and when a shareholder personally secures the company's debts. For the creditor, joint and several liability is strong security.

Before signing a contract with joint and several liability, it is important to know who the company is binding itself with. If a consortium partner fails to deliver its part, the client can demand full performance or damages from the other company. An internal agreement between the partners should set out shares, the settlement procedure and security for recourse claims.

In accounting terms, joint and several liability beyond the company's own share is a contingent liability disclosed in the notes. If it is probable the company will have to pay for a partner, it creates a provision. Banks also take such obligations into account when assessing a company.

What to watch out for

Companies often underestimate that joint and several liability arises automatically in business relationships. If two companies sign a joint order without expressly dividing responsibility, each may owe the whole amount. If you do not want that, the contract must state expressly that each is liable only for its own part.

When enforcing a joint and several debt, watch limitation. Steps against one debtor do not necessarily interrupt limitation against the others. A creditor who sues only one debtor, who turns out to have no assets, may find its claim against the others already time-barred. It is sensible to act against all of them at once.