How should joint sellers share liability?
Posted on 02/03/2015
Hidden amongst an array of legal jargon, an acquisition agreement will usually contain two generic types of obligations for a seller:
active obligations, which require the seller to do something (for example, to sell shares) or to not do something (for example, not to compete with the business being sold); and
passive obligations, such as warranties and indemnities which don’t require the seller to do (or not do) anything immediately but which give the buyer a post-completion remedy if the warranty is breached or the indemnity is triggered.
Where there are multiple sellers, a key question is how those sellers should share liability under these obligations.
Liability for obligations entered into under an acquisition agreement may be:
joint and several;
(and ‘several’ here is just an old-fashioned word used by lawyers to mean separate).
So what does this actually mean for the sellers?
Joint and several liability
Where obligations are entered into on a ‘joint and several’ basis, each seller agrees to assume liability for the obligations both individually and also collectively on behalf of all the sellers.
Where a buyer subsequently suffers loss or damage arising from a breach of an obligation or wishes to enforce the performance of an obligation, it may pursue all the sellers or any one of them for the whole loss arising from the breach or the failure to perform, regardless of which seller was in fact responsible.
Each seller will be deemed to have the same knowledge as each of the other sellers with whom they are jointly and severally liable. So, where a warranty is qualified by an expression such as ‘so far as the sellers are aware’, if one seller is aware of any relevant facts or circumstances, all the other sellers will be deemed to have that knowledge.
On the death of a joint and several seller, his liability to the buyer will remain in place and will pass to his personal representatives.
Where obligations are entered into on a ‘joint’ basis, each seller agrees to assume collective liability for the obligations given to the buyer.
In practice, the end result for multiple sellers entering into this form of liability will largely be the same as if the obligations had been given on a joint and several basis. One key difference, however, is that the liability of a joint seller will generally cease on death: their liability effectively passes to the surviving sellers rather than to their personal representatives.
In addition, a buyer will usually have to pursue all joint sellers for any loss or damage although if a judgment is obtained the buyer can decide to enforce that judgment against only one seller.
Where obligations are entered into on a several basis, each seller agrees to assume separate liability for their obligations. That seller alone will be liable for the whole loss arising from their breach.
Which one to choose?
As a general rule a buyer will prefer the sellers to be liable on a joint and several basis. This gives it the widest possible scope of recovery, allowing it to pursue all or any seller for any breach, depending on who the buyer thinks has the deepest pockets. Each seller will be deemed to have the same knowledge as all the others and the liability of a seller will not cease on death.
For all these reasons, joint and several liability will generally be resisted by multiple sellers who will be keen to avoid liability for the acts of their fellow sellers where they themselves have done nothing wrong. The sellers will usually prefer to share liability on a several basis, particularly where there is a wide discrepancy in the knowledge of the sellers or their shareholdings in the target company. This would ensure that each seller is only liable for their own acts, not those of other sellers. Knowledge of one several seller is not passed to any other seller, so an ‘innocent’ seller cannot be liable for the knowing defaults of another seller.
Joint liability is generally unattractive to both parties. The fact that joint liability ceases on death makes it unappealing to the buyer who could see its pool of potential recovery diminish. For sellers, they could see their potential liability increase by the share of a deceased joint seller.
Ultimately, the way in which liability is shared between multiple sellers will often come down to the respective bargaining power of the parties and the specific circumstances of the deal.
This post was edited by Hannah Fletcher. For more information, email email@example.com.