Joint and Several Liability of Founders

Joint and several liability is a legal term which outlines the shared responsibility within a lawsuit. If two or more parties are jointly and severally liable for a  wrongful act, each one of them can be sued independently, and will be independently liable for the injuries from the act as per common law.

Liability clauses

There are 3 main types of liability clauses, namely “unlimited liability clauses”, “limited liability clauses” and “no liability clauses”.

Unlimited liability clauses

“Unlimited liability clauses” set out scenarios where a party’s liability to its counterparties is unlimited. You need to ensure that the scenarios under which your liability is unlimited is kept to a minimum. Failure to do so could result in crippling losses for your business.

What do unlimited liability clauses cover? 

● Breaches of an extremely egregious nature.

● Scenarios stipulated under applicable law where a person’s liability is unlimited. 

Limited liability clause

“Limited liability clauses” set out caps (or any other forms of limitations) on a party’s liability under various circumstances. When reviewing “limited liability clauses'', you should pay special focus on the following areas:

● The levels of the liability caps/limits – are they too high/too low?

● Exceptions to the liability caps/limits – are there any forms of liability that are not subject to the caps/limits, and should they nevertheless be subject to the caps/limits?

No liability clause

“No liability clauses'' set out scenarios where a party’s liability to its counterparties is excluded. When reviewing “no liability clauses'', you should pay special focus on the following areas:

● The scope of scenarios where liability is excluded – is the scope too wide/too narrow?

● Indirect losses – while it is common for a contract to stipulate that parties exclude liability for ‘indirect losses’ (generally defined to mean losses that are remote and/or unforeseeable), does the contractual definition of ‘indirect losses” nevertheless encompass any forms of direct loss?

Indemnities

An indemnity is a contractual obligation on a party to compensate its counterparty for losses that the counterparty may suffer as a result of the occurrence of certain events. Indemnities are generally located in contractual agreements where the indemnifying party agrees to compensate the indemnified party for losses that the latter incurs arising out of an agreed state of affairs. 

They are used as a means of legal protection against the risks associated with a particular state of affairs and typically arise in investment documents or commercial agreements.  

Things to review when in indemnities in a contract

The nature of the events that you are required to provide an indemnity for 

As a general rule of thumb, you should not be providing indemnities for events that are beyond your control, or that occur due to no fault on your part.

The extent of losses that you are required to indemnify 

Are the losses that you are required to indemnify potentially very high?

Who do you indemnify? 

Does the indemnity apply only to the counterparty? Or does it extend to other persons such as the counterparty’s affiliates, shareholders and personnel?

Depending on the probability of risk, it may be prudent to limit your indemnification obligations, in order to reduce your potential contractual liabilities. On the converse, being the indemnified party can be useful in offsetting any potential losses that you may suffer as the risk is transferred to the other party.

As a rule of thumb, in deciding whether to agree to any request from another party for an indemnity, you should ascertain which party has more control over the indemnified event. It is usually reasonable for the party with greater control over the event to be the indemnifying party.

What Next?

When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.

We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.

*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.