joint and several liabilities

The Doctrine of Derivative Liability

The doctrine of derivative liability (or successor liability) refers to the legal concept whereby a business that purchases the assets of an existing business assumes the liability of that business. Third parties who are owed money by the original business can sometimes pursue claims against the purchasing business in order to receive payment of the debt. This concept is a potent tool in protecting creditors of a business and ensuring that they are duly compensated for goods or services provided to the business.

This doctrine is a form of strict liability which means that the liability is imposed regardless of fault. In other words, the purchasing business, called the successor, is liable even if they had nothing to do with the original businesss obligations or debts. The courts generally recognize the successor liability in three separate instances:

1. When the purchasing business explicitly agrees to pay the debts of the existing business.

2. When the purchasing business purchases the existing business as part of a merger or consolidation with the existing business.

3. When the purchasing business has acquired the existing business and is viewed by the courts as a mere continuation of the existing business.

When a buying business is considered a mere continuation of the existing business, the buying business is liable for the existing businesss debts even if the merger did not explicitly state that the buying business assumes the debt of the existing business or does not meet the other criteria for derivative liability. In the mere continuation concept, courts consider factors such as the assets of the two businesses, the ownership of the assets, and the continuation of the same business purpose to determine if the buying business is a mere continuation of the existing business.

The doctrine of derivative liability is an important legal concept that protects customers and suppliers of a business from economic loss when the business merges or acquires new assets from another business. Without this legal concept, creditors would have practically no chance of recovering their losses when a business disposes of its assets. The courts recognize the need for this protection and have therefore allowed creditors to pursue claims against the purchasing business.

When a business is considering purchasing assets from another business, it is important to ensure that all debts associated with the assets are identified and addressed appropriately. Businesses should consider negotiating tentative payment agreements with creditors prior to the completion of the asset purchase, and the language of the purchase agreement should adequately address any potential liability that the purchasing business may incur.

Liability in solidum refers to a shared obligation of a group of people. It satisfies the creditor, because each of the solidary debtors is jointly and severally liable for the entire debt; the creditor is allowed to pursue all the debtors for the full amount of the debt.

In contrast, when the debt of parties is limited to the assets to be transferred, it is a case of joint and several liability. Each of the parties will be jointly and severally liable for the debt, but if the assets have a value lower than the debt, the parties will only be liable up to the value of the assets.

In the case of liability in solidum, all the debtors are jointly and severally liable for the entire amount of the debt, regardless of the value of the assets. This means they must equally satisfy their part of the debt, or pay the entire amount if necessary.

The concept of solidary liability has been recognized by many countries, although the rules may differ from country to country. It is also a common form of liability in contracts, where each of the parties is responsible for the entirety of the obligations.

Solidary liability works well with multiple debtors. In most cases, debtors can still make payments to one another, although the creditor can still pursue them for the full amount of the debt if necessary. In addition, the creditor may be able to hold any of the debtors liable for any incomplete performance of the obligations.

Overall, liability in solidum is a useful legal concept that plays an important role in many commercial agreements. It allows the creditor to pursue multiple debtors and holds each of the parties equally liable for the obligations. This ensures that the debt is satisfied and encourages the parties to meet their commitments.