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JOINT AND SEVERAL LIABILITY AND PROFESSIONAL DEFENDANTS:  OPTIONS DISCUSSION PAPER

Report of the Standing Senate Committee on Banking, Trade and Commerce

October 1997

Chairman:  The Honourable Michael Kirby

Deputy Chairman:  The Honourable David Tkachuk


MEMBERSHIP

The Honourable Michael Kirby, Chairman

The Honourable David Tkachuk, Deputy Chairman

and

The Honourable Senators:

Angus, W. David

Austin, Jack, P.C.

Callbeck, Catherine S.

*Graham, Alasdair B., P.C. (or Carstairs, Sharon)

Hervieux-Payette, Céline, P.C.

Kelleher, James F., P.C.

Kolber, E. Leo

*Lynch-Staunton, John (or Kinsella, N., acting)

Meighen, Michael Arthur

Oliver, Donald H.

Stanbury, Richard J.

Stewart, John B.

*Ex Officio Members

Note: The Honourable Senators Kenny, Landry, Perrault, P.C. and St. Germain, P.C., were members or present at meetings at various stages during the course of this study.

Staff from the Parliamentary Research Branch, Library of Parliament:  Ms. Margaret Smith, Research Officer, Law and Government Division.

Staff from the Committees and Private Legislation Directorate:  Ms. Lise Bouchard, Administrative Assistant.

Paul Benoit

Clerk of the Committee


ORDER OF REFERENCE

Extract from the Journals of the Senate, Wednesday, October 22, 1997:

"The Honourable Senator Carstairs for the Honourable Senator Kirby moved, seconded by the Honourable Senator Callbeck:

THAT, the Standing Senate Committee on Banking, Trade and Commerce be authorized to examine and report upon the present state of the financial system in Canada;

THAT the Committee have the power to permit coverage by electronic media of its public proceedings with the least possible disruption of its hearings; and

THAT the Committee submit its final report no later than December 10, 1998.

The question being put on the motion, it was adopted."

Paul Bélisle

Clerk of the Senate


TABLE OF CONTENTS

PART I: INTRODUCTION

Background

A. Levels of Professional Liability

B. Joint and Several Liability Amongst Co-Defendants

C. Claims for Economic Loss Resulting from Negligent Misrepresentation

PART II: LIABILITY CONCERNS

A. Accounting Profession

B. Building Industry

C. Professions Generally

D. Impact of Liability Concerns on the Provision of Professional Services

E. Liability Insurance

PART III: DEVELOPMENTS IN DIFFERENT JURISDICTIONS

A. Australia

    1. Inquiry into the Law of Joint and Several Liability
    2. Report of the Working Party of the Ministerial Council for Corporations -- Professional Liability in Relation to Corporations Law Matters
    3. New South Wales Law Reform Commission
    4. Western Australia -- Parliamentary Select Committee on Professional and Occupational Liability
    5. South Australia, Victoria and Northern Territory -- Building Legislation

B. United Kingdom

C. United States

D. Ireland

E. European Union

F. Bermuda

G. Canada

    1. British Columbia
    2. Alberta
    3. Ontario
    1. Report of the Ontario Law Reform Commission
    2. Wolff Report
    3. Toronto Stock Exchange Report -- Corporate Governance
    4. Ontario Securities Commission -- Task Force on Small Business Financing
    5. Toronto Stock Exchange -- Corporate Disclosure Report

PART IV: DIFFERENT APPROACHES

A. Full Proportionate Liability: Arguments For and Against

    1. Fairness
    2. Costs and Certainty
    3. Settlement of Claims
    4. Insurance
    5. Deterrence
    6. Complexity and Practical Problems
    7. Changing Circumstances

B. Modified Forms Of Proportionate Liability

    1. Proportionate Liability Where the Plaintiff Is Contributorily Negligent
    2. Proportionate Liability Where the Plaintiff Is Contributorily Negligent with a Proportionate Reallocation of an Insolvent Defendant’s Share
    3. Proportionate Liability for a Peripheral Wrongdoer
    4. Proportionate Liability with a Reallocation of Some or All of an Insolvent Defendant’s Share
    5. Court Discretion

Options -- (for both Sections A and B)

C. Joint And Several Liability With A Reallocation Of An Insolvent Defendant’s Share

Options

D. Limiting Liability By Contract

Options

E. Capping Professional Liability By Statute

Options

F. Compulsory Directors’ and Officers’ Insurance

Options

G. Limiting the Scope of Professional Liability

    1. Limiting to Whom a Duty of Care is Owed
    2. Options

    3. Limiting the Functions to which Professional Liability Attaches

Options

H. Reducing the Limitation Period for Commencing Legal Actions Based on the Provision of Financial Information

Options

I. Limiting the Life of Financial Information

Options

J. Allow Professionals to Limit their Liability through Incorporation or Limited Liability Partnerships

Options

APPENDIX A: WITNESSES


PART I: INTRODUCTION

In August 1995, the Honourable John Manley, Minister of Industry, asked the Standing Senate Committee on Banking, Trade and Commence (the "Committee") to hold hearings on a number of policy issues related to the modernization of the Canada Business Corporations Act (the "CBCA").(1) Among the matters that the Minister asked the Committee to examine was the issue of auditors’ liability.

On 13 February 1996, representatives of the Canadian Institute of Chartered Accountants (the "CICA") appeared before the Committee in Calgary to outline their liability concerns. The accounting profession maintains that auditors are facing a liability crisis brought on for the most part by the application of the rule of joint and several liability.

The CICA submitted to the Committee a written brief prepared by the Honourable W. Z. Estey Q.C. and entitled Proportionate Liability and Canadian Auditors, ( the "Estey brief").(2) This outlined the concerns of the auditing profession and presented a recommendation for change. In particular, the CICA recommended that the relevant federal and provincial statutes be amended to bring the following proposal into effect:

The Court in awarding damages for negligence relating to the issuance of financial information by an organization, apportion such damages according to the fault of each defendant and their liability shall not exceed their proportion of the fault.

The CICA suggested that its proposal be implemented at both the federal and provincial levels, but pointed out that its main concern lay with the former. It, therefore, recommended that amendments be made to implement a system of proportionate liability in relation to the issuance of financial information in respect of corporations incorporated under the Canada Business Corporations Act and in relation to financial institutions incorporated under the Bank Act,(3) the Trust and Loan Companies Act,(4) and the Insurance Companies Act.(5) This proposal would extend proportionate liability to all defendants involved in the issuance of financial information, including corporate directors, management and other advisors.

In its August 1996 report on corporate governance, the Committee expressed the view that the issue of joint and several liability as it affects all professional defendants, not just auditors, warrants further investigation and agreed to hold hearings on the subject.(6) These hearings were held in October and November 1996. In December 1996, the Committee issued an Interim Report, Joint and Several Liability and Professional Defendants (7)(the "Interim Report") in which it stated that an options discussion paper would be prepared and released.

The purpose of this discussion paper is two-fold:

  • to present a number of approaches and options for addressing the issue of joint and several liability, particularly as it pertains to liability amongst co-defendants in the context of the CBCA and federal financial institutions legislation; and
  • to provide a basis and context for further hearings to be held by the Committee before the end of 1997.

The paper is predicated on a number of notions. First, a professional will continue to be responsible for his or her own actions. Second, liability stemming from intentional wrongdoing and fraud will not form part of the discussion; it is assumed that joint and several liability will continue to apply where fraud or wrongdoing have been found. Third, the discussion is limited to situations involving pure economic loss -- financial loss that is not causally consequent upon physical injury to a plaintiff or to his or her property(8) -- and will not include an examination of the rule of joint and several liability as it pertains to personal injury claims. Fourth, the federal government has the constitutional authority to legislate with regard to matters affecting civil liability as long as those legislative provisions form part of the federal responsibility in relation to a matter or are functionally and integrally related to a valid legislative power. Fifth, any analysis of the approaches and options contained in this paper should be mindful of the liability regimes operating in Canada’s major trading partners.

The discussion paper outlines several approaches and options for dealing with the liability concerns raised in connection with joint and several liability amongst co-defendants. Many of these approaches have been discussed and, in some cases, implemented in other countries or were brought to the Committee’s attention by witnesses who appeared at the Committee’s earlier hearings. To the degree possible, the paper attempts to cover the most widely used and widely discussed approaches to the joint and several liability issue.

To further the discussion, the paper presents a number of advantages and disadvantages associated with each approach. The recitation of advantages and disadvantages is neither exhaustive nor intended to favour one approach over another. The fact that there may be more advantages than disadvantages presented in relation to a particular approach or vice versa should not be interpreted as indicating support for or disapproval of that approach.

Finally, the Committee notes that there may be objections to the options contained in this discussion paper. There may be approaches of which the Committee has not yet been made aware. The paper is intended to solicit views, comments and recommendations to assist the Committee in developing its recommendations to the Government.

Background

A. Levels of Professional Liability

For professionals who practise their profession within a partnership structure, there are three levels of liability:

    • personal liability of individual partners who actually perform or supervise the act or omission under consideration;
    • joint and several liability amongst co-defendants; and
    • joint and several liability amongst professional partners, exposing both the partnership assets and those of the individual partners to the liability of the firm.(9)

Thus, a professional firm faces joint and several liability amongst co-defendants and the individual partners will be subject to joint and several liability for the liabilities of the partnership.

For businesses operating within a corporate structure, on the other hand, exposure is limited to the assets of the corporation. Generally, shareholders, directors and officers do not face personal liability except in cases involving fraud and theft and for liabilities imposed by statute.

As mentioned earlier, this discussion paper is largely concerned with the second level of liability -- joint and several liability amongst co-defendants.(10)

B. Joint and Several Liability Amongst Co-Defendants

Joint and several liability developed under circumstances different from those of today. First, at the time the rule came into being, if a plaintiff was partly responsible for his or her loss (contributorily negligent), a defendant would not be held liable. Contributory negligence was a complete bar to recovery. In addition, it was believed that the courts were incapable of apportioning fault among several defendants.

The overriding aim was to ensure that a blameless plaintiff would be made whole for the loss suffered. The desire to afford full recovery for a plaintiff meant that if a wrongdoer was insolvent or otherwise unable to satisfy his or her share of the liability, the risk of satisfying that wrongdoer’s share would fall upon the other wrongdoers.

Before proceeding further, it is worth defining what is meant by joint and several liability amongst co-defendants. For this purpose, the relevant section of the Interim Report is repeated:

Joint and several liability involves two or more wrongdoers acting independently so as to cause the same damage to a plaintiff. Where two or more persons, acting independently of each other, have by their separate wrongful acts brought about a single and specific injury to another person, the law holds them jointly and severally liable for the full loss. The law treats each wrongdoer as the effective cause of the plaintiff’s entire loss and therefore allows the plaintiff to seek full compensation from any of the defendants found liable. (11)

A defendant who satisfies a judgment has a right of contribution from the other parties who are liable. This right allows the court to make an order requiring each defendant who has caused or contributed to a plaintiff’s loss to contribute to paying the judgment based upon the extent of his or her responsibility for the loss. For example, where a plaintiff’s loss is found to have been caused by the negligence of three different defendants, joint and several liability holds each of the defendants 100% liable to the plaintiff and the plaintiff is entitled to seek full payment from any one of them. Among the defendants, however, responsibility may be apportioned, for example, 40% to Defendant1 (D1), 35% to Defendant2 (D2) and 25% to Defendant3 (D3).

Although a right of contribution gives a defendant the opportunity to reduce his or her ultimate liability, the right will have little meaning when some of the defendants are insolvent or unavailable. In these situations, a solvent defendant under a joint and several liability regime will have to bear the cost of another defendant’s insolvency or unavailability.

There is a perception that joint and several liability increases a defendant’s liability and makes a defendant responsible for paying an entire damage award in situations where he or she bears relatively little blame for a plaintiff’s loss. This is not so, but joint and several liability, however, leaves a defendant responsible for assuming the obligations of co-defendants when they are insolvent or unavailable. In this regard, it is worth repeating the words of the U.K. Law Society’s Special Committee on Joint and Several Liability, as quoted in the Interim Report.

...[J]oint and several liability does not increase a defendant’s liability. Rather by affording the right to claim a contribution from fellow wrongdoers, it offers the chance to reduce the ultimate liability. The rule only applies where all the co-defendants are equally and fully liable, so there is no question of a person accepting greater liability than would always have been his legal responsibility. (12)

In Canada, the various negligence statutes provide for joint and several liability amongst co-defendants, with a right contribution among the defendants.

C. Claims for Economic Loss Resulting from Negligent Misrepresentation

There have been a number of important changes in the legal environment for the provision of professional services: the basis for imposing tort liability has broadened; the liability of professionals, once based only on contract, is now recognized in both contract and tort; damage awards have increased in magnitude; and the tendency to litigate has increased in the wake of greater public awareness of consumer rights. (13)

A significant development in the area of professional liability was the expansion of negligence law to allow recovery for pure economic loss.

Although the courts have long recognized that a person can recover damages for personal injury stemming from the negligent action of another, the ability to recover damages for economic loss based on negligent misrepresentation is a relatively recent development. In the early 1960s, the decision of the House of Lords in Hedley Byrne & Co. v. Heller & Partners Ltd.(14) recognized the right to recover for economic loss caused by negligent misrepresentation. This case continues to be the leading authority on this issue.

There are essentially four elements that must be established to maintain an action based on negligent misrepresentation. These are:

    • a misstatement or misrepresentation that was negligently made;
    • a relationship between the parties giving rise to a duty of care;
    • reasonable reliance placed on the statement or representation; and
    • damages suffered by the party relying upon the statement or representation. (15)

An important Canadian case in relation to liability for economic loss arising

from negligent misrepresentation is the Supreme Court of Canada decision in Haig v.Bamford.(16) In that case, the plaintiff, in reliance on financial statements prepared by the defendant auditors, invested in a company. The company subsequently became insolvent and the plaintiff lost his investment. The Supreme Court of Canada held that the auditors were liable for the economic loss resulting from the plaintiff’s reliance on the financial statements.

A crucial threshold issue in negligent misrepresentation cases is whether the defendant owes the plaintiff a duty of care. This was an issue with which the Supreme Court of Canada grappled in Haig v. Bamford.

From the authorities, it appears that several possible tests could be applied to invoke a duty of care on the part of accountants vis-à-vis third parties: (i) foreseeability of the use of the financial statement and the auditor’s report thereon by the plaintiff and reliance thereon; (ii) actual knowledge of the limited class that will use and rely on the statement; (iii) actual knowledge of the specific plaintiff who will use and rely on the statement. (17)

The Court concluded that the proper test to apply in this case was actual knowledge of a limited class.

In the present case the accountants knew that the financial statements were being prepared for the very purpose of influencing ... a limited number of potential investors. The names of the potential investors were not material to the accountants. What is important was the nature of the transaction or transactions for which the statements were intended, for that is what delineated the limits of potential liability.(18)

In a May 1997 judgment that has implications for all professional advisors, the Supreme Court of Canada reaffirmed the test that governs the existence of a duty of care in negligence cases and confirmed that this test will also apply to cases of negligent misrepresentation. In Hercules Managements Ltd. v. Ernst & Young,(19) another auditor’s liability case, the SCC concluded that the existence of a duty of care in negligence cases is to be determined through the application of the following two-part test:

  • is there a sufficiently close relationship between the plaintiff and the defendant that, in the reasonable contemplation of the defendant, carelessness on its part might cause damage to the plaintiff? In other words, does the defendant owe the plaintiff a prima facie duty of care?
  • are there policy considerations that would negate or limit the duty?(20)

In cases involving negligent misrepresentation, the Court concluded that a defendant will owe the plaintiff a prima facie duty of care where:

  • the defendant ought reasonably to foresee that the plaintiff will rely on his or her representation; and
  • reliance by the plaintiff would, in the particular circumstances of the case, be reasonable. (21)

If, based on the reasonable foreseeability/reasonable reliance criteria, a prima facie duty of care is found to exist, the court must then determine whether policy considerations such as indeterminate liability should eliminate or limit the prima facie duty. The SCC noted that "the fundamental policy consideration that must be addressed in negligent misrepresentation actions centres around the possibility that the defendant might be exposed to ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class’." (22)

The SCC concluded that in the general run of auditors’ cases, concerns over indeterminate liability will negate a prima facie duty of care. However, policy considerations surrounding indeterminate liability will not be a concern and a duty of care will exist where "the defendant knows the identity of the plaintiff (or of a class of plaintiffs) and where the defendant’s statements are used for the specific purpose or transaction for which they were made...."(23)

Another important decision in the area of negligent misstatement is the April 1997 decision of the British Columbia Court of Appeal in Kripps. v. Touche Ross & Co.(24). Among other things, this case dealt with two important elements of negligent misrepresentation -- the standard of care and reliance on the misrepresentation.

In Kripps, the plaintiffs were investors who had purchased debentures after the issue of a prospectus by Victoria Mortgage Corporation Ltd. (VMCL). Touche Ross was VMCL’s auditor from 1980 to 1984. In accordance with the requirements of the B.C. Securities Act, its audits were included in the prospectuses issued by VMCL to sell debentures.

VMCL eventually collapsed and investors launched an action against the auditors claiming that they had relied on the 1983 audit report to their detriment and that the report was a negligent misrepresentation because certain elements of VMCL’s financial position ought to have been disclosed and were not. Evidence in the case revealed that Touche Ross was aware of certain loans in default but concluded that the losses did not have to be disclosed under the General Accepted Accounting Principles (GAAP) in existence.

A key issue raised in Kripps was whether the auditor’s conduct was in breach of the standard of care.

The current judicial attitude towards standards set by professions was set out by Sopinka J. for the majority of the Supreme Court of Canada in ter Neuzen v. Korn. The following passage from this judgment was quoted in Kripps: (25)

I conclude from the foregoing that, as a general rule, where a procedure involves difficult or uncertain questions of medical treatment or complex, scientific or highly technical matters that are beyond the ordinary experience and understanding of a judge or jury, it will not be open to find a standard medical practice negligent. On the other hand, as an exception to the general rule, if a standard practice fails to adopt obvious and reasonable precautions which are readily apparent to the ordinary finder of fact, then it is no excuse for a practitioner to claim that he or she was merely conforming to such a negligent common practice.

The auditors in Kripps argued that a professional defendant may avoid liability where the conduct in question is in accordance with standard and approved professional practice. In other words, the auditors argued that if they prepare financial statements in accordance with GAAP, the accepted professional standard, they will not be liable.

Writing for the majority on this issue, Finch J. A., held

while professional standards would normally be a persuasive guide as to what constitutes reasonable care, those standards cannot be taken to supplant or to replace the degree of care called for by law. A professional body cannot bind the rest of the community by the standard it sets for its members. Otherwise, all professions could immunize their members from claims of negligence. A partial immunization would be the result of giving effect to the "qualification" in unqualified auditor’s reports that the financial statements present fairly the financial position "in accordance with GAAP". It is for this reason that I respectfully disagree with the learned trial judge that it is appropriate for auditors to sign unqualified auditor’s reports if the financial statements are prepared in accordance with GAAP, if the auditors know or ought to know that the financial statements are misleading. (26)

In finding the auditors negligent, the majority held that Touche Ross fell below the required standard of care when it made its auditor’s report because it had had actual knowledge that the application of GAAP would omit material information and lead to financial statements that did not fairly represent the financial position of VMCL.

Another key element in actions based on negligent misrepresentation is the matter of reliance. This arises when a plaintiff takes some action based on a representation that he or she would not have otherwise taken if the representation had not been made or some true representation had been made.

On this issue, the majority in Kripps held that

it is sufficient ... for the plaintiff in an action for negligent misrepresentation to prove that the misrepresentation was at least one factor which induced the plaintiff to act to his or her detriment. I am also of the view that where the misrepresentation in question is one which was calculated or would naturally tend to induce the plaintiff to act upon it, the plaintiff’s reliance may be inferred. The inference of reliance is one which may be rebutted but the onus of doing so rests on the representor. (27)

According to Kripps, the reliance requirement will be met if the negligent misrepresentation is one factor in the plaintiff’s decision. Arguably, it does not have to be a significant factor nor does it have to play a real and substantial part in the plaintiff’s decision.

 

PART II:   LIABILITY CONCERNS

A. Accounting Profession

In recent years, the accounting profession has been vocal in expressing its concern about what it describes as a "liability crisis" emanating from an increasing amount of litigation against accountants and the expansion in their liability. The International Federation of Accountants points to the increased commercial activity of the 1980s, followed by a world-wide recession and an expansion of the range of persons to whom an auditor may be liable as the root causes of this expanded liability. (28)

The Estey brief identifies the existing joint and several liability regime as the most serious threat facing the independent audit function. The CICA contends that factors such as the magnitude of the claims against auditors, the fact that auditors can be called upon to fully compensate a plaintiff when their degree of fault is minor compared to that of other defendants, and the often inadequate insurance or financial resources of other defendants create a significant liability problem for the accounting profession. The lack of financial resources of co-defendants places auditors in the position of being the effective insurer of their co-defendants’ risk.

The CICA argues that plaintiffs seek accountants out as defendants because there is a perception that auditors carry substantial amounts of liability insurance and represent the most promising source of recovery. Accountants further maintain that the likelihood of being found liable to pay an entire damages award puts pressure on auditors to settle for an amount greater than what they might be called upon to contribute if the relative responsibilities of the various defendants were determined in contribution proceedings.

The CICA notes that there are a number of claims underway in Canada involving actions against auditors. Four of these -- Castor Holdings, Standard Trust, Confederation Life and Royal Trust-- involve claims totalling in the order of $3 billion.(29)

B. Building Industry

Defendants in the building industry have also condemned the principle of joint and several liability. In the United Kingdom, a joint construction industry/Department of the Environment working party criticized the disproportionate effect of joint and several liability in the construction industry and recommended that in construction cases not involving personal injury liability arising from latent defects should be based on the apportionment of fault.(30)

The Association of Consulting Engineers of Canada told the Committee that the doctrine of joint and several liability has an adverse impact on the engineers practising in the construction industry in Canada. According to the Association, there have been numerous cases where consulting engineering firms have had to pay a disproportionate share of damages as a result of the application of joint and several liability.

The Association noted that claims against engineers involved in construction projects differ materially from those against other professions. A large number of the actions are brought by the person -- the owner/developer -- who chooses the parties who ultimately become the defendants in a lawsuit. There is also a considerable amount of overlap in responsibilities between the design consultant and the various contractors. Owners tend to select a low bidder with meagre financial resources to construct a project and this places a significant burden on parties such as design consultants who have the financial resources, largely through professional liability insurance, to pay for losses sustained. Given that a number of parties involved in a construction project may be impecunious, the present system puts the consultant in the unenviable position of being the insurer of such parties.(31)

The engineering profession and the CICA, however, do not share the same concerns about the economic burden associated with joint and several liability, which does not pose an economic problem for professional engineers in Canada.

We are not aware of an identical commercial reason why the engineering profession is in need of reform in this area. It can be demonstrated that they continue to operate with relative commercial success, notwithstanding their exposure to joint and several liability. We have not witnessed the bankruptcies or insolvencies of the nature referred to by the accounting profession .... (32)

The Association’s plea for the abolition of joint and several liability is based upon the argument that all professions should be treated fairly and equitably: if the application of joint and several liability is to be abolished in relation to professionals involved in the provision of financial information, it should also be abolished for other professionals.

C. Professions Generally

Liability concerns are not limited to one or two professions. The impact of joint and several liability amongst co-defendants is the same across all professions. If a firm of professionals is found liable in a civil action, whether the firm is composed of auditors, professional engineers or lawyers, it will be considered as the effective cause of the entire financial loss suffered by the plaintiff and be responsible for fully compensating the plaintiff.

D. Impact of Liability Concerns on the Provision of Professional Services

The CICA contends that liability concerns threaten the ability of the major accounting firms to continue to provide auditing services to Canadian businesses. As a result:

  • there will be a decrease in the availability of traditional and extended audit services;
  • the profession will be unable to attract high quality candidates;
  • audit services will cost more; and
  • certain "high risk" companies will have difficulty obtaining auditing services. (33)

The Supreme Court of Canada, in Hercules, noted similar consequences if liability for negligently prepared audit reports were to go unchecked. (34)

The CICA maintains that joint and several liability jeopardizes the long-term survival of the accounting profession, and has implications for the independent audit function, the financial reporting system, the capital markets and the well-being of business and the public generally.(35) As the CICA noted, the issue is of particular concern to the major accounting firms (the "Big Six" firms) because they are the primary providers of auditing services to large businesses and financial institutions. Legal actions against accounting firms in areas other than auditing, the CICA notes, are not significant.(36)

Commenting on the effect of joint and several liability on the provision of professional services, the Canadian Bar Association noted that the cost of professional services increases with over-researching of issues, multiple reviews to ensure agreement on opinions, and the unwillingness to give effective guidance on an issue for fear it will represent an "opinion". Furthermore, the costs of protection from liability are passed on to clients, both in the nature of the advice and larger fees. (37)

E. Liability Insurance

Much of the discussion about joint and several liability amongst co-defendants focuses on the role, availability and cost of liability insurance.

The CICA asserts that the magnitude of the claims against auditors and the doctrine of joint and several liability have had an adverse impact on the insurance coverage available to the major accounting firms. Liability insurance is becoming increasingly expensive and more difficult to obtain. The largest firms have to purchase insurance coverage in the international market and must self-insure as well.

While smaller accounting firms can obtain limited amounts of insurance from Canadian insurers, the larger firms have to obtain the significant cover that they require from international markets. Even in the international markets, coverage of the magnitudes of these enormous claims we face is simply not available from commercial insurers. To a very large extent we are forced to self-insure against these risks....

... none of the major accounting firms in Canada has insurance coverage that is in excess of approximately U.S. $150 million. The commercial insurance portion of that amount probably ranges between 25 per cent and 50 per cent depending upon the firm in question and the year in question. Consequently, the firms themselves, through their own captive insurance companies, would be required to bear anywhere between $75 million and $120 million of loss.

Even more seriously, I would note that any losses in excess of US $150 million would have to be borne directly and totally by the accounting firm and the partners themselves out of their firms and their personal assets.

To complicate matters further, insurance coverage is not available for an unlimited number of claims. Typically, coverage is available for only two or three or four claims worldwide in any year. If ours is claim number five, we are out of luck and we have no insurance coverage whatsoever. Even at that, commercial and self-insurance costs for the major audit firms have increased tenfold since 1989, and the cost per partner is now approximately $35,000 per year. (38)

Insurance underwriters and brokers confirm that adequate professional liability insurance from commercial sources, although readily available for professionals generally, is not available for the Big Six auditing firms. Insurers are reluctant to insure those who they believe are being targeted when a business fails or an investor loses money. The nature of the business in which the Big Six firms are engaged, the size and complexity of the transactions, and the frequency and magnitude of the claims against them make their liabilities difficult to underwrite. (39)

The cost and availability of liability insurance was also cited by the CBA as an important component of the issue of joint and several liability for professionals. Available and affordable insurance can temper the economic impact of liability, but practitioners in fields such as auditing, lawyers in banking and securities practices and doctors in obstetrics and emergency medicine are finding insurance increasingly expensive and sometimes unobtainable.(40) The CBA, however, noted that it had "found little empirical data on the impact of a perceived insurance crisis on the provision of professional services."(41)

The cost and availability of professional liability insurance is not a significant issue for the engineering profession. Indeed, its insurance costs are "in retreat, at least temporarily, and not expanding beyond the control of the profession’s economic means."(42)

 

PART III:  DEVELOPMENTS IN DIFFERENT JURISDICTIONS

This section will outline developments pertaining to joint and several liability amongst co-defendants in Australia, the United Kingdom, the United States, Ireland, the European Union, Bermuda and Canada.

A. Australia

1. Inquiry into the Law of Joint and Several Liability

In 1994, the federal and New South Wales Attorneys General established an inquiry into the law of joint and several liability. The inquiry report was presented in two stages: Stage One, published in July 1994, consisted of a review of the desirability and feasibility of changing the rules pertaining to joint and several liability; Stage Two, released in January 1995, contained recommendations with respect to the law of joint and several liability. (43)

The increasing cost of professional insurance and the fear that such insurance may be more difficult to obtain served as the background to the inquiry. According to its terms of reference, the inquiry was instructed to consider the issue of professional liability. The terms of reference, however, excluded consideration of personal injury claims, the introduction of a capping system and an examination of the range of persons to whom a professional might be liable. (44)

The report recommended that "joint and several liability be abolished, and replaced by a scheme of proportionate liability, in all actions in the tort of negligence in which the plaintiff’s claim is for property damage or purely economic loss." (45)

The report examined four variations of proportionate liability:

  • proportionate liability in all circumstances, without regard to whether the plaintiff has also been in any way to blame for the loss;
  • proportionate liability when the plaintiff is partly at fault;
  • proportionate liability when the plaintiff is contributorily negligent but where there is a proportionate division of an insolvent defendant’s share;
  • proportionate liability depending on the defendant’s degree of fault.

The report favoured the first variation and recommended that "joint and several liability for negligence which causes only property damage or economic loss be replaced by liability which apportions fault, in all circumstances, among those responsible for the damage or loss."(46)

The report noted that full proportionate liability exists under legislation in Victoria, South Australia and the Northern Territory in connection with claims for defective building work. The report recognized that a proportionate liability scheme would transfer the risk of an insolvent defendant from the other defendants to the plaintiff; however, it did not consider this to be inherently unfair since the plaintiff already bears this risk when there is only one defendant.(47) The report also pointed out that this variant of proportionate liability does not depend on findings, or assumptions, as to the cause of the plaintiff’s loss, but requires only the attribution of fault, and degrees of fault, to a defendant against whom an action is brought. The need for contribution rules is obviated.(48)

The report observed

Once a defendant is found to bear a certain percentage of the blame for a particular loss, that defendant can be assured that the extent of his or her liability will not increase solely because another defendant is either insolvent or has only minimal assets with which to satisfy a judgment. Joint and several liability is imposed on defendants despite the fact that each has acted independently of the others in bringing about the plaintiff’s loss. It can scarcely be regarded as just that one of the defendants should bear the burden of satisfying a claim for loss, when the principal reason for that loss lay in the activities and defaults of others, over whom the one solvent defendant had no real control. (49)

The report also made recommendations in connection with liability arising under certain statutes. It concluded that liability for misleading conduct under the Trade Practices Act, the Fair Trading Act and the Corporations Law should be changed from joint and several to proportionate liability. However, the report noted that if the principle of providing full compensation for consumer claims was determined to be paramount, joint and several liability might be retained for those claims. (50)

July 1996 saw the release for consultation of draft model provisions to implement the recommendations of the inquiry. To date, there has been no official government position on the issue and no legislative action has been taken.

2. Report of the Working Party of the Ministerial Council for Corporations -- Professional Liability in Relation to Corporations Law Matters

A study carried out at the request of the Ministerial Council for Corporations (MINCO) into professional liability in relation to corporations law matters identified the possibility of allowing auditors to limit their liability through incorporation as an alternative to capping professional liability. The report also suggested a review of the rule of joint and several liability.(51)

3. New South Wales Law Reform Commission

In 1990, the New South Wales Law Reform Commission published a report entitled, Contribution among Wrongdoers: Interim Report on Solidary Liability. This report looked at replacing joint and several liability with proportionate liability in relation to personal injury cases as well as those involving pure economic loss and property damage. The Commission concluded that joint and several liability should be retained. (52)

New South Wales has, however, introduced a scheme to cap the liability of members of professional and other occupational groups. The Professional Standards Act 1994, which came into force in 1995, establishes a minimum cap of $500,000 (Australian) with higher levels as appropriate.

4. Western Australia -- Parliamentary Select Committee on Professional and Occupational Liability

In response to initiatives in New South Wales to cap the liability of members of professional and other occupational associations, in 1991 the Parliament of Western Australia formed a Select Committee on Professional and Occupational Liability.

Reporting in January 1994, the Committee recommended a Professional Standards Bill that would allow for capping the liabilities of professional bodies. The amount of the cap would be determined by the amount of business assets, a multiple of a reasonable charge for the work or by reference to insurance arrangements. (53)

The report also considered the matter of joint and several liability and concluded that it should be changed to separate liability, at least in the case of professional liability.(54) This would be accomplished by legislative amendments that would require a court, in awarding damages, to consider if liability should be joint, several, or joint and several. Liability would be apportioned as the court thought just and equitable depending on the degree to which each person’s actions contributed to the damage, and the relative culpability of those actions. The court would have the power to order that tortfeasors be jointly and severally liable for up to 10% of the total damages awarded.(55)

Following upon these recommendations, the Professional Standards Bill 1997 was given third reading in the Legislative Assembly of Western Australia on 19 June 1997. Among other things, the bill would establish a statutory cap on damages for financial loss. Claims for death, personal injury or in relation to conduct involving breach of trust, fraud or dishonesty would be excluded from the capping scheme. The bill would also require the introduction of risk management and risk reduction strategies for professionals taking advantage of the capping provisions.(56)

5. South Australia, Victoria and Northern Territory -- Building Legislation

The Australian states of South Australia, Victoria and Northern Territory have replaced joint and several liability with proportionate liability for claims involving defective building work.(57)

Section 155 of the Northern Territory Building Act 1993, for instance, provides:

(1) After determining the award of damages in an action, a court shall apportion the total amount if the damages between all persons who are found in the action to be jointly and severally liable for the damages, having regard to the extent of each person’s responsibility for the damage.

(2) The liability for damages of a person found to be jointly and severally liable for damages in an action shall be apportioned to the person by the court.(58)

Joint and several liability continues to apply where defective construction has lead to death or personal injury.

B. United Kingdom

In the context of concern about the operation of the principle of joint and several liability, the Department of Trade and Industry invited the Common Law Team of the Law Commission, under Professor Andrew Burrows, to undertake a feasibility investigation of the law of joint and several liability. The purpose of the investigation was to decide whether a full Law Commission project on joint and several liability should be undertaken.

In February 1996, the Common Law Team published its conclusions in the consultation paper Feasibility Investigation of Joint and Several Liability. The investigation report noted that in recent years accountants and defendants in the building industry have challenged the principle of joint and several liability.

Much of the report was taken up with and examination of proportionate liability. The report expressed the view that a full proportionate liability scheme would be workable and could be rationally confined to non-personal injury cases, but concluded that the present joint and several liability regime should not be replaced by full proportionate liability.(59)

The investigation report set out a number of objections to full proportionate liability. The first was that it was unfair for a legally blameless plaintiff to have to bear the risk of a defendant’s insolvency. The report noted that it was "misleading to say that defendants can currently be called on ‘to provide 100% of the damages even though they are only 1% at fault’ since the principle of joint and several liability is that relative to the plaintiff each defendant is 100% responsible for the whole of the loss." (60)

The report further suggested that proportionate liability would result in less likelihood of a plaintiff’s recovering full damages as the victim of two wrongs, (either of which would have been sufficient to cause the loss, one by a solvent defendant and the other by an insolvent defendant) than if he or she had been the victim of a single wrong by a solvent defendant. (61)

The investigation report examined and rejected three forms of modified proportionate liability. The first provides for the reallocation of the share of an insolvent defendant between the other defendants and the plaintiff where the plaintiff is contributorily negligent; the second applies proportionate liability to a person whose fault is secondary when compared to that of the other wrongdoers; the third allocates the uncollected share of an insolvent defendant, but only up to 50% of each defendant’s proportionate share.(62)

Although not directly within the scope of the terms of reference, the Common Law Team considered other possible solutions to the "serious liability problems being encountered by professional defendants."(63) These were compulsory insurance shemes, contractual exclusions of liability by professionals and capping professional liability by statute.

The report concluded that there was "scope for a review of the extent to which professionals and others are prevented from limiting their liability to clients by contract over and above the normal market controls on such clauses."(64) It went on to suggest that section 310 of the Companies Act 1985 could be amended to allow auditors to limit their liability and that, depending upon the views of the professions, the application of the Unfair Contract Terms Act 1977 to the exclusion or limitation of professional liability for economic loss should be reviewed.(65)

Since the release of the investigation report, the U.K. Department of Trade and Industry has been asked by the professional organizations representing auditors and the construction industry, the Confederation of British Industry and others to conduct a further study of joint and several liability from a more general economic perspective.

C. United States

After considerable study and debate over a three-year period in both the Senate and the House of Representatives, a form of proportionate liability was adopted at the federal level in the U.S. with the passage of the Private Securities Litigation Reform Act of 1995.(66) From the beginning, altering the rule of joint and several liability was an important component of the reform effort.(67)

The Act retains joint and several liability for defendants who knowingly violate securities laws and in relation to claims made by small investors. A small investor is defined as a plaintiff whose net worth is $200,000 or less and whose share of the damage award is equal to at least 10% of his or her net worth.(68) For claims other than those described above, proportionate liability replaces joint and several liability. Where a defendant is insolvent and a plaintiff is unable to collect the defendant’s share, however, each of the remaining defendants is further liable for the uncollected share provided that the additional liability is not more than 50% of the remaining defendant’s proportionate share. The Act also contains a contribution right which allows any person required to contribute more than his or her proportionate share to proceed against other persons who bear responsibility.(69)

The vast majority of the states in the United States have modified the rule of joint and several liability in favour of some form of proportionate liability. While some states have abolished joint and several liability entirely, most states have chosen rather to alter it.(70) In many cases, the adoption of proportionate liability regimes at the state level took place in conjunction with the abolition of the common law rule that negligence on the part of a plaintiff was a complete bar to the plaintiff’s ability to recover damages. However, much of the impetus for modifying joint and several liability came from a perceived insurance crisis. Municipal governments in particular, often targeted as "deep pocket" defendants with relatively minor degrees of fault, argued that joint and several liability was the root cause of higher taxes and service reductions.(71)

In the U.S., tort law reform at the state level falls into three general categories:

  • proportionate liability where a plaintiff is contributorily negligent;
  • proportionate liability where a defendant is a "peripheral wrongdoer" -- a defendant whose fault is limited and secondary when compared to that of other defendants; and
  • the proportionate reallocation of the uncollected share of a damages award attributed to an insolvent defendant. (72)

Some states have adopted full proportionate liability in all circumstances. Others apply full proportionate liability but exclude cases involving intentional torts or strict liability. Some jurisdictions, for example, have retained joint and several liability for torts involving automobile and airline accidents, for product liability cases, environmental pollution or for certain mass injury situations.(73)

A number of states have instituted proportionate liability where the defendant’s fault falls below a specified percentage. Others apply proportionate liability if the plaintiff is contributorily negligent or where the plaintiff’s fault exceeds a specified degree.(74)

Yet other states apply proportionate liability when damages are of a certain type. For instance, some states distinguish between economic and non-economic loss (damages for pain and suffering and emotional distress). Some states apply proportionate liability for non-economic damages, but hold defendants joint and severally liable for those that are economic. Other states have instituted proportionate liability for economic damages.(75)

In some states joint and several liability has been abolished for certain deep pocket defendants. Most often, proportionate liability has been introduced for municipalities and certain professionals.

D. Ireland

In Ireland, proportionate liability applies where a plaintiff is contributorily negligent but joint and several liability applies where no negligence is attributable to the plaintiff.(76) Ireland’s version of proportionate liability provides that the portion of the total loss attributable to an insolvent or unavailable defendant is shared rateably among the other solvent defendants and the plaintiff.(77)

E. European Union

Some member countries of the European Union apply joint and several liability while others apply proportionate liability in respect of statutory auditors’ liability.(78)

In 1994, DG XV of the European Commission commissioned a study on the role, position and liability of the statutory auditor within the European Union. The study looked at three factors that affect audit quality: auditor independence, the competence of the auditor and the content of the audit and auditor liability.

With respect to the issue of auditor liability, the report stemming from the study noted that it was necessary to find a balance between giving auditors sufficient incentive to provide high quality services while, at the same time, avoiding making auditing an uneconomic activity through excessive risk of litigation.(79)

The report went on to recommend that auditors’ civil liability within the European Union should move towards a regime with the following features:

  • the possibility of third party litigation;
  • liability that is proportionate to the auditor’s degree of fault;
  • no legally determined liability cap;
  • freedom for auditors to agree to a contractual cap with clients;
  • mandatory professional indemnity insurance; and
  • the ability of audit firms to organize under any business structure.(80)

F. Bermuda

Bermuda has amended its corporations legislation to adopt proportionate liability for auditors and corporate officers in situations where they are found to be liable for damages arising out of the performance of any function contemplated by the legislation. Joint and several liability, however, continues to apply in cases of fraud or dishonesty.

The legislation provides that the liability of an auditor or officer shall be determined in the following manner:

(3) (a) The Court shall determine the percentage of responsibility of the plaintiff, of each of the defendants, and of each of the other persons alleged by the parties to have caused or contributed to the loss of the plaintiff. In considering the percentages of responsibility, the Court shall consider both the nature of the conduct of each person and nature and extent of the causal relationship between the conduct and the loss claimed by the plaintiff;

(b) the liability of the auditor or officer, as the case may be, shall be equal to the total loss suffered by the plaintiff multiplied by the auditor’s or officer’s, as the case may be, percentage of responsibility as determined under paragraph (a) hereof.

(4) No auditor or officer whose liability is determined under subsection (3) shall have any liability in respect of any judgment entered against any other party to the action.

(5) Except where agreed in writing between the parties, where the liability of an auditor or officer has been determined in accordance with subsection (3) no other person shall have any right to recover from such auditor or officer any portion of any judgment entered against such other person in respect of the action.(81)

G. Canada

In Canada, provincial laws provide for joint and several liability where two or more persons are responsible for the same damage. However, under the Negligence Act of British Columbia(82) the liability of a defendant is proportionate if the plaintiff is contributorily negligent and joint and several if the plaintiff is not.

1. British Columbia

In 1986, the British Columbia Law Reform Commission reviewed the British Columbia law relating to shared liability and recommended that a plaintiff’s contributory negligence should not sever the liability of persons who would otherwise be jointly and severally liable for any loss or damage. Furthermore, the Commission recommended that where the liability is joint and several, and there is no real possibility of collecting a judgment or contribution from a defendant, the court should apportion the latter’s portion of the judgment among the other parties according to their degrees of fault.(83)

The Commission’s recommendations have not been implemented.

2. Alberta

In April 1979, the Institute of Law Research and Reform of the University of Alberta published the report Contributory Negligence and Concurrent Wrongdoers. The report considered whether liability among several wrongdoers should continue to be joint and several or should be apportioned in accordance with their respective degrees of fault.

The report recognized the force of the arguments in favour of proportionate liability but "concluded that paramount importance should be accorded to the principle that the non-negligent plaintiff should obtain full recovery, if at all possible."(84)

The report observed that the arguments in favour of proportionate liability are stronger where the plaintiff is at fault. However, it pointed out that there is no significant demand for changes to the rule of joint and several liability and that a contributorily negligent plaintiff should only be deprived of the share of the damages resulting from his or her own actions. It was suggested some confusion might result from having one set of rules applicable to a non-negligent plaintiff and another set applicable to a negligent plaintiff.(85)

After considering these factors, the Institute recommended that "the liability of concurrent tortfeasors either to a plaintiff who is free from negligence or to a contributorily negligent plaintiff should continue to be joint and several."(86)

3. Ontario

a. Report of the Ontario Law Reform Commission

The Ontario Law Reform Commission examined the issue of joint and several liability in 1988. In its Report on Contribution Among Wrongdoers and Contributory Negligence, the Commission considered whether the applicable rules should be changed.

In preparing its report, the Commission examined the laws of the various states of the United States on joint and several liability and commissioned a research paper from one of the leading American academics in the field. The Commission noted that the debate centres on arguments relating to fairness, the dramatic changes in the liability insurance market and the deterrent effect on activity that may cause harm to others.(87)

The Commission observed that the principle of joint and several liability "helps to assure the goal of full compensation to an injured person for losses attributable to the fault of others, a goal that the Commission regards as fundamentally just."(88) It was not persuaded that there were sufficiently strong economic arguments to support the abolition or modification of the rules of joint and several liability; nor was it convinced that there was persuasive empirical evidence that joint and several liability constitutes a significant contributing factor to the increased costs and diminishing availability of liability insurance. The Commission also considered that any unfairness to a defendant flowing from joint and several liability was outweighed by the unfairness to an innocent plaintiff who, under a proportionate liability regime, would be undercompensated if a defendant were insolvent or otherwise unavailable to satisfy a judgment.(89)

The Commission acknowledged the merit in the argument that a defendant’s liability should be proportionate in cases where a plaintiff is contributorily negligent, however, in the end it recommended that there should be no change to the law concerning the liability of concurrent wrongdoers, even where the plaintiff is contributorily negligent.(90)

The report went on to address the issue of how the risk of insolvency or absence on the part of one concurrent wrongdoer should be shared among other solvent concurrent wrongdoers. It recommended that the liability of a concurrent wrongdoer who is unable to satisfy his or her share of liability should be divided among the remaining wrongdoers in proportion to their respective degrees of fault, without discharging the defaulting wrongdoer’s liability to contribute.(91)

b. Wolff Report

In 1994, a report commissioned by the Government of Ontario into reform of the province’s Public Accountancy Act was prepared by Professor Roger Wolff. It recommended that the Government of Ontario undertake a study of the principle of joint and several liability with a view to substituting a system of proportionate liability in relation to the claims against public accountants.(92)

c. Toronto Stock Exchange Report -- Corporate Governance

In December 1994, the Toronto Stock Exchange Committee on Corporate Governance in Canada, released its report Where were the Directors?- Guidelines for Improved Corporate Governance in Canada. It noted the increasing concern being expressed about the liability of outside corporate advisors such as public accountants and the escalating incidence of lawsuits and claims against such advisors. The Committee suggested further consideration of the establishment of appropriate limits to this liability.(93)

d. Ontario Securities Commission -- Task Force on Small Business Financing

In October 1996, the Final Report of the Ontario Securities Commission Task Force on Small Business Financing examined the issue of auditors’ liability in connection with the offering documents prepared using the Small Business Prospectus Form. It recommended that "auditors be liable only for their proportionate share of damages awarded to a plaintiff in a statutory civil action for misrepresentation in an offering document prepared using the Small Business Prospectus Form."(94) It also recommended that joint and several liability continue for defendants who intentionally make a misrepresentation or delay disclosure.

e. Toronto Stock Exchange -- Corporate Disclosure Report

In its March 1997 report Responsible Corporate Disclosure, the Toronto Stock Exchange Committee on Corporate Disclosure concluded, among other things, that, subject to reasonable limitations, civil liability should attach to issuers and others for their continuous disclosure to investors in secondary markets.(95)

The Committee recommended that experts should be liable for misleading disclosure in connection with reports, opinions or statements attributed to them. But each defendant should be liable only for its proportionate share of the damages awarded to a plaintiff, unless the plaintiff established that the defendant had intentionally made the misrepresentation or caused the disclosure to be delayed. In the latter situations, joint and several liability would apply.(96)

The Committee also recommended a cap on the liability of issuers, directors, officers and experts.(97)

 

PART IV:  DIFFERENT APPROACHES

There are several approaches for dealing with the liability concerns put forward by the accounting and other professions. These include altering joint and several liability by implementing full proportionate liability or some modified form of proportionate liability, allowing parties to limit liability by contract, capping professional liability, compulsory insurance for corporate directors and officers, limiting the scope of professional liability, reducing the limitation period for commencing legal actions, and limiting the effective life of financial information. These approaches, along with joint and several liability, are considered in this part of the discussion paper. Arguments for and against and advantages and disadvantages of each approach are presented.

It should be noted that the approaches discussed are not necessarily mutually exclusive and one or more of them could potentially be adopted to address the liability concerns of professionals.

A. Full Proportionate Liability: Arguments For and Against

The approach put forward by the CICA is to replace the existing system of joint and several liability with a system of proportionate liability for all defendants in relation to claims for economic loss suffered as a result of the dissemination of defective financial information.

Under a system of proportionate liability, the liability of each co-defendant is limited to the proportion of the loss or damage for which he or she is found to be actually responsible. While joint and several liability makes each defendant the effective cause of the entire loss suffered by a plaintiff, proportionate liability apportions causal effectiveness according to the degree of fault of each defendant found to be liable. As a result, a defendant will be required to pay only his or her share of the liability as determined by the court.(98)

The following example illustrates how full proportionate liability operates. A plaintiff is awarded $100,000 in damages and there are three defendants whose liability is determined as follows: 40% to D1, 35% to D2 and 25% to D3. D2 and D3 are insolvent. The plaintiff will recover $40,000 or D1’s portion of the judgment. D1 will not be responsible for paying D2’s and D3’s uncollected share.

The significant difference between joint and several liability and proportionate liability is that the former puts the risk of an insolvent or unavailable co-defendant on the other co-defendants, while the latter transfers the risk to the plaintiff. Thus, the debate centres on who will bear the burden of an insolvent or unavailable defendant -- the plaintiff or the remaining co-defendants.(99)

There are a number of arguments for and against full proportionate liability. For the most part, they focus on issues such as fairness, the effect on the availability and cost of liability insurance, the costs and certainty associated with litigation and the question of deterrence. These and other issues are discussed below.

a. Fairness

The central argument against full proportionate liability is that the present joint and several liability regime is, on balance, fair. If two or more persons are the cause of the economic or financial loss suffered by another, they should be liable for the consequences. The fact that the actions of another wrongdoer contributed to the same loss should not jeopardize a plaintiff’s right to be fully compensated for the damage; it would be unfair to a plaintiff to shift to the plaintiff from the defendants(s) the risk of a defendant’s inability to pay damages. That risk ought to be borne by the defendant(s) because they have caused the financial or economic loss to the plaintiff.(100)

Joint and several liability rests on well-established principles of causation. To be held jointly and severally liable, each defendant must be found to be the effective cause of the entire loss suffered by the plaintiff.(101) Joint and several liability, as pointed out earlier, does not increase a defendant’s liability; in relation to the plaintiff, each defendant is 100% responsible.

The principal argument in favour of proportionate liability is also based on fairness -- fairness to defendants. It is argued that it is unfair for a defendant whose degree of fault is minor when compared to that of other defendants to have to fully compensate a plaintiff should the other defendants be insolvent. In theory, the less blameworthy defendants can recover contribution from the more blameworthy defendants; in practice, however, the former, particularly where they are insured professionals, are left to bear the lion’s share of liability when other defendants are insolvent or have disappeared.

The Australian Inquiry into the Law of Joint and Several Liability put it this way:

But the fairness and justice of a legal rule must be questioned when its effect is to place full liability on a defendant who may have been only marginally at fault, and to provide full compensation to a plaintiff who is able to find one on whom to fix the blame for the loss.(102)

Deep Pocket Defendants

Proponents of proportionate liability contend that joint and several liability encourages plaintiffs to unfairly target defendants who are known or perceived to be insured or solvent. The CICA maintains that, because auditors are known to be insured, plaintiffs seek them out as defendants. The same can be said for lawyers and other professionals. Accountants feel that it is unjust to impose liability for the full extent of losses suffered as a result of another person’s wrongdoing and unfair to make "deep pocket" defendants such as auditors, insurers of the insolvency of their co-defendants.(103)

Plaintiffs decide when, where and whom to sue. It is argued, therefore, that plaintiffs will sue persons who they believe afford the best opportunity for recovery.

Some professionals bear "an unfairly and unacceptably high share of awards of damages, because they are known to have ‘deep pockets’. Professional advisors who are fully or substantially insured ... become defendants of choice; plaintiffs can be sure that any award of damages against them will be honoured. By the same token, those professional practitioners cannot be so confident that those who share liability with them will be able to pay their contribution towards the total liability.(104)

It has also been suggested that the likelihood of having to pay an entire damages award puts pressure on deep pocket defendants, such as auditors and other professionals, to avoid protracted, expensive litigation by settling for amounts that may be excessive.

Sophisticated versus unsophisticated plaintiffs

It has been suggested that the level of sophistication of the plaintiff must also be considered when discussing the fairness issue. The CICA, for instance, contends that, in most cases involving auditors’ liability, the plaintiffs are sophisticated business people or organizations who are aware of the risks associated with making significant investments. The notions of fairness and making the plaintiff whole, the CICA contends, should apply to claims for damages in cases of physical injury arising from negligent conduct, but have less relevance to claims for financial loss resulting from negligent misrepresentation where sophisticated plaintiffs are aware of the inherent risks associated with business and financial decisions. For sophisticated business plaintiffs, the possibility of professional negligence should be one more commercial factor to be taken into account when making an investment decision. A small, unsophisticated investor, however, would not necessarily be aware of these risks. Some, therefore, contend that it is fair and appropriate for a modified proportionate liability regime to make a distinction between sophisticated and small investors.

It has also been argued that a proportionate liability regime is appropriate in certain types of commercial transactions. For instance, proportionate liability could apply where a plaintiff

  • is buying services as a business buyer and not for individual or personal purposes;
  • has chosen his or her own professional advisors; and
  • can evaluate the financial worth of the advisors.(105)

The proponent of this variant contends that, in the circumstances outlined above, "the balance of the argument lies with accepting that the business plaintiff should properly accept the risk of insolvency of one of his advisers, and that proportionate liability should apply as between jointly liable co-defendants...."(106)

Moreover,

It is the plaintiff who has determined the grouping of persons with whom the business transactions or arrangements will be concluded. Defendants will often not have chosen the grouping of defendants to the extent that the plaintiff has chosen the group of persons with whom they will deal. Therefore, it is somewhat puzzling, why advocates of joint and several liability believe that co-defendants should fully bear the risk of insolvency of another co-defendant or the inability to recover from a defendant for other reasons. It is difficult to determine why the plaintiff’s failure to assess the ability to recover from the potential defendants should be visited on the professional, who is required to both carry insurance and practice in a general partnership.(107)

It could be argued, on the other hand, that the level of sophistication of an investor is irrelevant to the issue of fairness. Regardless of the amount the amount of money invested, a person’s business experience, or the type of transaction, a person should be entitled to assume that the reports and opinions of auditors and other professionals are not negligently prepared, and be fully compensated for any financial losses he or she incurs.

Compensation

A fundamental aim of tort law is to compensate a plaintiff for his or her loss. Proponents of joint and several liability contend that the right of a plaintiff to recover damages for his or her loss takes precedence over the position of the defendant. Proportionate liability, it is argued, would derogate from that right. Under a proportionate liability regime, a plaintiff claiming damages from more than one defendant would be less likely to recover full damages by being the victim of two wrongs either of which would have been sufficient to cause the loss, one by a solvent defendant and the other by an insolvent defendant, than if he or she had been the victim of a single wrong by a solvent defendant.(108)

On the other hand, supporters of proportionate liability point out that a plaintiff whose loss has been caused by one defendant bears the entire risk of the insolvency of the defendant. Since the law does not provide redress to a plaintiff in this situation, it is not logical for it to do so merely because more than one defendant contributed to the plaintiff’s loss. If a plaintiff would have to bear the risk of loss in one situation, it is fair for the plaintiff to continue to do so when there is more than one defendant.

b. Costs and Certainty

It has been argued that proportionate liability may increase the costs of litigation because it will produce more uncertainty for parties when attempting to reach a settlement. Parties would not only have to ascertain the likelihood of liability being found, and the extent of damages, but also the degree of liability to be assigned to each defendant.(109)

The U.K. Law Society’s Special Committee on Joint and Several Liability stated the following

There is also a strong practical reason for retaining joint and several liability. If, on every occasion when there was potentially more than one defendant, the plaintiff was obliged to proceed against all of them in order to recover full damages, the result would be in some cases to increase the plaintiff’s involvement in litigation and negotiating settlement of claims. Because he would be involved in complications which are not at present his concern, the cost of these aspects of litigation would increase.... Clearly, the need to settle contribution shares may, as things stand at present, require multi-partite litigation. However, the change would inevitably increase the number of parties having to contest complex actions, because the plaintiff would be concerned with aspects of the dispute which at the moment he can disregard.(110)

On the other hand, it has been suggested that joint and several liability increases the overall cost of litigation because it involves two sets of proceedings: one to determine the liability for the loss and one to establish the measure of contribution among co-defendants. With proportionate liability, both issues would be settled in one trial, potentially saving time and money.(111)

c. Settlement of Claims

Professor Andrew Burrows, head of the Common Law Team that produced the Feasibility Investigation of Joint and Several Liability for the U.K. Department of Trade and Industry, noted the concern of the New South Wales Law Reform Commission about the possible effect of the introduction of proportionate liability on the settlement of claims. The Commission stated the following:

At present the matters in dispute between a plaintiff and a particular defendant are restricted to the question of the liability of that defendant (which will often be clearly established) and the assessment of the plaintiff’s total loss. To add to these issues, the question of the possible complicity of any other wrongdoers and the assignment of proportionate liability would introduce a new measure of uncertainty to litigation and might well hinder settlements being reached, thereby further clogging the court.(112)

On the other hand, it can be argued that proportionate liability would remedy situations where certain defendants, who are known to have deep pockets, might feel compelled to settle unmeritorious claims or claims where they are marginally responsible because they would otherwise have to bear the burden of an entire award should the other defendants be uninsured or insolvent. Knowing their liability was limited, deep pocket defendants might be less likely to enter into such settlements. The advantage of reducing "excessive settlements" might well outweigh the disadvantage of a potential increase in the number of cases that may go to trial.

d. Insurance

Auditors contend that joint and several liability is the major cause of their difficulties in obtaining adequate insurance coverage at affordable rates. The nature of the business in which auditors are engaged, as well as the frequency and the size of the claims, makes their liabilities difficult for insurers to underwrite.

The fact that plaintiffs choose the defendants in a legal action and target insured professionals as defendants of choice has led to

professional advisers and their insurers bearing the brunt of judgments in cases where professionals are liable to others. ... In the professional indemnity market, where significant losses have been suffered in respect of some professions, this has resulted in both loss of capacity and in substantially increased cost of insurance, particularly for accountants.(113)

Proportionate liability, it is argued, should reduce the amount of a claim that can be recovered from a particular defendant and make deep pocket defendants less attractive targets.

The impact of proportionate liability on the size of claims is uncertain at this time, however. Damages awards might still be large. Whether plaintiffs under such a regime will be less inclined to target deep pocket defendants is also unclear. There is no guarantee that proportionate liability will relieve the liability burden faced by many professionals. If available insurance is only $50 million, this may be the amount arrived at during settlement negotiations under either a joint and several or proportionate liability regime.

Insurance underwriters are uncertain about whether liability insurance would become more readily available and affordable under a proportionate liability regime. They told the Committee that they would have to wait for a considerable period to see the effect of proportionate liability before they could be convinced to make liability insurance coverage more readily available for the Big Six accounting firms.(114)

e. Deterrence

Joint and several liability, it is argued, deters activity that may cause loss to others. Knowing they will be held fully accountable, parties are more likely to implement measures to avoid liability. It has been suggested that replacing joint and several liability with a proportionate liability regime might adversely affect the risk management behaviour of potential defendants; because defendants would be liable for their portion of the damages only, the incentive to develop, adhere to and improve professional standards might decline.(115)

On the other hand, others argue that a proportionate liability regime will also be an effective incentive to engage in proper professional conduct. Whether the liability is for a $50-million loss rather than a $150-million loss is not, they believe, likely to make professionals less inclined to set and adhere to rigorous professional standards.

It should also be noted that in addition to the deterrent factor imposed by litigation, professionals often face significant sanctions from their professional bodies for certain types of conduct.

f. Complexity and Practical Problems

Proponents of joint and several liability argue that it is less complex than a system of proportionate liability since a plaintiff’s claim can be dealt with without having to take apportionment among the defendants into consideration.

This may be true in relation to the main action; however, the question of apportionment still has to be considered in subsequent contribution proceedings. Thus, the disappearance of such proceedings under a proportionate liability regime may be an advantage.(116)

It has been suggested that proportionate liability would burden the plaintiff with having to identify all persons responsible for his or her loss. However, one study notes that regimes where various forms of proportionate liability have been operating, such as Ireland and several states in the United States, appear to have few difficulties applying proportionate liability in practice.(117)

g. Changing Circumstances

Critics of joint and several liability argue that, because circumstances have changed since the rule was developed, it has outlived its usefulness at least in situations involving economic loss. Originally, the rule benefited only completely innocent plaintiffs; plaintiffs who bore some responsibility for their loss were barred from obtaining damages. The abolition of the rule which prevented contributorily negligent plaintiffs from recovering damages, however, opened the door to recovery for such plaintiffs.

Until the Hedley Byrne decision in 1963, there was no cause of action for economic loss based on negligent misrepresentation. Hedley Byrne paved the way for a whole new class of negligence claims against professionals, experts and advisors. The ability to sue for economic loss based on negligent misrepresentation in situations where joint and several liability applies created potential liability for 100% of any loss on the part of each defendant.

Factors such as change in the economic environment, changing attitudes toward litigation, the increasing complexity of business operations and transactions, the increased size and sophistication of corporations and financial institutions and the trend toward the globalization of corporate clients, financial operations and professional firms have created a situation in which exposure to liability has increased and the magnitude of potential claims against professionals has risen dramatically. It can be argued that the legal environment of joint and several liability amongst co-defendants has not kept pace with these developments.

On the other hand, it can be argued that, even in the face of rapid change, joint and several liability and the goal of full compensation for plaintiffs continue to be valid. Proponents of joint and several liability believe that the legal process continues to provide adequate protection to professionals. They point to the many hurdles that must be overcome before professionals generally, and auditors, in particular, are found liable for negligent misrepresentation. One of these is causation; the plaintiff must establish, on the balance of probabilities, that he or she would not have suffered the loss but for the defendant’s negligence. In addition, the courts have sought to limit liability by defining to whom a duty of care is owed and the situations in which the duty is owed. The plaintiff must also demonstrate the requisite degree of reliance on the defendant’s work before liability will be found. Furthermore, the plaintiff’s claim may still be unsuccessful if another subsequent cause was so significant that it breaks the chain of causation.(118)

B. Modified Forms Of Proportionate Liability

There are a number of modified forms of proportionate liability in existence and three general variations have been adopted at the state level in the United States. These are: (1) proportionate liability where a plaintiff is contributorily negligent; (2) proportionate liability where a defendant is a "peripheral wrongdoer" -- a defendant whose fault is limited or secondary when compared to that of other defendants; and (3) the proportionate reallocation of some or all of the uncollected share of a damages award attributed to an insolvent defendant. Another variation, proportionate liability involving a reallocation of an insolvent defendant’s share where a plaintiff is contributorily negligent, exists in the Republic of Ireland.

These and other approaches are discussed below. It should be noted that many of the arguments for and against full proportionate liability also apply to the various forms of modified proportionate liability and have been set out above.

1. Proportionate Liability Where the Plaintiff Is Contributorily Negligent

This variation of proportionate liability would retain joint and several liability in relation to a blameless plaintiff, but would abolish or modify the rule where the plaintiff contributed to his or her own loss. In other words, a plaintiff who was contributorily negligent would bear the risk of a defendant’s insolvency.

For example, P suffers a loss of $100,000. Liability is apportioned as follows: P 25%, D1 35% and D2 40%. D2 is insolvent. Under a regime of proportionate liability with no secondary allocation of the insolvent defendant’s share, P is entitled to $35,000 from D1. P is responsible for $25,000 and will bear the $40,000 shortfall.

This form of proportionate liability has been adopted under the law of British Columbia and in some U.S. states. In Georgia, for example, proportionate liability applies where a plaintiff bears any portion of fault.

Supporters of this variant contend that it is no longer clear that it is more appropriate for the defendants rather than the plaintiff to bear the risk of a co-defendant’s insolvency when the plaintiff is legally blameworthy, particularly where the plaintiff’s degree of fault is greater than that of the solvent defendant.

Law reform agencies in New South Wales, Alberta and Ontario examined this variation of proportionate liability. These agencies concluded, however, that the "contributory negligence of the plaintiff was not an adequate reason for proposing a move to proportionate liability. Their common reason for that view was that the fault of a contributorily negligent plaintiff is often different in kind from the fault of a defendant."(119) These agencies considered instances of bodily injury as well as economic loss in reaching this conclusion.

The U.K. Feasibility Investigation of Joint and Several Liability rejected this approach in favour of retaining joint and several liability in cases involving economic loss. In Australia, the Inquiry into the Law of Joint and Several Liability favoured full proportionate liability over this approach. Observing that it was somewhat arbitrary for the extent of a defendant’s liability to depend on whether the plaintiff was at fault, the report concluded that this variant of proportionate liability appears to be less fair or just than full proportionate liability.(120)

2. Proportionate Liability Where the Plaintiff Is Contributorily Negligent with a Proportionate Reallocation of an Insolvent Defendant’s Share

This variation of proportionate liability provides for reallocating the liability of an insolvent defendant among all remaining parties, including a contributorily negligent plaintiff, in proportion to their respective degrees of fault. Thus the plaintiff and the remaining defendants all bear the risk of a defendant’s insolvency.

For example, P suffers a loss of $100,000. Liability is apportioned as follows: P 10%, D1 40% and D2 50%. D2 is insolvent. D1 pays $40,000 to P. D1 and P will share the risk of D2’s insolvency. P will be responsible for one-fifth of D2’s share ($10,000) and D1 will be responsible for four-fifths of D2’s share (an additional $ 40,000).

This type of proportionate liability exists in the Republic of Ireland and has been supported by some leading authors on the law of torts.(121) In addition, some states in the U.S. give defendants the opportunity to obtain a secondary judgment to reallocate the share of an insolvent or absent defendant.

This approach was nevertheless rejected by the U.K. Feasibility Investigation of Joint and Several Liability in favour of joint and several liability. The Australian Inquiry into the Law of Joint and Several Liability favoured full proportionate liability over this variant.

This form of proportionate liability has been criticized because it is perceived to be complex to apply in practice, requiring the plaintiff to face a second court proceeding if a defendant should be insolvent. The U.K. Feasibility Investigation report notes that this approach would not be beneficial in most cases involving auditors’ negligence because the defendants would most likely not be able to establish that a plaintiff was contributorily negligent.(122)

3. Proportionate Liability for a Peripheral Wrongdoer

Under this approach, a defendant will be proportionately liable if his or her share of the fault falls below a specified percentage, say 30%; above that percentage, liability would be joint and several. This form of proportionate liability operates in several U.S. states. The percentage of fault that triggers proportionate liability varies; in some states a defendant’s responsibility must be 50% or less, in others 25% or less, in yet another 20% or less.

This regime favours defendants whose degree of fault is relatively small when compared to that of the other defendants. Deep pocket defendants who are marginally at fault would likely derive considerable benefit from this form of proportionate liability.

There is, however, some arbitrariness associated with establishing the threshold between proportionate and joint and several liability.

4. Proportionate Liability with a Reallocation of Some or All of an Insolvent Defendant’s Share

This variant provides for reallocating the liability of an insolvent defendant among the remaining defendants in proportion to their respective degrees of fault. Under this approach, the plaintiff may or may not be contributorily negligent; joint and several liability would continue to apply in cases of fraud and where laws had been knowingly violated.

As mentioned earlier, this form of proportionate liability is found in the U.S. Private Securities Litigation Reform Act of 1995 and applies to claims brought under federal securities law. The Act retains joint and several liability for defendants who knowingly violate securities laws and in relation to claims made by small investors. A small investor is defined as a plaintiff whose net worth is $200,000 or less and where the plaintiff’s share of the damage award is equal to at least 10% of that person’s net worth. For other claims, proportionate liability replaces joint and several liability. Where a plaintiff is unable to collect an insolvent defendant’s share, however, each of the remaining defendants is further liable for the uncollected share, provided that the additional liability is no more than 50% of that remaining defendant’s proportionate share.

Reallocating some of an insolvent defendant’s share among solvent defendant’s attempts to strike a balance between the goal of compensating the plaintiff and that of relieving the solvent defendants of the total liability burden. This approach recognizes that the plaintiff may or may not bear some of the risk of insolvency. In distinguishing between larger and perhaps more sophisticated investors and small investors, the approach suggests that sophisticated parties are better equipped to and can more appropriately accept a certain degree of risk. Such parties enter into a relationship with a company recognizing and accepting some risk of loss and accepting that some advisors or other involved parties might not be able to compensate them for losses for which the latter might be responsible.

The U.K. Feasibility Investigation of Joint and Several Liability described the form of modified proportionate liability found in the Private Securities Litigation Act of 1995 as "an elaborate pragmatic package." The report noted that it would be possible to formulate a more general reform of proportionate liability on the basis of this model, and that it would consider such a model as the "most attractive pragmatic way forward" if there was an overwhelming case in terms of economic efficiency and public interest. Nonetheless, the report rejected this approach because it did not overcome the objections of principle that had been identified in the report as a grounds for rejecting full proportionate liability.(123)

5. Court Discretion

A modified approach might be to give to the courts the discretion to apply joint and several or proportionate liability, depending upon the facts and circumstances of a particular case. The court, in certain cases, may well agree that one defendant’s fault was comparatively minor and that his or her share of the liability should be apportioned proportionately. A major drawback to this approach, however, is the high degree of uncertainty existing until the court had ruled on the case. It could take a considerable amount of time for the courts, through the evolution of case law, to develop criteria for the application of either rule.

Options -- (for both Sections A and B)

(1) Recommend that the status quo be maintained -- joint and several liability.

(2)(a) Recommend implementation of a scheme of full proportionate liability in relation to the issuance of financial information in respect of corporations incorporated under the Canada Business Corporations Act and in relation to financial institutions incorporated under the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act. This proposal would apply to all defendants involved in the issuance of financial information, including auditors, corporate directors and management and other advisors. Joint and several liability would continue to apply in cases of intentional wrongdoing and fraud.

(2)(b) Recommend the implementation of a scheme of full proportionate liability as outlined in (2)(a) with an exception for claims made by small investors in respect of which joint and several liability would continue to apply. A small investor could be defined as a plaintiff whose net worth is $200,000 or less and where the plaintiff’s share of the damage award is equal to at least 10% of his or her net worth. (This definition is found in the U.S. Private Securities Litigation Reform Act of 1995.) Alternatively, the definition of small investor might be based solely on net worth.

(3) Where a plaintiff is at fault (contributorily negligent), recommend implementation of a scheme of proportionate liability in relation to the issuance of financial information in respect of corporations incorporated under the Canada Business Corporations Act and in relation to financial institutions incorporated under the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act. This proposal would apply to all defendants involved in the issuance of financial information, including auditors, corporate directors and management and other advisors. Joint and several liability would continue to apply where a plaintiff was not contributorily negligent and in cases of intentional wrongdoing and fraud.

(4) Where a plaintiff is at fault (contributorily negligent), recommend implementation of a scheme of proportionate liability with a proportionate reallocation of an insolvent defendant’s share among all parties (including the plaintiff) in relation to the issuance of financial information in respect of corporations incorporated under the Canada Business Corporations Act and in relation to financial institutions incorporated under the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act. This proposal would apply to all defendants involved in the issuance of financial information, including auditors, corporate directors and management and other advisors. Joint and several liability would continue to apply where a plaintiff was not contributorily negligent and in cases of intentional wrongdoing and fraud.

(5)(a) Recommend implementation of a scheme of proportionate liability where a defendant’s degree of fault falls below a specified percentage in relation to the issuance of financial information in respect of corporations incorporated under the Canada Business Corporations Act and in relation to financial institutions incorporated under the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act. This proposal would apply to all defendants involved in the issuance of financial information, including auditors, corporate directors and management and other advisors. Joint and several liability would continue to apply to defendants whose fault is determined to be above the specified percentage and in cases of intentional wrongdoing and fraud.

(5)(b) Recommend the implementation of a scheme of proportionate liability as outlined

in (5)(a) with an exception for claims made by small investors in respect of which joint and several liability would continue to apply. A small investor could be defined as a plaintiff whose net worth is $200,000 or less and where the plaintiff’s share of the damage award is equal to at least 10% of his or her net worth. (This definition is found in the U.S. Private Securities Litigation Reform Act of 1995.) Alternatively, the definition of small investor might be based solely on net worth.

(6)(a) Recommend implementation of a scheme of proportionate liability with a reallocation of some or all of an insolvent defendant’s share among remaining defendants in relation to the issuance of financial information in respect of corporations incorporated under the Canada Business Corporations Act and in relation to financial institutions incorporated under the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act. Where a plaintiff was unable to collect an insolvent defendant’s share, each of the remaining defendants would be further liable for the uncollected share provided that the additional liability would not exceed 50% (or such other percentage) of the remaining defendant’s proportionate share. This proposal would apply to all defendants involved in the issuance of financial information, including auditors, corporate directors and management and other advisors. Joint and several liability would continue to apply in cases of intentional wrongdoing and fraud.

(6)(b) Recommend the implementation of a scheme of proportionate liability as outlined in (6)(a) with and exception for claims made by small investors in respect of which joint and several liability would continue to apply. A small investor could be defined as a plaintiff whose net worth is $200,000 or less and where the plaintiff’s share of the damage award is equal to at least 10% of his or her net worth. (This definition is found in the U.S. Private Securities Litigation Reform Act of 1995.) Alternatively, the definition of small investor might be based solely on net worth.

(7)(a) Recommend that the courts have discretion to apply joint and several or proportionate liability depending upon the facts and circumstances of a particular case involving the issuance of financial information in respect of corporations incorporated under the Canada Business Corporations Act and in relation to financial institutions incorporated under the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act. This proposal would apply to all defendants involved in the issuance of financial information, including auditors, corporate directors and management and other advisors. Joint and several liability would continue to apply in cases of intentional wrongdoing and fraud.

(7)(b) Recommend the implementation of a scheme of apportioning liability as outlined in (7)(a) with an exception for claims made by small investors in respect of which joint and several liability would continue to apply. A small investor could be defined as a plaintiff whose net worth is $200,000 or less and where the plaintiff’s share of the damage award is equal to at least 10% of his or her net worth. (This definition is found in the U.S. Private Securities Litigation Reform Act of 1995.) Alternatively, the definition of small investor might be based solely on net worth.

C. Joint And Several Liability With A Reallocation Of An Insolvent Defendant’s Share

It was noted earlier that the joint and several liability/proportionate liability debate centres on who should bear the risk when a co-defendant is insolvent or otherwise unable to pay his or her share of a judgment.

This issue was examined in the Report on Contribution Among Wrongdoers and Contributory Negligence issued by the Ontario Law Reform Commission in 1988 and in the Law Reform Commission of British Columbia’s 1986 Report on Shared Liability. Both reports addressed the issue of apportioning any shortfall that might arise when a co-defendant is insolvent or absent.

The Ontario report recommended the following:

Where there are more than two concurrent wrongdoers, and one wrongdoer is insolvent or otherwise unavailable to satisfy her share of liability, that share should be divided between the remaining wrongdoers in proportion to their respective degrees of fault, without discharging the liability to contribute of the defaulting concurrent wrongdoer.(124)

The British Columbia report contained this recommendation:

Where liability is joint and several and the court is satisfied that there is no reasonable possibility of collecting contribution or judgment from a party contributing to a person’s loss or damage, the court shall make an order that it considers necessary to apportion the contribution or judgment that cannot be collected among the other parties proportionate to their degrees of fault.(125)

This method of apportioning a shortfall would operate as follows: Assume that P’s loss is $200,000. Responsibility under contribution proceedings is apportioned as follows: D1 20%, D2 30% and D3 50%. P recovers $200,000 from D1 under a joint and several liability regime. D3 is insolvent. D1 seeks contribution from D2 and receives $60,000. Under the present law D1 can recover $60,000 from D2. The shortfall of $100,000 (D3’s share) is borne by D1. If the shortfall were apportioned according to the respective degrees of fault of the remaining defendants, D1 would be responsible for contributing two-fifths of the shortfall ($40,000) for a total out of pocket expenditure of $80,000 and D2 would have to contribute three-fifths of the shortfall (an additional $60,000) for a total of $120,000.

This type of reapportionment could also operate in situations where plaintiffs are contributorily negligent.

By retaining joint and several liability, this approach would allow the plaintiff to have full recovery from a solvent defendant, while going some way toward mitigating the hardship of the present law, which puts the entire risk of an insolvent defendant on the remaining solvent defendant(s). Unlike full proportionate liability, however, (where a defendant is responsible for the portion of the plaintiff’s loss based on its proportionate amount of fault and no more), under this approach, solvent defendants would have to make a further contribution to make up a shortfall. Furthermore, where there was only one solvent defendant, that defendant would be required to compensate the plaintiff for the entire loss and would not benefit from any contribution from co-defendants.

Options

(1) Recommend that the status quo be maintained -- joint and several liability with no reallocation.

(2) Recommend that the Canada Business Corporations Act , the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act be amended to provide that, in cases relating to the issuance of financial information under those statutes and where there is no reasonable possibility of collecting contribution or judgment from a party contributing to the plaintiff’s loss, the uncollected share be divided among the remaining wrongdoers in proportion to their respective degrees of fault, without discharging the liability of the defaulting concurrent wrongdoer to contribute. This proposal would apply to all defendants involved in the issuance of financial information, including auditors, corporate directors and management and other advisors. Joint and several liability would continue to apply in all circumstances.

D. Limiting Liability By Contract

Limiting liability by contractual means would allow the parties involved in a contract to accept limitations on liability.(126) Legislation governing certain professions or professional conduct rules might prohibit some professionals from limiting their liability in certain circumstances. For example, the Canada Business Corporations Act provides that directors and officers cannot contract out of their statutory duties, including the duty to exercise care. The Code of Ethics of the Chartered Accountants of Quebec prohibits accountants from including clauses in contracts that would limit or exclude civil responsibility. The CICA advises that there may also be an implied limitation against contractual capping of liability by the U.S. Securities and Exchange Commission (SEC) based on an SEC policy which prohibits indemnification of an auditor by a client. According to the CICA, this would apply to a number of Canadian corporations falling under SEC jurisdiction.

One type of contractual limitation would have the parties agree that, in the case of loss, proportionate liability rather than joint and several liability would apply.

For example, the U.K. Law Society has suggested that, in commercial situations where a number of parties enter into complex inter-dependent contracts to which each contributes his or her own expertise, it would be appropriate for the parties to agree to apply proportionate liability in the event of a loss. The Law Society went on to note that a proportionate liability regime could be set out in statute and available for the contracting parties to adopt if all were in agreement.(127)

Contractual limitations on professional liability may provide a reasonable and negotiated balance between the rewards of the professional’s engagement and the level of risk that a professional can reasonably be expected to bear. They also afford some certainty as to the upper limit of the risk of exposure.(128) On the other hand, there is a risk that contractual limitations might undermine the credibility of a professional’s opinion and create a perception that professional services rendered under the protection of limitation clauses are of lesser quality than those that are not.

Concerns arise in respect of contractual limitations when a professional is sued concurrently for breach of contract and in tort for negligence. Another concern is the impact of contractual limitations of liability on third parties. In addition, contractual exclusions will not be binding on third parties who are not privy to the contract and who bring an action in tort rather in contract.

In 1996, the U.K. Feasibility Investigation of Joint and Several Liability endorsed reform of the U. K. companies legislation to enable auditors to limit their liability by contract while stressing the need to provide adequate safeguards for shareholders.(129)

Options

(1) Recommend that the status quo be maintained.

(2) Recommend that the Canada Business Corporations Act, the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act be amended specifically to allow parties involved in the provision of financial information as contemplated by those statutes to limit their liability by contract. It should be noted that the provincial statutes and rules of conduct governing professions may prohibit contractual exclusions of liability.

E. Capping Professional Liability By Statute

Another method for dealing with the liability concerns of professionals would be to introduce a cap on the amount of damages available for claims for economic loss in connection with certain types of work. There are a number of ways to do this. A single monetary amount could be established as a limit or the limit could be based on a percentage of the fee charged by the professional, or a percentage of damages awarded, or some other established amount.

In Australia, the New South Wales Professional Standards Act 1994, introduced a statutory capping scheme for professionals. The New South Wales legislation applies to all professions who apply for approval of a scheme under the Act. To do so, a professional association must submit a proposal for approval to the Professional Standards Council, established under the Act. The scheme must include risk management strategies and matters such as a code of ethics, claims monitoring and review, complaints and discipline mechanisms and continuing education.(130)

The liability cap is determined by reference to the amount of business assets, or a multiple of the fee charged by the relevant professional or insurance coverage, or a combination of these factors. The minimum cap is $500,000 (Australian) with higher levels as appropriate. There is no cap on claims arising out of fraud or those covering death or personal injury.(131) As of March 1997, schemes limiting liability were in place for the Law Society of New South Wales, the Institution of Engineers, Australia, the Association of Consulting Engineers, Australia, and the College of Investigative Consulting Engineers, Australia. A scheme covering accountants is being considered.(132)

A similar statutory capping scheme is being considered in the state of Western Australia. The Professional Standards Bill 1997 received third reading in the Legislative Assembly of Western Australia on 19 June 1997 and will likely be introduced into the Legislative Council when Parliament resumes sitting in mid-August 1997. Among other things, the bill would set a threshold of up to $500,000 before a cap on damages for financial loss could be established, exclude from the capping scheme claims for death, personal injury or conduct involving breach of trust, fraud or dishonesty, require the introduction of risk management and risk reduction strategies, and mandate full disclosure of any limit of liability.(133)

The bill would establish a Professional Standards Council to consider and approve the liability limitation schemes proposed by professional bodies. Participation by any professional or occupational group would be voluntary. The bill proposes that liability for a particular group be limited by reference to insurance arrangements, business assets, a multiple of the fee charged or a combination of the three. In order to assure payment, the bill would require insurance and/or business assets be held to the established liability limit.(134)

In Canada, the Toronto Stock Exchange Committee on Corporate Disclosure recently looked at capping liability for damages. The Committee, in its March 1997 report Responsible Corporate Disclosure, concluded that civil liability should attach to issuers and others for their continuous disclosure to investors in secondary markets. In addition to recommending that liability should be in proportion to the relative fault of each defendant, the Committee recommended that a cap be established to limit liability for damages. The liability of experts such as accountants, and others who have given opinions, made reports or statements in a disclosure document would be limited to the greater of $1 million or the fees earned by such expert and its affiliates from the issuer and its affiliates during the preceding year.(135)

There are a number of advantages to a capping scheme.

  • A statutory cap would limit exposure to the risk of huge damage awards by stabilizing the level of such awards, thereby making it easier for insurers to predict their potential exposure.
  • A cap might reduce the costs for professionals and their clients.
  • Provided the cap was set at a sufficiently high level to cover the majority of claims and to limit recovery only on the largest, it would continue to deter professional negligence.
  • A cap would alleviate the concerns expressed by some professions, particularly the accounting profession, about the unfairness of the present system of joint and several liability.

The disadvantages to an arrangement to cap liability include the following:

  • A cap might diminish the deterrent effect of full liability and reduce the incentive to settle actions through negotiation.
  • A cap would represent a significant move away from the principle that a plaintiff should be fully compensated for his or her loss. In this respect, the concept could be inherently unfair to a plaintiff. It might also be unfair to other defendants who would continue to be exposed to full liability.
  • The adoption of a scheme similar to the New South Wales rules would involve the creation of a bureaucracy to monitor the caps established for the relevant professions. This might involve substantial costs. Moreover, professionals in Canada are largely self-regulating; capping liability might require review and modification of the self-regulatory system.
  • A cap, by its nature, has an element of arbitrariness. It may be difficult to fix a level of a cap appropriate to all cases and ensure that it is reviewed and updated at regular intervals when necessary.

Options

(1) Recommend that the status quo be maintained - no statutory cap on liability.

(2) Recommend the introduction of a statutory cap on liability arising from the issuance of financial information in respect of corporations incorporated under the Canada Business Corporations Act and financial institutions incorporated under the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act. This proposal could apply to all defendants involved in the issuance of financial information including auditors, corporate directors and management and other advisors. The cap would not apply in cases of intentional wrongdoing or fraud.

F. Compulsory Directors’ and Officers’ Insurance

Auditors claim that it is unfair for them to be jointly and severally liable for the entire loss of a client corporation when they negligently fail to detect a material mistake in the corporation’s accounts resulting from the negligence or fraud of the corporation’s senior managers and directors.(136) It has been suggested that mandatory directors’ and officers’ insurance might help to alleviate such concerns.

The Canada Business Corporations Act provides that a corporation can take out insurance for its directors and officers, provided that they act in good faith and in the best interests of the corporation. As a result, insurance can be available for negligent acts done in good faith, but not for acts performed fraudulently or otherwise not in the best interests of the corporation as a whole.

In order for corporations to be able to purchase insurance to cover defalcations by directors and senior officers, even where the conduct is fraudulent or done in bad faith, the CBCA would have to be amended.(137)

Introducing compulsory directors’ and officers’ insurance presents a few practical, although not insurmountable, problems. The amount of coverage would have to be substantial to meet the nature of the claims involved. Those who would be entitled to be covered would have to be determined -- would insurance apply to all directors, officers and senior management? Compulsory insurance might not guard against the actions of middle managers where problems of fraud are perceived to be the most prevalent.(138)

A wide range of corporations are incorporated under the CBCA, ranging from small one-person companies to Canada’s largest corporations with thousands of public shareholders. A scheme of compulsory insurance could be appropriate for one corporation but entirely inappropriate for another. Exemptions might have to be created to accommodate companies of certain types or sizes.

Insurance might be costly because it would be compulsory. Would a mandatory insurance scheme impose too heavy a cost on corporations in terms of premiums and international competition?(138)

On the positive side, however, compulsory directors’ and officers’ insurance would create

another set of deep pockets for recovery in the event of the improper preparation and/or audit of a company’s financial statements. Shareholders could be protected, at least to the limit of the insurance cover, against the loss of their investment arising from the wrongful conduct of management and the directors.(140)

Generally, if more potential defendants are insured, the liability burden will fall less heavily on professional defendants. It is worth noting that the New Zealand Companies Act requires all companies to purchase insurance for directors and officers in respect of liability for any act of omission in their capacity as such.(141)

Options

(1) Recommend that the status quo be maintained.

(2) Recommend that the Canada Business Corporations Act, the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act be amended to require corporations and financial institutions to purchase directors’ and officers’ insurance to cover the liability of directors and officers for any act or omission in their capacity as such.

G. Limiting the Scope of Professional Liability

1. Limiting to Whom a Duty of Care is Owed

Professionals may be liable to third parties because of statutory requirements or through common law actions for negligence. Since the inception of damages awards for economic loss, the courts have been hesitant to expose defendants to liability for "an indeterminate amount for an indeterminate time to an indeterminate class." The courts have aimed to restrict the range of persons who could make a claim for economic loss by attempting to define those to whom a defendant owes a duty of care.

The law pertaining to the extent of the duty of care owed by auditors to third parties has been developing through judicial decisions in a number of common law jurisdictions. The most significant case in the United Kingdom to date is the House of Lords’ decision in Caparo Industries plc v. Dickman.(142)

In Caparo, the plaintiff, a shareholder in a public company, alleged that it had purchased additional shares and made a take-over bid for the company in reliance on the company’s financial statements that had been audited by the defendant auditors. The plaintiff claimed that, as the financial statements did not reveal the company’s true financial picture, the shares were actually worth far less than the amount paid.

The plaintiff contended that the defendant auditors owed the plaintiff a duty of care for two reasons: (1) the plaintiff was already a shareholder before the financial statements were released and as such was owed a duty because the statutory requirement for a corporation to have audited financial statements was designed to allow shareholders to monitor the operation of the company; and (2) the plaintiff was within a limited identifiable class of potential investors who the auditors ought to have foreseen would rely on the statements.

The House of Lords held the auditors did not owe a duty of care to the plaintiff in either of the two respects. With respect to the issue of the plaintiff as a shareholder, the House of Lords concluded that the remedy available in this situation would be an action commenced against the auditors in the name of the company.

The shareholders of a company have a collective interest in the company’s proper management and in so far as a negligent failure of the auditor to report accurately on the state of the company’s finances deprives the shareholders of the opportunity to exercise their powers in general meeting to call the directors to book and to ensure that errors in management are corrected, the shareholders ought to be entitled to a remedy. But in practice no problem arises in this regard since the interest of the shareholders in the proper management of the company’s affairs is indistinguishable from the interest in the company itself and any loss suffered by the shareholders, e.g. by the negligent failure of the auditor to discover and expose a misappropriation of funds by a director of the company, will be recouped by a claim against the auditors in the name of the company, not by individual shareholders.(143)

On the issue of whether the a duty of care was owed to the plaintiff as an investor, the House of Lords held that, while one could foresee that a company’s financial statements would fall into the public domain and be relied on for investment or other purposes, there was no "proximity" between the public and the auditors. Lord Bridge held:

... looking only at the circumstances of these decided cases where a duty of care in respect of negligent statements has been held to exist, I should expect to find that the "limit or control mechanism ... imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence" rested in the necessity to prove, in this category of the tort of negligence, as an essential ingredient of the "proximity" between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind ... and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction or upon a transaction of that kind.(144)

The House of Lords concluded:

[A]uditors of a public company’s accounts owe no duty of care to members of the public at large who rely upon the accounts in deciding to buy shares in the company. If a duty of care were owed so widely, it is difficult to see any reason why it should not equally extend to all who rely on the accounts in relation to other dealings with a company such as lenders or merchants extending credit to the company.(145)

In Canada, the most important case to date on the question of the duty of care in situations involving negligent misrepresentation is the Supreme Court of Canada decision in Hercules Management Ltd. v. Ernst & Young. Hercules turned on whether the auditors owed shareholders and investors of two companies a duty of care with respect to the investment losses they had allegedly incurred as a result of reliance on the annual audit reports and for losses in the value of their shareholdings.

As noted earlier, the Supreme Court of Canada made the following points with respect to the duty of care:

  • A prima facie duty of care will exist in negligent misrepresentation cases where the defendant ought reasonably to have foreseen that the plaintiff would rely on the defendant’s representations and that reliance by the plaintiff in the circumstances would be reasonable (reasonable foreseeability/reasonable reliance test).(146)
  • The prima facie duty of care can be negated or limited by policy considerations. In negligent misrepresentation cases, the main policy consideration is indeterminate liability -- liability for an indeterminate amount, for an indeterminate time, to an indeterminate class.(147)
  • In cases of negligent misrepresentation involving auditors:

generally, auditors will owe a prima facie duty of care because the reasonable foreseeability/reasonable reliance test can be easily met;

however, policy considerations such as the concern about indeterminate liability will, in most cases, negate the prima facie duty;(148)

indeterminate liability will not be a concern and a duty of care will exist, however, where it can be shown that the auditor knew the identity of the plaintiffs (or the class of plaintiffs) who would rely on the financial statements and the audited statements were used for the specific purpose for which they were prepared.(149)

Essentially, Hercules provides that an auditor will not owe a duty of care to shareholders or investors for negligent misrepresentation in connection with the preparation of audited financial statements unless it can be shown that the auditor knew the identity of the plaintiffs (or the class of plaintiffs) who would rely on the financial statements and the audited statements were used for the specific purpose for which they were prepared. The SCC went on to hold that the annual audited financial statements required by statute were provided for the purpose of allowing the shareholders, as a group, to oversee the management of a corporation and not for the purpose of making personal investment decisions.(150)

One method of limiting professional liability would be to clearly define by statute the parties who would be entitled to bring an action based on the provision of professional services. This could involve enacting legislation to confine the duty of care owed by professional advisors in relation to the issuance of financial information or other matters. The scope of professional liability could be circumscribed by limiting the duty of care to persons in a contractual relationship with the professional or to a restricted group of persons who the professional actually knew would use and rely on the information provided by him or her in connection with a particular transaction or transactions.

An example of a restriction on the range of persons who can bring an action against an auditor can be found in the companies legislation of Bermuda. The relevant section provides the following:

(3A) No action shall lie against an auditor in the performance of any function as an auditor contemplated by this Act except in the instance of

(a) the company who engaged the auditor to perform such function; or

(b) any other person expressly authorized by the auditor to rely on his work(151)

Some of the arguments in support of restricting the duty of care to a narrow range of persons include:

  • Because professional negligence is more likely to arise out of human error rather than from a deliberate departure from professional standards, it would be appropriate to limit those who could make a claim based on such error.
  • Restricting the duty owed to third parties would help to promote the flow of commercial information.
  • Insurance could become more readily available and its cost could decrease.
  • Sophisticated business parties should accept some of the risk inherent in commercial transactions and may be less deserving of the protection afforded by the law of negligence.(152)

Arguments against restricting the duty of care by legislation include:

  • Since professionals are often engaged because their professional opinions and reports give added quality and credence to corporate documents such as financial statements, liability should not be restricted.
  • In many cases professionals undertake to provide opinions and reports knowing that they will be a matter of public record.
  • Restricting liability might discourage commercial activity if creditors and investors could not rely on the accuracy of corporate documents such as financial statements because the professional would not be liable for preparing them negligently.
  • Third party liability may not be the major concern for some professionals -- often liability arises in connection with actions brought by the company, or its receiver or liquidator.(153)
  • Because developments in the case law in Canada and other jurisdictions appear to be restricting the range of persons to whom an auditor and other professionals may be liable, it may not be necessary or appropriate to introduce legislation to restrict the duty of care.

Options

(1) Recommend that the status quo be maintained -- the scope of the duty of care be left to the courts and the evolution of law.

(2) Recommend that legislation be enacted to limit the range of persons to whom a duty of care is owed in relation to the provision of financial information under the Canada Business Corporations Act, the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act.

2. Limiting the Functions to which Professional Liability Attaches

Another option for limiting liability would be to restrict the types of professional functions that would give rise to a claim for negligence. For example, audits performed to fulfil a statutory requirement would not give rise to an action by third parties or shareholders for economic loss, but audits conducted for specific purposes (public offerings, seeking investors, and loans) would be subject to negligence actions. The traditional services performed by the professional in question could be open to negligence actions but types of work outside of the scope of this framework would not.

Such limitations would raise many questions. For example, the CBCA now requires audits of publicly traded corporations. This mandatory audit requirement might have to be revisited should professional liability be limited in relation to it.

Many of the arguments outlined above in support of and against restricting the duty of care by legislation would also apply to restricting services to which professional liability attaches. Moreover, and again in view of recent developments in the case law in Canada and elsewhere which appear to be taking a more transaction-specific approach to liability for negligent misrepresentation, it may not be necessary or appropriate to restrict the services to which professional liability attaches.

Options

(1) Recommend that the status quo be maintained -- the matter would be left to the courts and the evolution of law.

(2) Recommend that legislation be enacted to limit the functions to which liability for economic loss based on negligence would attach under the Canada Business Corporations Act, the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act.

H. Reducing the Limitation Period for Commencing Legal Actions Based on the Provision of Financial Information

Under provincial legislation it is generally not possible to commence a legal action for negligence after six years from the date on which the cause of action arose. The limitation period in negligence cases involving economic loss may in fact be longer than six years because the period begins some time after the date the negligent advice is given.

Laws limiting the time during which a legal action can be commenced seek to balance the need to give a plaintiff enough time to commence an action and the desire to provide some certainty to defendants that they will not be pursued indefinitely.

A number of federal laws contain limitation periods. For example, section 252(2) of the Canada Business Corporations Act provides that a prosecution for an offence under that Act must be instituted within two years after the time when the subject-matter of the complaint arose. The insider trading provisions of the CBCA state that an action to enforce a right, where an insider makes use of confidential information for his or her own benefit that might reasonably be expected to affect materially the value of the security, must be commenced within two years after the discovery of the facts that gave rise to the action or if the transaction is one that is required to be reported, within two years from the time of reporting (section 131(5)).

An option for limiting liability would involve decreasing the limitation period for actions arising under the CBCA and federal financial institutions legislation in relation to actions arising from the provision of financial information under those laws. The limitation period could be shortened or established to run from the time of the provision of the report or opinion by the relevant professional.

Since a negligent audit, for example, may not be discovered until years after the audit has been done, such a change would likely benefit the auditing profession. On the other hand, change of this nature would be a disadvantage to plaintiffs.

Options

(1) Recommend that the status quo be maintained.

(2) Recommend that legislation be enacted to reduce the period of time during which a legal action could be commenced for negligence in relation to the provision of financial information under the Canada Business Corporations Act, the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act.

I. Limiting the Life of Financial Information

Another approach to limiting liability would be to limit the time during which financial information could be relied upon. For example, it could be provided that financial statements could not be relied upon after a period of 12 or 18 months after they have been produced.

Since reliance is one of the factors that must be proven in a negligence action, it may be appropriate to specify in legislation that it is not reasonable to rely on financial statements that are over a certain age. On the other hand, it may be more appropriate for the courts to determine what constitutes reasonable reliance rather than introducing legislative amendments.

Options

(1) Recommend that the status quo be maintained -- the question of reliance be left to the courts and the evolution of law.

(2) Recommend that legislation be enacted to specify the period of time after which a person would not be able to rely on financial information under the Canada Business Corporations Act, the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act.

J. Allow Professionals to Limit their Liability through Incorporation or Limited Liability Partnerships

Professionals such as lawyers and accountants usually practise in a partnership structure. Regardless of the number of partners involved in a negligent act, each partner in a firm is jointly and severally liable with the other partners if a claim for damages based on negligence is made against any of the firm’s partners. Moreover, the personal assets of a partner may be used to satisfy a judgment against the firm, even if the partner is not actually responsible for the loss.

The development of liability amongst professional partners was described by the Canadian Bar Association in the following manner:

The traditional professions of law, medicine and accounting have historically attached responsibility and care beyond that of the provider of other services and consequently face liability for the results of their professional advice and business activities beyond that generally imposed on the businessperson. These consequences were based on a client relationship, and the importance of the services to the client who often required special protection.

Joint and several liability for members of professional firms emerged at the time when professionals had responsibility only to their clients. Professional responsibility has evolved by the imposition of tort liability, elimination of contributory negligence bars to a plaintiff’s action and expanded recognition of responsibility to persons other than clients. Professionals now face potential liability from a variety of sources, including third parties, knowingly or unknowingly relying on the professional work. In addition, the size of awards has increased dramatically.

The issue is whether liability of this nature, based on a unique relationship with a learned professional, remains valid. Most occupational groups now recognized as professional do not face the liability issues of the traditional professions. They are often permitted to practice in an incorporated or other limited liability business structure, thus restricting individual liability to their direct professional activity. They are not exposed to liability for the activities of their partners... . The compulsory exposure of joint and several liability to partners and personal liability to partners (even if uninvolved in the matter), and personal liability for mere error, omission or exercise of judgment is unique to the traditional professional relationship.(154)

Liability at the partnership level is an important aspect of the liability concerns of defendants who practise in a partnership structure. Joint and several liability amongst co-defendants and joint and several liability within a partnership, however, are two separate issues.

The second issue relates to limited liability partnerships and a reform of partnership law. ... It has nothing to do with the general common law principle of joint and several liability, it is concerned purely with partnerships. It is the principle whereby any negligence, or anything equivalent, by one partner renders the other partners jointly and severally liable.... You have to distinguish between the internal joint and several liability within the partnership, ... and the external joint and several liability, or, ... the whole partnership along with defendants outside the partnership. They are quite distinct issues.(155)

In Canada, the issue of joint and several liability amongst professional partners falls within provincial jurisdiction.

[F]ederal constitutional authority over the imposition of joint and several liability is limited to professional services in federal corporate and financial institution legislation. Provincial jurisdiction includes regulation of tort liability, and the regulation of most business and professional enterprises. (156)

Many jurisdictions have concluded that it is appropriate for professional firms to limit their liability. In the United States, in particular, the move to professional corporations, limited liability companies and limited liability partnerships is well advanced, with most states having enacted legislation to permit professionals to operate within these new frameworks.

State legislatures have enacted legislation that allows lawyers and other professionals to create professional corporations (PCs). The structural and operational aspects of PCs are similar to those of business corporations. PC statutes, however, do not protect a professional from his or her malpractice and some extend malpractice liability to the actions of other professionals under the direct supervision and control of a particular professional.(157)

The limited liability company (LLC) is an amalgam of corporate and partnership characteristics; it is a separate legal entity like a corporation but it is treated like a partnership for tax purposes. The members of an LLC own the ferm and have limited liability. LLCs can operate under a corporate structure or under a partnership model. Most LLC statutes provide that members of the LLC are not personally liable for the tort or contract obligations of the LLC solely because they are a member or acting as a manager. Generally, liability still exists for the professional’s own actions.(158)

Limited liability partnerships (LLPs), allow firms to retain their partnership structure while protecting the personal assets of partners who have no involvement in a negligence action. The firm is liable for the acts committed by its members in the ordinary course of the firm’s business, but individual members will not be liable for each other’s acts. Individual partners, however, continue to maintain responsibility for their own acts and for those over which they have a direct supervisory role or knowledge.

The United Kingdom appears to be moving toward allowing professionals to form limited liability partnerships. In February 1997, the U.K. Department of Trade and Industry issued a consultation paper on Limited Liability Partnership. The paper details the government’s proposals for allowing LLPs for regulated professions. Among other things, the U.K. proposals include safeguards such as

  • penalties for wrongful and fraudulent trading, powers to disqualify members, and powers of investigation similar to those for companies;
  • public filing of audited accounts and other information;
  • measures to ensure the availability of funds on liquidation; and
  • measures to ensure a minimum standard of conduct through membership in a regulated profession.(159)

Professionals, such as auditors, are already permitted to incorporate in the U.K., while Jersey, an established financial centre, has enacted legislation to provide for limited liability partnerships.

The Limited Liability Partnership (Jersey) Law 1996 includes a number of provisions designed to protect the personal assets of innocent partners from seizure when a successful negligence action is brought against a partnership. Generally, liability attaches to the LLP itself and to the partners who are responsible for the negligent act or omission. The legislation also contains safeguards for third parties dealing with the LLP. A £5 million bond must be posted by the LLP to cover a potential insolvency. In addition, the LLP must disclose that it is operating as such by using the LLP designation after its name and by stating its, name, registration number and the fact that it is a Jersey LLP on its stationery, correspondence and other public documents.(160)

At present, there are no limited liability partnership regimes in Canada. However, in 1996 the Ontario government released a discussion paper on whether limited liability partnership legislation should be developed for Ontario. British Columbia allows auditors to incorporate, but has not implemented a limited liability partnership system.

It is worth pointing out that those advocating LLPs seek this structure to protect the personal assets of uninvolved partners rather than as a solution to concerns about the joint and several liability rule as it pertains to co-defendants. LLPs will neither protect the assets of the partnership or the personal assets of partners directly involved in a damages claim based on negligence nor will they affect the responsibility of defendants for compensating a plaintiff. However, LLPs and corporations will shelter the personal assets of partners not directly involved in a negligence claim and limit the potential adverse impact on those assets of a large judgment against a partnership.

Options

(1) Recommend that the status quo be maintained.

(2) Recommend that the federal government encourage the provincial and territorial governments to enact legislation that would permit professionals to form corporations or to limit their liability through the creation of limited liability partnerships.

 


APPENDIX A:  WITNESSES

Issue No 1 (Task Force):   Calgary, February 13, 1996

From The Canadian Institute of Chartered Accountants:  Mr. Michael H. Rayner, President; Mr. William H. Broadhurst, Chair, CICA Legal Liability Task Force; and The Honourable Willard Z. Estey.

 

Issue No 12: October 28, 1996

From Fasken Campbell Godfrey: Mr. John Campion; and Ms. Victoria Stewart.

By Teleconference: From the Australian Treasury:  Mr. Ian Govey, Principal Adviser, Business Law Division.

From the Australian National University: Mr. Jim Davis, Professor.

 

Issue No 12:  October 29, 1996

From the Association of Consulting Engineers of Canada:  Mr. Pierre A. H. Franche, President and Chief Operating Officer; and Mr. Bruce Carr-Harris, Legal Council.

 

Issue No 13:  October 31, 1996

From the Canadian Bar Association:  Mr. Russell W. Lusk, President; Ms. Alison Manzer, Chair, Committee on Financial Institution Legislative Reform; and Mr. John D.V. Hoyles, Executive Director.

From the Canadian Institute of Chartered Accountants:  Mr. Michael H. Rayner, President; Mr. William Broadhurst, Chair, Legal Liability Task Force; and Mr. Ron Gage, Past Chairman.

 


NOTES

  1. R.S.C. 1985, c. C-44, as amended.
  2. Honourable W.Z. Estey, Q. C. Proportionate Liability and Canadian Auditors, Brief Prepared for the Legal Liability Task Force, Canadian Institute of Chartered Accountants, 23 January 1996.
  3. S.C. 1991, c. 46, as amended.
  4. S.C. 1991, c. 45, as amended.
  5. S.C. 1991, c. 47, as amended.
  6. Standing Senate Committee on Banking, Trade and Commerce, Corporate Governance, August, 1996, p. 2.
  7. Joint and Several Liability and Professional Defendants, Interim Report of the Standing Senate Committee on Banking, Trade and Commerce, ("Interim Report"), December 1996.
  8. Bruce Feldthusen, Economic Negligence, Third Edition, Carswell, 1994, p. 1. The Feldthusen text points out that pure economic loss usually occurs when a person loses money after relying on negligent financial advice.
  9. Canadian Bar Association, Professional Liability, Submission to the Standing Senate Committee on Banking, Trade and Commerce, October 1996, p. 1-2.
  10. The more appropriate legal expression for joint and several liability amongst co-defendants is in solidum liability. For the purposes of this paper, however, the concept will be referred to as joint and several liability amongst co-defendants.
  11. Interim Report , (1996), p. 3-4.
  12. United Kingdom, Report by the Law Society’s Special Committee, Joint and Several Liability, July 1996, p. 2.
  13. Alison Manzer, Joint and Several Liability for Professionals - Canada, Paper prepared for the Canadian Bar Association - Annual Meeting, August 1997, p. 21.
  14. [1963] 2 All E.R. 275, (H.L.).
  15. John A. Campion and Diana W. Dimmer, Professional Liability in Canada, Carswell 1994, p. 8-6.
  16. (1976), 72 D.L.R. (3d) 68 (SCC).
  17. Ibid., p. 75.
  18. Ibid., p. 76.
  19. (1997), 146 D.L.R. (4th) 577 (SCC).
  20. Ibid., p. 587.
  21. Ibid., p. 589.
  22. Ibid., p. 592.
  23. Ibid., p. 596.
  24. Kripps v. Touche Ross & Co., April 25, 1997, (unreported), (B.C.C.A.)
  25. Ibid., para. 69.
  26. Ibid., para. 73.
  27. Ibid., para. 103.
  28. International Federation of Accountants, Auditors’ Legal Liability in the Global Marketplace: A Case for Limitation, July 1995, p. 3.
  29. Canadian Institute of Chartered Accountants, Proportionate Liability: Why Reform is Necessary Now, Submission to the Standing Senate Committee on Banking, Trade and Commerce, 31 October 1996, p. 2.
  30. United Kingdom, Department of Trade and Industry, Feasibility Investigation of Joint and Several Liability, 1996, p. 12.
  31. Association of Consulting Engineers of Canada, On Joint and Several Liability for Consulting Engineering Firms, A Brief Presented to the Standing Senate Committee on Banking, Trade and Commerce, 28 October 1996, p. 6-7.
  32. Ibid., p. 10.
  33. CICA, Proportionate Liability, Why Reform is Necessary Now, (1996), p. 3.
  34. Hercules Managements Ltd. v. Ernst & Young, p. 592-594.
  35. CICA, Proportionate Liability, Why Reform is Necessary Now, (1996), p. 3.
  36. Proceedings of the Standing Committee on Banking, Trade and Commerce, 31 October 1996, Issue 13:38.
  37. Canadian Bar Association, Professional Liability, (1996), p. 6.
  38. Proceedings of the Standing Senate Committee on Banking, Trade and Commerce, 31 October 1996, Issue 13:30.
  39. Proceedings, Fact Finding Meeting on Joint and Several liability, 22 November 1996, Issue 24B:3-4.
  40. Canadian Bar Association, Professional Liability, (1996), p. 6.
  41. Ibid., p. 7.
  42. Association of Consulting Engineers of Canada, On Joint and Several Liability for Consulting Engineering Firms, (1996), p. 10.
  43. Australia, Inquiry into the Law of Joint and Several Liability, Report of Stage One, July 1994, Report of Stage Two, January 1995.
  44. Inquiry into the Law of Joint and Several Liability, Report of Stage Two, (1995), p. 10-11.
  45. Ibid., p. 34.
  46. Ibid., p. 36.
  47. Ibid., p. 35.
  48. Ibid.
  49. Ibid.
  50. Ibid., p. 40.
  51. Australia, Professional Liability in Relation to Corporations Law Matters, Report of the Working Party of the Ministerial Council for Corporations, June 1993, p. 44.
  52. Feasibility Investigation of Joint and Several Liability, (1996) p. 71-72.
  53. Parliament of Western Australia, Select Committee on Professional and Occupational liability, Final Report, January 1994, p. 7.
  54. Ibid., p. 8.
  55. Ibid., p. 89.
  56. Debates, Legislative Assembly Western Australia, March 18, 1997, p. 435-436.
  57. Feasibility Investigation of Joint and Several Liability, (1996), p. 74.
  58. These provisions are set out in the paper, Limited Liability - A Survey Study of Australia, by Carolyn Wilson, Cassels, Brock & Blackwell, 1997, p. 33.
  59. Feasibility Investigation of Joint and Several Liability, (1996), p. 16.
  60. Ibid., p. v.
  61. Ibid. p. 18.
  62. Ibid., p. v.
  63. Ibid., p. 78.
  64. Ibid., p. 46.
  65. Ibid.
  66. Pub. L. No. 104-67, 109 Stat. (1995). The Act became law on December 22, 1995 when Congress overrode the President’s veto.
  67. Donald C. Langevoort, "The Reform of Joint and Several Liability Under the Private Securities Litigation Reform Act of 1995: Proportionate Liability, Contribution Rights and Settlement Efforts", The Business Lawyer, Vol. 51, August 1996, No. 4, pp. 1157-1175, at p. 1157.
  68. For example, an investor worth $150,000 would have to lose $15,000 in the relevant transaction to be classified as a small investor.
  69. Langevoort, "The Reform of Joint and Several Liability Under the Private Securities Litigation Reform Act of 1995: Proportionate Liability, Contribution Rights and Settlement Efforts", (1996), p. 1172.
  70. As of December 1996, Vermont, Utah, Wyoming and Illinois had totally abolished joint and several liability. The courts of Alabama, Indiana, Kansas and Oklahoma do not apply the doctrine. The American Tort Reform Association, Tort Reform Record, 31 December 1996.
  71. John Scott Hickman, "Efficiency, Fairness and Common Sense: The Case for One Action as to Percentage of Fault in Comparative Negligence Jurisdictions that Have Abolished or Modified Joint and Several Liability," Vanderbilt Law Review, Vol. 48, No. 3, April 1995, pp. 739-769, at p. 747.
  72. Feasibility Investigation of Joint and Several Liability, (1996), p. 24.
  73. Robert Mednick and Jeffrey J. Peck, "Proportionality: A Much-Needed Solution to the Accountants’ Legal Liability Crisis, Valparaiso University Law Review, Vol. 28, 1994, pp. 867-918, at p. 876.
  74. Ibid., p. 878.
  75. Ibid., p. 879.
  76. Feasibility Investigation of Joint and Several Liability, (1996), p. 76.
  77. Inquiry into the Law of Joint and Several Liability, Report of Stage Two, (1995), p. 27.
  78. European Commission, Final Report of a Study on the Role, Position and Liability of the Statutory Auditor within the European Union, 1996, p. 96. This study notes that five countries have a system of joint and several liability where auditors and their clients are exposed to civil liability initiated by a third party. Among these are Denmark, the United Kingdom, and Germany. Countries such as France, Sweden and Norway, for example, are listed as having proportionate liability regimes.
  79. Ibid., p. XII.
  80. Ibid.
  81. Bermuda, Companies Amendments Act, 1996, section 8 (new section 98B of the principle Act).
  82. R.S.B.C. 1979, c298, ss. 1, 2(c).
  83. Law Reform Commission of British Columbia, Report on Shared Liability, August 1986, p. 22.
  84. University of Alberta, Institute of Law Research and Reform, Contributory Negligence and Concurrent Wrongdoers, April 1979, p. 31.
  85. Ibid., p. 33.
  86. Ibid.
  87. Ontario Law Reform Commission, Report on Contribution Among Wrongdoers and Contributory Negligence, 1988, p. 31-39.
  88. Ibid., p. 46.
  89. Ibid., p. 46-47.
  90. Ibid., p. 48.
  91. Ibid.
  92. Roger N. Wolff, Regulation of Public Accounting in Ontario, October 1994.
  93. Toronto Stock Exchange, Committee on Corporate Governance in Canada, Where were the Directors?- Guidelines for Improved Corporate Governance in Canada, December 1994. p. 45.
  94. Ontario Securities Commission, Task Force on Small Business Financing, Final Report, October 1996, p. 83.
  95. Toronto Stock Exchange, Committee on Corporate Disclosure, Final Report, Responsible Corporate Disclosure, March 1997, p.vii.
  96. Ibid., p. 50.
  97. Ibid., p. 59-60.
  98. Interim Report, (1996), p. 14.
  99. Ibid.
  100. Campion, Evidence Proportionate Liability -- Auditors, p. 50-51.
  101. Feasibility Investigation of Joint and Several Liability, (1996), p. 16-17.
  102. Inquiry into the Law of Joint and Several Liability, Report of Stage Two, (1995), p. 33.
  103. Campion, Evidence Proportionate Liability -- Auditors, p. 53.
  104. United Kingdom, The Law Society, Joint and Several Liability, (1996), p. 2-3.
  105. Michael Brown, Liabilities of Professionals in the U.K., Summary of Comments by Michael Brown to the Standing Senate Committee on Banking Trade, and Commerce, 22 November 1996, p. 6.
  106. Ibid.
  107. Alison Manzer, Joint and Several Liability - A Legal Overview From a Personal Viewpoint, Paper prepared for the Canadian Bar Association Annual Conference, August 1997, p. 21.
  108. Feasibility Investigation of Joint and Several Liability, (1996), p. 18.
  109. Campion, Evidence Proportionate Liability -- Auditors, p. 52.
  110. United Kingdom, The Law Society, Joint and Several Liability, (1996), p. 4-5.
  111. Campion, Evidence Proportionate Liability -- Auditors, p. 53.
  112. New South Wales Law Reform Commission LRC 65; Contribution among Wrongdoers: Interim Report on Solidary Liability (1990). para. 42, as quoted in Professor Andrew Burrows, In Defence of Joint and Several Liability, 4 November 1996, p. 6-7.
  113. United Kingdom, The Law Society, Joint and Several Liability, (1996), p. 3.
  114. Proceedings, Fact Finding Meeting on Joint and Several Liability, 22 November 1996, Issue 24B:14.
  115. Ontario Law Reform Commission, Report on Contribution Among Wrongdoers and Contributory Negligence, 1988, p. 39.
  116. Feasibility Investigation of Joint and Several Liability, (1996), p. 19.
  117. Inquiry into the Law of Joint and Several Liability, Report of Stage Two, (1995), p. 33.
  118. Feasibility Investigation of Joint and Several Liability, (1996), p. 16-17.
  119. Inquiry into the Law of Joint and Several Liability, Report of Stage Two, (1995), p. 36.
  120. Ibid., p. 36-37.
  121. Ibid., p. 31.
  122. Feasibility Investigation of Joint and Several Liability, (1996), p. 27.
  123. Ibid., p. 34-35.
  124. Report on Contribution Among Wrongdoers and Contributory Negligence, (1988), p. 48.
  125. Report on Shared Liability, (1986), p. 22.
  126. Limitations on liability would be incorporated into the contract between the client and the professional. Such limitations would be subject to both common law and any relevant statutory controls. They would be interpreted strictly and subject to general restrictions in the law of contract pertaining to unconscionability. Ambiguities would be construed against the professional.
  127. United Kingdom, The Law Society, Joint and Several Liability, (1996), p. 5.
  128. Campion, Evidence Proportionate Liability -- Auditors, p. 75.
  129. Feasibility Investigation of Joint and Several Liability, (1996), p. vi.
  130. Campion, Evidence Proportionate Liability -- Auditors, p. 69.
  131. Ibid., p. 70.
  132. Debates, Legislative Assembly, Western Australia, March 18, 1997, p. 435.
  133. Ibid., p. 435-436.
  134. Ibid., p. 436.
  135. Responsible Corporate Disclosure, (1997), p. 60.
  136. An auditor’s liability may arise from the auditor’s negligent failure to detect errors in information supplied by senior management or the directors of a company, or from reliance upon inadequate internal controls. Liability may also arise when an auditor does not insist that management revise the presentation of financial information where that information has been presented in a misleading manner. Further, liability may arise where the auditor does not qualify an opinion when required to do so. Campion, Evidence Proportionate Liability -- Auditors, p.48.
  137. Ibid., p. 77.
  138. Ibid., p. 77-78.
  139. Ibid., p. 78.
  140. Ibid., p. 77.
  141. Feasibility Investigation of Joint and Several Liability, (1996), p.37.
  142. [1990] British Company Cases 164, (H. L.).
  143. Ibid., p. 175.
  144. Ibid., p. 171-172.
  145. Ibid., p. 173.
  146. Hercules Managements Ltd. v. Ernst & Young, (1997), 146 D.L.R. (4th) (SCC), p. 597.
  147. Ibid., p. 592.
  148. Ibid., p. 597.
  149. Ibid., p. 596.
  150. Ibid., p. 601.
  151. Bermuda, Companies Amendments Act, 1996, section 5 (new section 90(3A) of the principle Act.)
  152. These arguments were put forward in the Australian Report of the Working Party of the Ministerial Council for Corporations, Professional Liability in Relation to Corporations Law Matters, June 1993, p. 13.
  153. Ibid., p. 14.
  154. Canadian Bar Association, Professional Liability., (1996), p. 4-5.
  155. Proceedings, Fact Finding Meeting on Joint and Several Liability, 21 November 1996, Issue 24A:5.
  156. Canadian Bar Association Professional Liability, (1996), p. 10.
  157. Carolyn Wilson, Limited Liability - A Survey Study of the United States of America, Cassels, Brock & Blackwell, 1997, p. 28-29.
  158. Ibid., p. 30-31.
  159. United Kingdom, Department of Trade and Industry, Limited Liability Partnership, A Consultation Paper, February 1997, p. 7.
  160. Philip Morris and Joanna Stevenson, "The Jersey Limited Liability Partnership: A New Legal Vehicle for Professional Practice", The Modern Law Review, Vol. 60, No. 4, July 1997, pp. 538-551, at p. 544-545.

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