PART II : SHOULD JOINT AND SEVERAL LIABILITY BE MAINTAINED?
PART III : WHAT TYPE OF LIABILITY REGIME SHOULD REPLACE JOINT AND SEVERAL LIABILITY?
PART IV : LIMITED LIABILITY PARTNERSHIPS
APPENDIX A : WITNESSES
In August 1995, the Honourable John Manley, Minister of Industry, asked the Standing Senate Committee on Banking, Trade and Commerce (the "Committee") to hold hearings on a number of policy issues related to the modernization of the Canada Business Corporations Act (the "CBCA").(1) One of the matters the Committee was asked to examine was 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.(2) This outlined the concerns of the auditing profession and 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, though 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 by corporations incorporated under the Canada Business Corporations Act and by financial institutions established 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, warranted 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 Options Discussion Paper (ODP) was released in October 1997 (Appendix B). The purpose of the Paper was 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 hearings to be held by the Committee before the end of 1997 on which options ought to be adopted by the federal government.
Parts I and II of the ODP include a discussion of the levels of professional liability, the liability concerns of the accounting profession and other professions, the impact of liability concerns on the provision of professional services, and the impact of joint and several liability on the cost and availability of liability insurance. International and domestic developments relevant to joint and several liability amongst co-defendants are set out in Part III of the ODP.
The ODP 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 Committees attention by witnesses who appeared at the Committees hearings in October and November 1996. They include:
- the status quo - joint and several liability;
- full proportionate liability;
- various forms of modified proportionate liability;
- limiting liability by contract;
- capping professional liability;
- compulsory insurance for corporate directors and officers;
- limiting the scope of professional liability by limiting the persons to whom a professional would owe a duty of care or the functions that would give rise to liability;
- reducing the limitation period for commencing legal actions;
- limiting the effective life of financial information; and
- allowing professionals to limit their liability through the creation of corporations or limited liability partnerships.
The ODP included an analysis of the advantages and disadvantages associated with each approach.
The next round of Committee hearings on joint and several liability was held in late October and early November 1997. Three organizations, the CICA, the Financial Executives Institute Canada (FEIC) and the Canadian Bar Association (CBA) made presentations to the Committee. These hearings focused on which of the options presented in the ODP, if any, ought to be adopted by the federal government. This report outlines the Committees findings and recommendations with respect to the options.
Definition of Joint and Several Liability
The ODP points out that there are three levels of liability for professionals who practise their profession within a partnership structure. These are:
- 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.(8)
This report is largely concerned with the second level of liability -- joint and several liability amongst co-defendants in the context of the CBCA and federal legislation dealing with financial institutions and cooperatives.
Before proceeding further, it is worth defining what joint and several liability amongst co-defendants means.
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 plaintiffs entire loss and therefore allows the plaintiff to seek full compensation from any of the defendants found liable.(9)
A defendant who compensates a plaintiff 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 plaintiffs loss to contribute to paying the judgment according to the extent of his or her responsibility for the loss. For example, where a plaintiffs 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, 35% to Defendant 1 (D1), 40% to Defendant 2 (D2) and 25% to Defendant 3 (D3).
Although a right of contribution gives a defendant the opportunity to reduce his or her ultimate liability, it has no meaning when the responsible co-defendants are insolvent or unavailable. In these situations, a solvent defendant under a joint and several liability regime must bear the cost of another defendants insolvency or unavailability.
At the outset, it is necessary to outline the parameters within which the issue of joint and several liability amongst co-defendants will be considered in this report:
- First, the recommendations are limited to situations involving economic (financial) loss and do not cover claims relating to personal injury;
- Second, the discussion and recommendations focus only on the Canada Business Corporations Act, the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act, the Cooperative Credit Associations Act and the Canada Cooperative Associations Act:
- Third, it is assumed that the existing joint and several liability regime will continue to apply where fraud and dishonesty are involved;
- Fourth, the Committees analysis and approach takes into account the liability regimes operating in Canadas major trading partners.