PART  I   : INTRODUCTION 

PART III  : WHAT TYPE OF LIABILITY REGIME SHOULD REPLACE JOINT AND SEVERAL LIABILITY?        

PART IV   : LIMITED LIABILITY PARTNERSHIPS

APPENDIX A : WITNESSES                           

PART II -- Should Joint and Several Liability Be Maintained?

The overriding principal in deciding if and how to change the current imposition of joint and several liability is fairness and reasonableness in the application of the law and legal result. (Canadian Bar Association)

 

Effect of Joint and Several Liability

All witnesses commented on the effect of joint and several liability. The general view was that joint and several liability, applied in the modern legal and commercial environment, was unfair, had an adverse impact on the cost and availability of liability insurance, increased the cost of professional services and limited the availability of certain types of professional services to "high risk" businesses.

The CICA and the FEIC argued that joint and several liability produces unfairness when one or more defendants in a legal action is insolvent or unavailable to pay his or her share of a plaintiff’s claim. Because each defendant is 100% responsible for a plaintiff’s loss, in such cases a single, peripheral defendant can be responsible for paying the entire loss.(10)

The CICA and the FEIC further argued that joint and several liability poses a threat to the future of the auditing profession in Canada with the result that:

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.(12) As the CICA noted, the issue is of particular concern to the major accounting firms because they are the primary providers of auditing services to large businesses and financial institutions.

Witnesses at the recent hearings and at the hearings held in 1996 pointed to a number of practical problems arising from joint and several liability. Two of these -- the impact on "deep pocket" defendants and the impact on the cost and availability of liability insurance -- were discussed in some detail.

The CICA and the Canadian Bar Association observed that joint and several liability encourages plaintiffs to target defendants who are known or perceived to be insured or solvent. The same observation was made in a brief prepared in 1996 by the Law Society of the United Kingdom.

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.(13)

They further argue that the likelihood of having to pay an entire damage award puts pressure on deep pocket defendants to settle a claim out of court in order to avoid protracted, expensive litigation.

The accounting profession asserts that the effect of joint and several liability is most apparent in the area of professional liability insurance. The potentially indeterminate liability resulting from a joint and several liability regime, they argue, makes adequate liability insurance difficult or impossible to obtain for major international firms. Indeed, insurance underwriters and brokers confirmed that adequate professional liability insurance from commercial sources, although readily available for professionals generally, is not available for the large auditing firms. Insurers stated that they are reluctant to insure professionals who they believe are being targeted when a business fails or an investor loses money.(14)

Lawyers in some jurisdictions have also suffered a steady increase in insurance costs and a decrease in availability of insurance in excess of the mandatory insurance of the applicable law societies.(15) The CBA observed that anecdotal evidence clearly suggests that the cost and availability of insurance have become matters of significant economic concern to the professions.(16)

 

Fairness

Those in favour of the present joint and several liability regime argue that it 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 plaintiffs to shift the risk of a defendant’s inability to pay damages to them. That risk ought to be borne by the defendant(s) because they have caused the financial or economic loss to the plaintiff.(17)

The principal argument against maintaining joint and several liability is also based on fairness -- fairness to defendants. It is argued that it is unfair that a defendant whose degree of fault is minor when compared to that of other defendants should have to fully compensate a plaintiff if the other defendants are insolvent. In theory, the less blameworthy defendants can recover contributions 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.(18)

Economic Loss versus Personal Injury

A fundamental aim of tort law is to compensate a plaintiff fully for his or her loss. Joint and several liability is one way of achieving this goal. In a legal action involving multiple defendants, the insolvency of one or more co-defendants is borne by the remaining solvent defendants rather than the plaintiff.

That the law should strive to compensate fully plaintiffs who suffer personal injury is beyond dispute. This premise was never challenged by any of the witnesses appearing before the Committee. It is not clear, though, that financial loss needs to be protected in the same way.

The Australian Inquiry into the Law of Joint and Several Liability questioned whether financial security should be afforded the same level of protection as bodily integrity.(19) The United Kingdom document, Feasibility Investigation of Joint and Several Liability, rejected reform of the principle of joint and several liability; it conceded, however, that because personal injury claims "raise sufficiently distinct issues (in particular because the nature of the harm is more serious to the plaintiff) … it would be perfectly rational to apply full proportionate liability to non-personal injury claims while retaining joint and several liability for personal injury claims."(20)

The Committee agrees with the view that claims for financial loss do not have to be afforded the same level of protection as personal injury claims. It therefore finds it reasonable to examine options for reforming the liability regime pertaining to claims for financial loss.

Legal and Economic Environment

Joint and several liability developed under circumstances different from those of today. At the time the rule came into being, a defendant could not be held liable if a plaintiff was partly responsible for his or her loss (contributorily negligent). The liability of professionals was based only in contract. It was not possible to recover damages in tort for pure economic loss. Furthermore, the courts did not apportion loss among multiple defendants, largely because it was believed that the courts were incapable of doing so.

The legal landscape has undergone dramatic change in recent years. The nature and scope of the changes were aptly described in the submission of the Canadian Bar Association.

          Notably, changes to tort principles have resulted in an expansion of professional liability into areas             of tort  and economic loss, and an elimination of plaintiff contributory negligence as an absolute             defence.

Professional liability is no longer limited to the contractual obligations which comprised the only professional liability when joint and several liability was initially imposed. The genesis of joint and several liability amongst partners of the professional firm arose primarily in the context of liability imposed in contract, based on responsibility owed directly to the client under that contract. The expansion of professional liability into tort has resulted in both an expansion of the matters for which the professional can be responsible, and the parties to whom responsibility is owed.

Expansion of liability to economic loss, and to parties other than the client, was accompanied by the elimination of contributory negligence as a defence to a liability claim. As a consequence, a professional may be responsible to a broad range of persons who act in reliance on advice or information given, in circumstances where tort principles are applicable. This eliminates the ability to limit duties and responsibilities contractually. It results in liability where the plaintiff’s negligence may have contributed to the loss to a greater extent than that of the professional defendant.(21)

The economic environment has also changed dramatically.

The economic environment in which the imposition of joint and several liability was considered suitable was considerably different from that applicable today. The increasing complexity and size of transactions are increasing exposure to claims for liability. There is a more litigious approach to dealing with loss on a global basis. Procedural changes, such as the ability to pursue class actions, greatly increase the potential impact of joint and several liability. No longer can professionals be concerned only for the affairs of their clients, and the contractual arrangements entered into with their clients. The risk is greater that another, often unknown, person will pursue a remedy in tort.(22)

Is it reasonable to believe that the principle of joint and several liability, which may have been fair and reasonable at the time of its inception, continues to be a fair and reasonable balancing of risk and responsibility in view of fundamental changes in the legal and economic environment? The witnesses have argued it is not. Ms. Alison Manzer of the Canadian Bar Association observed that "the status quo has probably degenerated from a meaningful recognition of a social, economic and legal environment to an expensive, arbitrary insurance scheme that fails to recognize the changes that surround the law."(23)

Clearly, the legal and economic environments have changed since the inception of joint and several liability. 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 transactions 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. When joint and several liability is viewed in the context of these changes, obvious doubts arise about its reasonableness and fairness with respect to auditors and other professionals.

Judicial Limitations on Liability

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, therefore, have attempted to restrict the range of persons who can 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. 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 Managements Ltd. v. Ernst & Young.(24) 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 incurred allegedly as a result of reliance on the annual audit reports and for losses in the value of their shareholdings.

The Supreme Court of Canada made the following points with respect to the duty of care:

It has been suggested that it is not necessary to change the rule of joint and several liability because the courts are able to protect professionals adequately by restricting the range of persons to whom a professional will owe a duty of care. The CICA, however, argued that limiting those to whom a duty of care is owed would not provide a complete solution to the liability problem faced by auditors. It argued that the Hercules decision and a comparable decision in the United Kingdom (Caparo Industries plc. v. Dickman) do not:

Moreover, the Canadian Bar Association was not convinced that the courts would be able to shield professionals adequately by imposing reasonable restrictions on the duty of care. It found more persuasive arguments suggesting that "as a consequence of theories of deep pocket recovery, and of the continuous expansion of duty into areas of economic loss, with the simultaneous elimination of contributory negligence as an absolute defence," the imposition of a reasoned duty of care by the courts would not be sufficient to protect professionals.(30)

 

Nexus between Professional Standards and Liability

The Options Discussion Paper noted that joint and several liability can serve as a deterrent to negligent behaviour. Knowing that they face the possibility of having to fully compensate the plaintiffs in a legal action should any of the defendants be insolvent, professionals will be more likely to implement measures to avoid liability. It has been suggested that replacing joint and several liability with proportionate liability, for example, would adversely affect the risk management behaviour of potential defendants; because a professional would be liable for only his or her portion of the damages, the motivation to develop, follow and improve professional standards might decline.

The CICA pointed out that, as members of a self-regulating profession, chartered accountants have a responsibility to protect the public interest by ensuring that they all adhere to professional and ethical standards. It claims that the professional standards of the accounting profession are and will continue to be rigorously enforced. These standards, the CICA believes, provide a strong incentive for accountants to conduct themselves professionally and will continue to do so irrespective of whether joint and several liability continues to exist. The CICA observed that under either a joint and several liability or a proportionate liability regime, the possibility of having to pay large damages awards would be a powerful incentive for accountants to engage in proper professional conduct.(31)

The CBA acknowledged that deterrence is a component of tort law, but felt that deterrence is not significantly enhanced by joint and several liability amongst co-defendants.(32)

Regimes in Other Jurisdictions

There appears to be a growing movement toward imposing limitations on liability. Many of the different approaches to limiting liability that have been implemented or discussed in other countries were outlined in the Options Discussion Paper. A number of the more significant studies and developments are mentioned below.

In 1994, the Australian federal and New South Wales Attorneys General established an inquiry into the law of joint and several liability. The final report of the inquiry recommended that joint and several liability be abolished and replaced by a scheme of full proportionate liability in relation to all negligence actions involving pure economic loss.(33)

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.(34)

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.

The Australian states of South Australia, Victoria and Northern Territory have replaced joint and several with proportionate liability for claims involving defective building work. New South Wales and Western Australia have legislation in place to cap the liability of members of

professional and other occupational groups in relation to claims for financial loss.

In 1996, the United Kingdom, Department of Trade and Industry released a study of joint and several liability undertaken by the Common Law Team of the Law Commission. Among other things, the consultation paper Feasibility Investigation of Joint and Several Liability examined joint and several liability and a number of forms of proportionate liability; it concluded that joint and several liability should not be replaced by proportionate liability. The investigation report noted that there was scope for reviewing the extent to which professionals and others can limit their liability by contract and went on to suggest that the Companies Act 1985 could be amended to allow auditors to limit their liability. To date, no changes have been implemented in the U. K.

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 modify it.(35) In the U.S. tort law reform at the state level falls into three general categories:

 

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.(37) From the beginning, altering the rule of joint and several liability was an important component of the reform effort.(38)

The Private Securities Litigation Reform Act of 1995 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 financial worth is less than $200,000 and whose recoverable damages are equal to at least 10% of his or her net worth. For other claims, proportionate liability replaces joint and several liability. Where a plaintiff is unable to collect the share of an insolvent defendant, however, each of the remaining defendants is further liable for the uncollected share provided that this is not more than 50% of his or her proportionate share. The Act also contains a contribution right that allows any person required to contribute more than his or her proportionate share to proceed against other persons who bear responsibility.(39)

In the European Union, some member countries apply joint and several liability while others apply proportionate liability in respect of statutory auditors’ liability. 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. Among other things, the study report

recommended that auditors’ civil liability within the European Union should move toward a regime that would include liability proportionate to the auditor’s degree of fault.(40)

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

The Options Discussion Paper noted that studies in Alberta, British Columbia and Ontario examined proportionate liability and recommended that joint and several liability be retained.(41) However, recent studies carried out by the Toronto Stock Exchange and the Ontario Securities Commission recommended that proportionate liability replace joint and several liability in the circumstances described in the particular study reports.(42)

The CICA and the CBA stressed the importance of considering the liability reforms that have been implemented in other jurisdictions. The CBA reviewed the legal approach in other jurisdictions and concluded that

although the approaches may differ, the general thrust to provide a form of limited liability protection, or proportionate liability protection amongst co-defendants, has now been recognized by significant common law jurisdictions as suitable.(43)

Conclusions

The Committee has reached at the following conclusions with respect to joint and several liability.

Furthermore, the witnesses were unanimous in their rejection of the status quo. The CBA put it this way:

Given the changing legal and economic environment, and the approach of other jurisdictions, the CBA concludes that Canadian law, left as it is, would be fundamentally out of step with the global approach to liability for the provision of professional services. The focus of federal laws is financial and corporate matters. Canada must operate in these spheres in the global environment. Federal statutes do not affect the rights in tort of an injured person in an automobile accident, for example, where concerns of the plaintiff’s recovery may be more profound and where continuation of a narrow, exclusively Canadian approach may be more easily tolerated. In conclusion, the CBA does not consider the status quo to be a viable option.(44)

 

Recommendation

The Committee recommends that joint and several liability not be maintained in relation to claims for economic (financial) loss arising by reason of any error, omission, statement or misstatement in connection with the provision of certain information under 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.

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