Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 13 - Evidence - October 31 Sitting
OTTAWA, Thursday, October 31, 1996
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:05 a.m. to examine the state of the financial system in Canada (professional liability).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, our first witnesses this morning are from the Canadian Bar Association.
Thank you for taking the time to appear. Please proceed.
[Translation]
Mr. John D.V. Hoyles, Executive Director, Canadian Bar Association: The Canadian Bar Association is a volunteer professional organization founded in 1896 and incorporated by a special act of Parliament in 1981. Today, the association represents over 34,000 lawyers, judges, notaries, professors and law students across Canada.
[English]
One way our members are involved in the CBA is through section work. Sections are organized for the study of particular areas of law. At the national level, there are 27 sections active in the legislative and law-reform initiatives. For this particular submission, three sections were involved: business law, insurance law, and civil litigation.
I will now turn, for the substantive presentation, to Mr. Lusk and Ms Manzer.
[Translation]
Mr. Russell W. Lusk, President, Canadian Bar Association: I am happy to be here today on behalf of the Canadian Bar Association. The subject under consideration is professional liability. This issue is as important to jurists as it is to the general public.
[English]
Mr. Chairman, I am very pleased to have this opportunity to appear before your committee on behalf of the Canadian Bar Association. Ms Manzer will present the details of our submission on this issue but, by way of introduction to her remarks, there are one or two points I would like to make.
First, the CBA representing over 34,000 jurists from every part of Canada, is keenly aware of the fact that any proposal to limit professional liability is important not only to professionals, including lawyers, but equally to the public at large. Professional liability exists on three levels: first, the personal liability of the negligent party or supervisor; second, the joint and several liability shared by co-defendants; and third, the liability of a professional firm which spills over to expose individual assets of all partners whether they are personally at fault or not.
Joint and several liability can at times wreak unfair havoc on wrongdoers who contributed only marginally to the damage. Just as surely, its existence can enable a plaintiff to gain relief where some co-defendants are insolvent. Any move to amend the status quo must strive to consider all aspects of the fairness equation -- the injured party vis-à-vis the defendants, each defendant vis-à-vis the other defendants, and professional defendants vis-à-vis their partners.
It is our view that the public policy issues are compelling and that further study is required. Based on the work we have been able to do to date, we cannot say that it would be prudent to draft legislation in this area at this time.
The issue of liability arising from the provision of financial information simply appears to us to be too narrow a basis upon which to build an appropriate legislated response. The appropriate option for providing relief to professional defendants is unclear to us at the present time. More analysis and evaluation is required.
In the end, it could come down to a public policy decision based on fairness between the competing interests of providing plaintiffs relief and subjecting professional defendants to greater burdens than those borne by other segments of society.
As I have indicated, we are not in a position at this time to determine that such decision can or should be made until the required research and analysis by us is complete. Even a quick review of the nature of professional liability illustrates the dangers inherent in proceeding prematurely. In weighing private and public interests, the greatest care must be taken to ensure accuracy and ultimate fairness.
It is now my pleasure to turn the CBA presentation over to Alison Manzer.
Ms Alison Manzer, Chair, Committee on Financial Institution Legislative Reform, Canadian Bar Association: The legal profession faces a challenge which perhaps none of the other professions faces as intimately as do we. The legal profession cannot consider the issue only from our own perspective and and as it relates to our place within society. We must also consider it from the view of fairness for the clients whom we routinely represent, and those clients evenly balance both sides of the issue.
Recognizing the basis for our consideration, we must bear in mind that unlimited liability for professionals, both as a consequence of joint and several liability for co-defendants in an action and as a consequence of a required practice in a general partnership format which imposes joint and several liability on each member of the partnership, was developed in a legal and historical time which, in the view of many, no longer exists. At the time joint and several liability was developed as a concept to provide protection to those who access professional services, the professions were drawn primarily from the privileged class. Their clients were ill equipped to deal with the issues that were put before the professionals who were providing them with services.
We suggest that today those types of relationships no longer exist. The educational playing field in which professionals deal with their clients is far more open and, as a consequence of universal education, the majority of clients are well able to understand the professional services and advice provided to them.
Further, the professions have become open to all. Most who practise in the professions now must do so as a matter of economic imperative -- to earn their livelihood -- rather than as the hobby or diversion it may have been at the time these concepts were developed. Further, the professions face the fact that new players are now offering services, often equivalent and at times identical, but without facing the spectre of joint and several liability in the provision of these services.
All of this is happening at a time when there is also shifting legal ground. The removal of contributory negligence as a bar to legal action; the broadening of the bases on which loss can be claimed, including economic loss; the change of the professional relationship from one in which claims can be made only in contract to one where claims can be made in tort, would all clearly indicate a single and unilateral response to the issue which is that joint and several liability must be eliminated. But must it?
In looking at the issue, we must consider that the test is intended to deal with ultimate fairness and the balancing of interests.
In our view, when considering joint and several liability, we must consider the impact on society that arises because the cost of professional services must be effected by the nature of the liability imposed on the professional. This arises both because of the nature of the advice and the professional services that would be provided. More conservative advice, more time spent in protecting the professional who is providing the advice than possibly the client, may result in the professional services not being provided effectively or cost effectively.
Further, the increasing cost of insurance and the exposure to the possibility of insurance being unavailable will increase the cost of professional services and may potentially result in the withdrawal of professional services. Weighed against that are those who represent the claimants in the various actions that may be taken to make a claim against the professional. Many of those have a genuine belief that the legal process continues to provide adequate protection, and many of them have a genuine belief that the insurance regime which presently exists, barring some anomalies, provides an effective balancing.
Many also continue to adhere to the risk and reward model which partially generated the initial development of joint and several liability concepts; that is, that access to the learned professions and the rewards of the learned professions meant that the risk to be taken was appropriate.
The issue then becomes how we recognize valid opposing interests. There is no question that in Canada the CICA, in introducing the issue to the committee, has brought forward a valid concern, a concern which has an immediate impact on their profession, particularly at the federal level, in a way that perhaps no other profession does, as they face the withdrawal of insurance coverage.
The Canadian Bar Association, however, believes that moving immediately to a single solution without considering the other approaches and options is premature. In the reviews which we have undertaken, other solutions have been identified to meet the problem. In fact, those solutions have been more prevalent in other jurisdictions.
We believe that there are a number of different responses which could address the issues that have been raised. These can include: greater recognition of the ability to contract for the exposure to limited liability, the proportionate liability that has been put forward by the CICA; limited liability models which we recognize would be provincial jurisdiction; statutory limitation of the scope of professional services which are exposed to limited liability; and statutory limitation of the parties to whom a duty for professional services is owed.
The Canadian Bar Association believes that there must be an early, effective response to the issue. We do not believe that the issue should be ignored or that a recommendation that legislation based upon the current proposals is premature means that the issue should be buried. The constitutional issues, for once in Canada, is not a bar. There is no question that the federal consideration can proceed in a parallel manner, and probably a different manner than that would be accomplished at the provincial level.
We believe that it should and could be reviewed at the federal level and that the timing remains urgent. We do, however, believe that the other responses to the issue must be considered, and we have suggested a number of parameters within which it should be considered.
We also believe that the public interest in the plaintiffs who are seeking recompense for damages lost, the appropriate model to weigh societal cost against the cost to the professions, and the impact on society as a consequence of the cost of professional services and the withdrawal of services must be considered.
In our view, the matter should be put forward for study on an urgent basis. However, we should not overlook the possibility that solutions other than proportionate liability may more fairly recognize the balancing of societal interests which are before us.
The Chairman: Thank you very much for an outstanding summary of the issue.
Senator Meighen: Thank you for an excellent presentation.
The bottom line being the need, however urgently, for further study, what type of group, in your view, should undertake this study? Should it be the bar; should it be an ad hoc committee made up of lawyers and others? Have you any views on that?
Mr. Lusk: Our primary comment is directed at a review that would put us in a position to make a final recommendation to you. Certainly, we do not feel we have had sufficient time to do the scope of the in-depth review that we would like to do, particularly when you bear in mind that the contributory fault legislation varies from province to province across the country. There are many similarities, but there are also many differences.
As well, aspects of this question must be looked at from an insurance perspective. There is no doubt that the availability of insurance coverage at a reasonable, affordable, rate is of great significance in this issue. It is fair to say the professions in the past have only survived through this process of unlimited liability as a result of insurance. The extent to which it is available for the professions today is a significant factor. To the extent that it has not already been considered looked by the committee is certainly an important factor.
Ms Manzer: With respect to the timetable for the review of the CBCA and the federal financial institution reform, although legislation is pending, I would suggest there still is time to conduct a study within the context of that. I do not believe the study would be necessarily complex. We have assisted in putting forward a number of recommendations as to alternate models for consideration. You have a committee structure in place. The appropriate place to deal with the issue at the federal level is, as a first step, within the context of the CBCA and federal finance institution legislative reform. I would suggest that is the appropriate forum for its consideration.
Senator Meighen: That is what I was thinking when I asked the question about whether or not we could get it in. Certainly our friends in the accounting profession view this as a window of opportunity.
Ms Manzer: I believe the window is still open. There is still sufficient time. My discussions with a number of persons involved in that reform schedule indicate it is an issue which could be accommodated.
The Chairman: When you say "that reform", I think it is important that you give us an answer separating the CBCA from financial institutions. I say that because the financial institution legislation has a sunset clause as of March 31. The CBCA does not. When you lump the two of them together and say "within the timetable", I do not know which timetable you are talking about.
Ms Manzer: I still believe it can be dealt with within the context of the financial institution reform timetable. I am aware of the status of legislative drafting, but I believe that, because the issue is fairly self-contained and would require a relatively narrow review within the context of finance institution reform, it could be accommodated within that timetable if the will were there to do so.
Senator Meighen: I will be the devil's advocate here. Why am I surprised by the fact that what we seem to be coming around to is more study? Is it more study or more experience with existing legislation in Canada and elsewhere that we need? We all know that we can study issues and come up with very different views because the issues have not been put to the test of real life in some instances. Should we not wait for more experience coming out of the U.S., British Columbia and maybe the U.K. before we rush into a solution or a proposed solution?
Ms Manzer: You are touching on an issue that was the subject matter of considerable discussion in committee review. We agree with you that there are a limited amount of empirical studies available in Canada, but surprisingly, that is also the case in the United States. Much of the empirical evidence is inconclusive.
The difficulty is that in Canada, at present, there is apparently an insurance crisis for at least some of the professional groups engaging in some professional activities. If we wait until a study has been completed, we may well have eliminated at least one of our professional sectors or at least the major firms participating in that sector.
I generally believe in more study, and my reasons are very practical. These hearings commenced and the bar association only became involved during the late summer. Consequently, our reviews were pulled together very quickly. Fortunately, we have an experience base that possibly other professions do not have, but we certainly are far from being omniscient on the topic.
As a consequence, the primary evidence put before the committee that we were able to review was a uni-directional study which reached a conclusion. They made their argument, studies and reviews support a conclusion. We simply believe that the other alternatives have not been given proper exposure before the review process and that there needs to be a discussion of the other alternatives. The evidence clearly indicates that there is a problem which merits consideration and rapid consideration. Our concern is that we have not had advocacy for those who would be most effected by the change, and that the opportunity to be heard by any legislative draftsmen in the review process should include the opportunity to consider their interests and their issues more than has been put before those committees to date. As well, there has been no conversation of alternative models, and I believe there should be such discussions.
Senator Meighen: Is it the bar association's considered view that the insurance crisis exists not just in the accounting and auditing profession but in other professions?
Mr. Lusk: I think there are insurance problems in other professions in some parts of the country more so than in others. In Ontario, for example, our profession has experience indicating that there is a very unhappy circumstance in many respects because of the cost of insurance borne by practitioners today.
I am not positive of my ground here, but I think if you look at the very large insurance amounts along the lines the accountants have been talking about, you will find that other professionals, with their claims history, have the same problems.
However, based on the information presented in the brief that we looked at, it seems that the greatest difficulty is faced by large firms today rather than small firms, although I would emphasize that the size of the premiums facing lawyers in parts of the country are not insignificant by any means.
Ms Manzer: I will give you an anecdote that may help to illustrate the point.
The large law firms in Toronto, in order to access sufficient excess coverage and in order to do so on an affordable basis, have had to put together a captive offshore. We are effectively self-insured. In order to do so, we must meet claims standards that many firms cannot meet. Those of us who can meet these standards can access the necessary excess coverage through our own captive. The difficulty is that even with that, when I say "adequate insurance", we can obtain insurance to the level of $65 million. I routinely close transactions in the hundreds of millions and billions of dollars. If I do so and make an error, not only are all of my personal assets at risk, but those of my partners, not just in Toronto, but potentially in the affiliated offices we have across the country. They have no knowledge of the fact that I am conducting a transaction, let alone do they have any means of controlling me.
We in the legal profession consider that although we may not have reached the same difficulty that the major accounting firms have reached, we do have a form of insurance crisis. We have sole practitioners in Ontario withdrawing from practice because they cannot make an adequate livelihood when they face expenses of $8,000 to $10,000 to $12,000 -- depending on the claims ratios for their insurance coverage -- when they are making $40,000 to $50,000 on a gross revenue basis. Yes, I suggest that we have an insurance crisis.
Senator Meighen: You have given me a very good reason to support the idea of legislation across the spectrum of professions. I suppose it would be for us to decide whether there would be a public policy or fairness consideration if it were limited.
Suppose you said that accountants were in much worse shape than anyone else, and therefore we should limit this to accountants and see how it works out. One argument against it would be the one you have just given me.
Ms Manzer: I do not believe the accountants are even requesting that. I believe the accountants have, for expediency, limited their request to an issue and a particular area dealing with the dissemination of financial information probably because it is quite digestible at the federal level.
They have not restricted their request to accountants or auditors but have indicated it is the parties who would be involved in the arrangements. I think even they recognize it is not necessarily an auditors' issue but a professionals' issue.
Senator Meighen: There are those who say: What is the fuss all about? If you do your job properly and exhibit the correct degree of diligence, you will not get into trouble.
There are cases pending. We have not heard the last of them. We do not know where it will shake out. Those are likely to be heard before a judge alone, unlike before a jury in the United States. Let's not get all stirred up at this stage. The world will not come to an end. This is not the United States yet. We have a different system. You are a little premature in your concern.
Do you have any response to my comments?
Ms Manzer: You are echoing the thoughts of many members of our profession. That was precisely what I meant by the comment that, as against our very real concerns, there are many who hold a genuine belief that the legal process continues to provide adequate protection.
Senator Meighen: Are you saying that it does not?
Mr. Lusk: The problem is that approach tends to be a little too simplistic in the eyes of many. There are very large claims out there today against members of the legal profession, simply because of the size of the commercial transactions that have taken place. You have claims in the hundreds of millions and, in some cases, in excess of $1 billion.
As you have heard from Ms Manzer, there is a maximum amount of insurance which even the largest law firms can obtain in order to insure themselves against risk.
If a law firm were hit with a successful claim for $1 billion, it would, to use the cliché, ruin their whole day.
For those partners who had no involvement whatsoever in the transaction, there is a further fairness issue. Most of society today enjoys the protections of incorporation or limited liability. Is it realistic to expect professionals who practice in areas with those kinds of claims not to have similar protections?
How many business people today would carry on business without either a corporate vehicle or adequate insurance or some other vehicle to protect them in the event of a major claim? That is the problem that arises.
The magnitude of these claims today and the scope of the reach of liability is such that this kind of problem has not generally been faced before.
Senator Meighen: Would a professional corporation go a minor way to meeting the problem, or a significant way?
Mr. Lusk: It depends upon the restrictions, if any, that were put upon the operation of that corporation. Obviously, if there were a professional corporation that provided the typical protections to be found in a business situation, then certainly that would provide considerable protection.
Senator Oliver: In your brief, you say that individuals maintain personal responsibility for their own acts and for those over which they have direct supervision and knowledge, even when they have the corporate shield.
Mr. Lusk: What you have heard from the accountants is that their proposal would incorporate that type of responsibility.
Ms Manzer: The models that have been used elsewhere to provide limited liability for professionals have continued to impose liability on the individual actually performing the services and the persons who are directly under that professional's supervision. The bar association in its brief and in its considerations has never considered it appropriate that professionals be able to escape liability for their own actions. As a consequence of joint and several liability among defendants, you may be responsible for a small proportion of the loss but then be responsible for the whole of the recovery. This is a similar issue to that raised by the accountants. It must be recognized that, in the context of joint and several liability, our partnerships no longer consist of one or two partners sitting intimately in adjoining offices with each one being aware of what the other is doing. Now there are very substantial partnerships with imposed standards to try to maintain quality throughout the firm. However, they cannot control all the services being rendered. We end up facing responsibility for that which we cannot and do not control.
If you review professional liability cases in Canada, professionals are not generally being sued for mistakes which are a gross abuse of their standards of care or of their trust relationship toward their client. Liability actions are arising generally for small and technical errors. For example, if you make one transcription error in completing a secured transaction on a computer filing, you can be liable, not only you, but all your partners may lose their personal assets.
We would suggest that, in looking at the balancing of interests and whether the legal process protects, you have to recognize the types of claims that are successfully being made against professionals. I think there has been a failure to recognize that these claims generally involve technical errors and not a breach of any professional duties or standards.
Senator Kelleher: I am interested in your suggestion, and this is something that we have discussed. You have said, and quite rightly so, that we must balance all interests. We must hear from the plaintiffs. That is something we have not done yet. You have obviously given this some thought. We would appreciate suggestions from you as to whom we might solicit to get those opinions. Do you know of any organizations or groups that we could usefully contact if we go down this road?
Mr. Lusk: We did not come here today with such a list, but certainly we would be happy to assist to the extent that we can in making such suggestions. I do not know that there are groups of plaintiffs or potential plaintiffs, but certainly there are groups across the country that I am sure can provide the other side of the equation to you.
The Chairman: That would be helpful.
Senator Kelleher: Any help you could give us in that regard would be most appreciated.
Senator Hervieux-Payette: I have read your brief. From my recollection of civil law, when a finding of contributory negligence is made against a plaintiff, he must deduct that percentage from his damages. Does that mean, in common law, that if you contribute to the fault, you would be 100 per cent liable?
Maybe there is a difference between the common law and the civil law. In our own jurisprudence, a claimant would be partly to blame if he gave erroneous information to his lawyer or accountant. If a plaintiff is found to be partly responsible, would he or she receive full compensation in common law?
Mr. Lusk: The general rules are these, and they may vary somewhat from province to province. Generally speaking, the negligence acts have changed what used to be the common law from one where if a plaintiff was at fault at all, there was no opportunity to recover in tort. Those laws have some provisions that are not particularly clear. In at least some of the provinces there has been case law to the effect that if a plaintiff is found to be partially at fault, then there is not joint and several liability, there is several liability. If a plaintiff is partially at fault, then, of course, the plaintiff can never recover that portion of the damage that they caused themselves. However, if they are at fault to a degree, then they are only able to recover that proportion of fault from an individual defendant caused by that defendant as opposed to the 100 per cent scenario we find with joint liability.
Senator Hervieux-Payette: When we compare lawyers with accountants, there may be some similarity in that they deal with concepts, words and figures. In the case of engineers, it is a matter of state-of-the-art construction standards and so on. If an engineer does not respect the minimum standards of the profession, buildings and other structures would not conform to those standards. We were discussing a scenario in which architects or engineers draw up plans and the owner hires the contractor who submits the lowest bid. We considered a situation where that contractor would ignore the specifications provided in the engineering plans and the structure falls down. In such a case the owner would be contributing to the fault along with the contractor. How can the architects and the engineers be held liable? It seems to me that the architect is the first person a complainant would go after. Architects are having a tough time.
When we compare the situation in the 10 provinces, the territories and the federal government, the biggest obstacle seems to be the fact that we have several jurisdictions and the federal government has a minimal role to play in establishing new patterns, new trends, or new rules.
Have we seen any type of situation in which, perhaps, 10 per cent of the problem could have been solved by the federal government while the other 90 per cent could have been solved by the provinces, and where the matter was resolved? We could study this problem to death, but if 90 per cent is where the solution lies, and there is a solution, then we ought to adopt the 10 per cent which falls under federal jurisdiction. I would say that 90 per cent of the problem is at the provincial level. Perhaps my equation is not perfect. However, it is much more a provincial matter than a federal one.
Ms Manzer: It is necessary to take a step back to answer your question, senator. You must keep firmly in mind the two levels of liability. When I was trying to assess the issue for myself to ensure that I had it clear in my mind, that was the first step I had to take. The two levels are joint and several liability among co-defendants to an action, and joint and several liability as a result of being obliged to operate in a general partnership structure.
There may be different solutions to each of those two levels of liability. The federal government can particularly attack the first, which is joint and several liability among co-defendants. Many of the areas in which that specific issue arises are directly under federal regulation which is the provision of professional services to federally regulated financial institutions, in particular, and corporate entities under the CBCA. The federal government can, without the need of support from the provinces, assist with the first of the issues in whatever manner it determines after reviewing the issue.
The second issue, which is the joint and several liability among the partners of a firm, must be dealt with at the provincial level and can be segregated. To say because of the intertwining we should not look at it at the federal level, fails to recognize that federal changes could very substantially address the first of the two issues. Even if the provinces deal separately with the general partnership structure, the federal level must necessarily continue to look at the issue because of the co-defendant issues and the provision of services to federally regulated entities.
The Chairman: On page 10 of your brief under "Constitutional Issues", it is stated, "Failure to harmonize" -- which means federal-provincial harmonization -- "would raise significant legal concerns." Yet, as I listen to you, you seem to be saying, understandably, that a piece of this problem is federal while another is provincial. You separated the joint and several liability into two categories and said that it makes sense for the federal government to deal with the area of federal jurisdiction.
My question to you is this: What are the significant legal problems?
Ms Manzer: The lack of explanation that comes out of brevity.
I suggest that the legislative harmony issue is one among the provinces. It is somewhat unique in that fashion this time.
The difficulty is, if we change from a joint and several liability structure, a general partnership, in one province and not in another, then we end up in a regime of forum shopping. The plaintiffs would simply attempt to sue the multiprovincial professional firms in the provinces that have not adopted that type of structure.
I suggest that the issue lies only at the joint and several liability among the partners' level, and it is a genuine concern. It would not be necessary to harmonize a federal response to the joint and several liability among defendants with a provincial response to the joint and several liability or among the partners in the partnership firm. Nor would it be necessary that the federal response deal with the first of the two issues in an identical way to that of the province. In my view, however, the provinces must harmonize their approach to avoid forum shopping.
Senator Angus: Thank you all very much for your excellent presentation. My colleagues, all members of the CBA, would agree that we are getting good value for our dues.
The Chairman: Some of us who do not pay dues are also getting value.
Senator Angus: There is a bit of a misunderstanding as to why the accounting, legal and some other professions cannot incorporate. Who has said they cannot? From where does the prohibition come? I realize a lot of these are self-policing, self-regulating professions.
Another question I have relates to why an individual professional remains responsible, even in the event of incorporation in some cases. We had evidence, for example, on Tuesday, from consulting engineers who told us that individual design consultants who, even in an incorporated entity such as SNC, Lavalin or others, are still legally liable.
It would be helpful to know where these kinds of specific laws come from, because it is a complex subject. I agree with you that it is important that there be further study. As I think you stated, there are many sections in the CBA, some of which perhaps do not agree with others.
Why and how did the concept of joint and several liability become enmeshed and engrained in our legal systems? How does it relate, if it does, to the concept of contributory negligence?
Mr. Lusk: Why is it that professionals cannot incorporate today? I think the answer goes back to legislation such as the Legal Professions Act in British Columbia. The Legal Professions Act governs our profession. Over the years, there would be a prohibition, variously worded in various statutes in various provinces, I am sure, that simply prohibits a lawyer from making arrangements to limit liability with a client.
In our province today, for example, lawyers can incorporate.
The Chairman: For the record, which province are you from?
Mr. Lusk: British Columbia.
Senator Angus: Perhaps each of you could advise us which firms you are with. We appreciate you are representing the profession here today.
Mr. Lusk: I am a partner in the firm of Ladner Downs.
Ms Manzer: I am a partner with the firm of Cassels, Brock, in Toronto.
Mr. Lusk: I wish to pick up where I left off.
I do not want to leave you with a misleading impression on the question of lawyers' incorporation.
While lawyers in British Columbia can incorporate, there is a specific provision in the legal profession that says that, notwithstanding incorporation, a member remains liable for his or her acts.
I think the short answer is that there are various reasons for incorporating, some of which provide equality of tax consideration to other members of the public. In those provinces where lawyers can incorporate, I think that it is that issue that has driven incorporation, as opposed to any limitation in liability.
The simple answer is that you find provisions in the various regulating statutes across the country, or perhaps in some provinces in other statutes, that simply require professionals to continue to be liable.
Senator Angus: Is it the professionals themselves who impose that?
Mr. Lusk: It is the statute which governs the professionals in most cases. In some cases, the benchers of the Law Society who are involved in the day-to-day regulation of our profession may also pass rules as part of conduct rules for members stipulating they cannot limit liability. I think the principal place where it appears is in the statutes governing professions at the provincial level.
Ms Manzer: You inquired as to how joint and several liability for the professions became enmeshed in our law.
The traditional professions emerged in approximately the 16th century. In the 16th and 17th century there was no such thing as a corporation. Corporations did not emerge until the late 18th and early 19th centuries.
Limited liability partnerships, unlimited liability corporations and such are creatures of the post 1950s.
At the time that professions emerged, there was really only one way for persons who got together to conduct business to conduct business, and that was as a partnership It is not unique to professional partnerships. All who undertake business in partnership as a general partnership are jointly and severally liable. This comes out of the concept that a partner is an agent both for the partnership and for the other partners.
It is not that there was the suggestion that professionals would be jointly and severally liable as among partnerships. This situation arose from the fact that professionals were originally constrained to operate in a general partnership format.
The need to regulate was then recognized, and they started to do that in about the 1750s and subsequently in Canada.
In the 1750s, professionals were operating in partnership. The will of the legislators was that they would continue to permit self-regulation. The quid pro quo, because we were still operating in that historical environment I started off describing, was that the trade off for self-regulation and the trade off for being a member of these vaunted and highly respected professions, was that we would continue to operate in a general partnership structure. That was the key change in the 1990s.
I have written a textbook that fairly succinctly explains these partnership developments among professionals in the first chapters.
The issue of joint and several liability among co-defendants arises from negligence concepts. I would suggest this a latecomer, because the ability to sue professionals in tort is recent. I would suggest that it happened to some extent accidentally as band-aid measures were used as a means of plaintiffs getting retribution from the professionals.
During the latter half of this century, litigation remedies expanded rapidly. I think without appropriate recognition of the other level of liability already held by professionals. The courts started slapping on the ability for plaintiffs who had otherwise contributed to damage to take action. It was then possible to not just sue in contract, where professionals can protect themselves by the contractual relationship, it moved into the realm of torts, where we have no ability to protect ourselves.
At the same time, they were expanding the groups who could take action. As opposed to it being only the client who could sue me, there is now the possibility of the unknown individual suing me because of purportedly relying on my advice although I had no means of knowing who would be looking at the advice I have given.
There was band-aid solution on top of band-aid solution. There was a failure to recognize the underlying environment in which we have to practice. Joint and several liability among partners is a historical relic that needs to be examined in that light.
Other areas require reassessment because, as remedies have been placed upon remedies, this has resulted in a situation where there has not been a fundamental consideration of the consequences.
Senator Angus: That is excellent. The textbook you referred to, is it mentioned and cited in the brief?
Ms Manzer: No, it is not. I can send a copy to the committee.
Senator Angus: Thank you very much.
Mr. Lusk: I think it is fair that, at least in the legal profession, traditionally, the question of insurance has been crucial. The answer to public concerns is that you can bring proceedings against lawyers and they are not protected by corporate vehicles.
On the other hand, the answer for lawyers, at a time when insurance was readily available and affordable, was to simply buy the insurance and that would protects against claims by plaintiffs. Those who were incorporated would not have to worry.
Economic loss claims, the magnitude of claims, and the lack of insurance, have dramatically affected one's ability to look at this fairness issue in the same light.
Senator Angus: In other words, this whole matter is driven largely by radically changed conditions.
For the purposes of our ongoing study of this issue, I assume that, in the case of the legal profession generally, prior to the auditors coming forward with their propositions and their requests for a study of this matter and for legislative reform, no initiative in this regard came from the legal profession.
Ms Manzer: To date, the initiative has been at the provincial level. The immediate issues that face the accounting profession are not so immediate for us because of the nature of the services that we render. There have been active and ongoing representations and discussions in several of the provinces at the provincial level. Ontario, for example, has on its books legislation which would provide limited liability for lawyers.
Senator Angus: I am specifically referring now to the joint and several element, of which you have correctly said that numerous alternatives must be considered. They may be rejected, but they must be analyzed.
The auditors have made it quite clear to us that a professional limited liability partnership is not the solution. You have pointed out why it would not alleviate their problem. They want proportionate liability. I agree with you that we cannot do one without the other.
My last question will focus on the joint and several issue. Am correct that it has not been front and centre in the legal profession until very recently?
Mr. Lusk: It is fair to say that, while the accountants have taken the initiative in terms of the specific issue that is before you today, at the same time, the magnitude of claims that are appearing against law firms that are engaged in corporate transactions has been a topic of concern within the legal profession.
Setting aside what the accountants have submitted to you, questions have been on the table within our profession as to what might be done about circumstances where there is not adequate coverage for all the types of practices that our members are engaged in today.
Many practitioners in smaller firms have an affordability problem. To that extent, the situation may be similar to that of the accountants. As I mentioned earlier, the large claims have been made against those who practise in large corporate bodies. The claims against auditors have been more prevalent today than they have been against our profession. However, that is not to say that we are not headed in that direction.
Senator Angus: Some wags have suggested that our profession has created the problem in that we thought up all these tricky ways to sue professionals other than ourselves. Therefore, we are lagging a bit behind.
I should like to deal briefly with the insurance issue. Again, I agree with you that that may be the nub of both the problem and the solution.
I cannot help but wondering if there is an insurance crisis for accountants, or lawyers, or other professionals. I am sure it is a matter of degree, whatever the answer is. It seems that doctors have a much bigger problem with insurance than we lawyers do, particularly those practising to the south of our border. However, obviously insurance is still available, or why would American law firms not be going out of business? All these large law firms still exist. They have huge damage awards against them, but they are still hanging in there, as are the accounting firms.
Ms Manzer: One of the most significant difficulties the committee faced in pulling the submission together was the attempt to obtain appropriate empirical information with regard to the availability of insurance and to try to get past the anecdotal concerns raised.
There is an insurance crisis. Whether it is fair to balance the insurance crisis against other interests is probably where the empirical evidence is deficient. When you state that many firms appear to still be in business and, accordingly, must be insured, you are accurate in that we must carry insurance to be in business. We must carry minimal levels of insurance. The Ontario system, according to our actuaries, is significantly underfunded. Therefore, we may carry that basic insurance but it is difficult to know whether claims will be able to be made against an underfunded system.
For the majority of large firms, excess insurance is done on a self-insurance basis, which is not insurance at all. It simply means that we are taking significant percentages of our earnings and putting them offshore and investing them to the extent that we hope will cover claims. That is not insurance. It is a case of ourselves funding the potential claims against us.
Insurance is becoming increasingly unavailable. There is talk in some of the provinces that certain areas of practise will not be able to access insurance. Some of those areas are often used by the average person, areas such as real estate.
We are looking at having to fundamentally restructure the way in which we monitor the profession and the way we practice to try to address the fact that insurance is becoming increasingly unavailable and increasingly expensive. I would suggest to you that that is an insurance crisis.
Senator Angus: That is only true if it is supportable by the empirical evidence, which I question.
In coming to whatever conclusion is ultimately arrived at, is it not important that we do not compare apples to oranges? You have made at least four references to the Ontario law society's insurance scheme. I am a member of the Quebec bar. Quebec has reduced by more than half the amount, per lawyer, that the members of the Quebec bar must pay for that first million dollars of coverage. Le Fonds d'indemnisation du Barreau are saying that is a result of good management; whereas there has been bad management in Ontario. Frankly, it has been messed up. That is why there is an insurance crisis in Ontario. Is that a fair comment?
Ms Manzer: There are many who would dispute that; and there are many who would espouse that.
There have been allegations of some mismanagement within the insurance fund. However, there is also a higher incidence of successful claims against lawyers in Ontario. I would suggest at least part of it is because of the difference between the civil and the common law systems. The room for error is much higher under the common law system than it is under the civil law system. At least part of it comes out of the litigation system as opposed to the mismanagement of the funds in the insurance scheme.
Senator Angus: In any event, you would agree that different elements of the issue must be examined.
B.C. has a well-administered program. However, this is a complicated matter and we must be careful not to draw general conclusions.
Most of the huge lawsuits occur in the U.S. The jury system, the recovery, punitive damages and exemplary damages are directed against all professionals, including lawyers. Yet, lawyers seem to be able to remain in business. This is not a new phenomenon. I know insurance is expensive, but it is available. There may be a harder market in the 1990s as a result of litigation in the 1980s, but I believe they can still get insurance.
Ms Manzer: One of the considerations the committee must take into account is the cost of delivery of professional services. When you are balancing interests, it is not simply the interest between a plaintiff and a defendant in a law suit; it is also the cost to society, because professional services become increasingly expensive.
We are at a time in our societal development where there is probably the greatest need for access to affordable professional services -- particularly legal services -- that there has ever been. If insurance remains available but at increasing cost, that increases the cost of providing services in two ways: The additional cost we have to build into our pricing; and the additional cost we have to build in as a consequence of the additional reviews that must be undertaken on an internal basis to attempt to protect ourselves from claims that might otherwise be made.
A survey done of a number of professional firms indicates that close to 25 per cent of the cost of the delivery of services is the additional review that is required to ensure that, to the best extent possible, all mistakes are eliminated. You must decide if you are looking for a standard of perfection in the delivery of professional services to society. If you are, you must recognize that society will be bearing the cost. It will be added to the delivery of services.
I would suggest that, although insurance may remain available, you must take the cost effect for the delivery of professional services into account when making that comment.
Senator Hervieux-Payette: We want to prevent situations where the damages awarded are so high that people declare bankruptcy. Thousands of companies in this country go bankrupt each year. Lately some engineering firms almost went bankrupt. In the normal world of business when mistakes are made in production, the company goes out of business. Entrepreneurs live with that all the time. Now we are dealing with professionals and trying to find another standard. When you make a bad business decision, you pay for it. Sometimes you pay for it personally, and if you have partners, associates and investors in with you, everyone loses. Why would we have a different legal system for the service provider as compared to those providing goods? How would I explain that to the normal taxpayer?
Mr. Lusk: I think the answer to that is straightforward. Few business people today, if they were in a position where they were making an informed decision, would carry on business in the form of a partnership, and very few of them would carry on business other than through a corporation.
To go back to your example, if someone makes an error in business that results in a major claim against them, they may well go bankrupt, but the "they" is their company in many cases. Their company may well go bankrupt. All of the shareholders in that company will not necessarily have their personal assets on the line. They may have signed guarantees which may put them on the line but, from the point of view of liability, a claim against those shareholders and owners, they have a much greater degree of protection through the incorporation procedure than professionals who are without that right today.
Senator Hervieux-Payette: I agree with you, providing that you are using a big law firm and all the risks are being accepted. The bank usually asks most small- or medium-size companies to put everything on the line. I agree with you that the big companies and their shareholders are somewhat protected, but smaller firms are subject to a law that makes it almost mandatory that they put up their personal goods as collateral before they will be approved for a loan.
Mr. Lusk: May I add one comment which supplements your question, but also deals with Senator Angus's question about U.S. lawyers? We have not come here today with data, so I am not giving you a researched and informed view. However, from my experience, I think there may be various answers to what U.S. attorneys do. There is this concept in some professions these days of "going bare". Some professionals, unless they have to be, are simply not insured at all. Their strategy in a defence is to say go ahead and get your judgment; there is nothing there when you get it. That discourages many people from ever taking proceedings.
As is mentioned in the brief, there are many forms of limited partnerships, incorporation or otherwise provided in the United States, including some for lawyers. I expect -- I am not sure of this -- that to some degree, insurance coverage is available. The answer may well be a combination of all of those things.
Senator Angus: That is interesting. My follow-up question on U.S. lawyers would be precisely on the issue of "going bare" or the issue of so-called "deep pockets".
I have had extensive discussions with the PI insurance industry, both in North America and in the U.K., and I am told, without exception, that the attorneys engaged in this kind of litigation are always looking for the deep pockets. They know who is going bare. They will look at the big firms, such as Ladner Downs, Stikeman Elliott and so on, to see what insurance they have. A lot of brokers and underwriters are suggesting that you should not get a lot of insurance because that will just attract litigation. I believe the accounting profession has run into the same situation. We find ourselves in an extraordinary dilemma. I do not know how to deal with that. Do you have any suggestions?
Mr. Lusk: There are two aspects to this that are unsatisfactory. First, it is not satisfactory for a professional to have to go through his or her professional life with no assets in his or her name. Second, it does not seem to be the optimal solution, from the point of view of the public, to go about having to try to protect yourself when you have no assets. In some of the other professions I know -- I am sure it varies -- negotiations take place up front, on at least some of these major transactions, such as major engineering contracts. I would think it is very unusual that there not be an extensive requirement for insurance.
The potential plaintiff does have a remedy if an error is committed. That would seem to be much more preferable than having no protection at all because various steps have been taken to ensure there is no remedy.
Senator Oliver: What you are saying is that we should not jump to conclusions, we should do more study and look at options other than the one that has been recommended to us.
On page 8 of your brief, you make two suggestions. One of them is limiting the scope of professional liability and limiting those to whom a duty of care is owed; and the other is limiting services to which professional liability attaches. The first suggestion consists of only two short paragraphs. It is a bit thin. Have you any working or background papers to supplement this? Can you help us in our consideration of these two interesting suggestions?
Ms Manzer: The committee does have much more extensive materials. In fact, the first draft would have overwhelmed you somewhat in its volume. I would be pleased to pull together some of that research and bring it to you.
Senator Oliver: Particularly on those two issues. Thank you.
The Chairman: I have one procedural question and then a substantive question. The procedural question is for Ms Manzer. Given the kind of study you have talked about, and given also your comments about how you could do a study and still fit in with the legislative timetable, do you have any sense as to how long it would take to pull together an analysis of two basic things: the real extent of the problem as opposed to the imagined extent of the problem; and the range of options for dealing with the problem, including the pros and cons? I am not asking that the Canadian Bar Association do this. There would be many interested parties. I am trying to get a rough idea of how big an undertaking that is, in light of the fact that there have been major studies in both Britain and Australia which we would obviously have available to us.
Do you have any sense of how long that would take?
Ms Manzer: Pulling together an outline of the range of options would not be terribly time consuming. The literature is readily available. We spoke to the clerk of this committee in mid to late August and were able to pull together our review by early October. Yet, we were able to quite thoroughly canvass that particular issue. That is the easier of the two.
In terms of determining the real extent of the problem, you first have to decide what that means; whether you are looking at hard statistics of the number of claims, whether you are looking at statistics of the nature and type of cases which are starting and the potential exposure, or whether you are looking at issues with regard to how the insurance industry will respond.
If you put reasonable parameters around your question as to what you mean by the "real extent", it can also be done within acceptable time frames. The insurance industry certainly has much of the information available, and the litigation statistics could be pulled together fairly quickly.
The Chairman: I am assuming that you consider three or four months to be an acceptable time frame.
Ms Manzer: At the outside.
The Chairman: I have a policy question which follows from the notion of the study which Ms Manzer outlined.
Mr. Lusk, you said that, in the end, the issue of who should pay how much is ultimately not an issue for which a solution can be developed based on legal principles; it is essentially a fairness issue which must rightfully be determined by those who make public policy as opposed to there being a clear "right answer".
Ultimately, we are faced with making a public policy judgment about whether the current system of joint and several liability is fair enough to be left alone, or whether it has been sufficiently unfair -- recognizing that "fair" is a subjective word -- that some other scheme is needed. Fundamentally, if that is the issue to be addressed, the solution can only be determined by those people who make public policy decisions about equity all the time -- which is what legislators do -- rather than saying to one profession or a group of professions, "Tell us what the right answer is."
Mr. Lusk: I think you have summarized it correctly.
My remarks were to the effect that a problem exists today. You heard about the problem and you have heard about some of the effects of that problem, some of which affect the public, as Ms Manzer has said. Very high rates of insurance affect the public because, to the extent that those in the profession are able to pass them on to the public, they do so in the form of costs.
In the final analysis, you have to be able to make a good public policy decision on whether the status quo should be maintained or whether events have changed so much that, in fairness to everyone, including the public, there should be a change. Those who look at the legislation will ultimately have to take into account the public interest.
The Chairman: Right. I am glad you used that term. However, my point is that there is no legal principle which would lead you to say that there is an objective test of what the public interest is, that fundamentally that judgment is just that, a judgment call, and that must be made by legislators because it is not a provable proposition one way or the other. Is that correct?
Mr. Lusk: What is important, of course, is that the judgment should be informed.
The Chairman: My final question is exactly on that point.
Ms Manzer, the study that you are saying would be desirable to do would lead us to be better informed, but I presume the objective of that study would not be to make a specific recommendation as to what the solution should be since clearly that is ultimately an area in which legislators ought to make the judgment.
In other words, you could get a group of people to agree collectively on the kinds of questions we have outlined, but the ultimate choice clearly rests in the hands of public policy makers, and the minute you move from fact-based suggestions to recommending a specific option, you have moved into the area of a value judgment. Obviously, if the study were done and there were hearings on it, every witness would apply his or her own value judgment, but there is no objective test of what that value judgment should be.
Ms Manzer: Your summary is exactly correct.
The Chairman: I would thank all three of you. You have been extremely helpful.
Honourable senators, we now have with us from the CICA Mr. Mike Rayner, who is president of the CICA; Mr. Ron Gage, the immediate past chairman, and Mr. Bill Broadhurst, the chair of the Legal Liability Task Force.
I know you watched this morning and I know that you were briefed on the presentations that we had on Monday and Tuesday, so may I suggest that you go through the highlights of your brief. As you can tell on the basis of the discussions we had with the CBA, there will be a lot of questions.
Mr. Michael H. Rayner, President, Canadian Institute of Chartered Accountants: We at the CICA are extremely pleased that the committee is holding these hearings on proportionate liability. We believe they will be an excellent vehicle for the government to obtain input on this issue and will be of great assistance to the Minister of Industry as he and his colleagues complete their review of corporate governance and potential amendments to the Canada Business Corporations Act.
You have already introduced my colleagues. I would just add that Mr. Gage is the Chairman and Chief Executive Officer of Ernst and Young, one of the large accounting firms in this country. Mr. Broadhurst, although he chairs our Legal Liability Task Force, also has the distinction of being a former senior partner of Price Waterhouse, another of our major accounting firms. Mr. Broadhurst, you will recall, appeared before you in February in Calgary.
We believe that our presentations to you today and our written submission clearly show four things: First, there are serious problems created by the principle of joint and several liability; second, there has been a thorough analysis and review of various options to address this problems; third, proportionate liability provides a simple and equitable solution to the liability crisis that is being caused by the application of joint and several liability; and fourth, action is required now to implement this solution in the current round of amendments to the CBCA and financial institutions legislation.
The auditing profession has been holding discussions on this issue with departmental officials in the federal government for a little over two years. When people are first briefed on the issue there is usually some confusion and misunderstanding on two important matters. The first one is that some people think that the issue relates only to auditors' liability. We want to make one thing very clear at the outset: The principle of joint and several liability with respect to financial information does not apply only to auditors. As we say on page 5 of our brief, our proposal would apply to all defendants: management, directors, and other advisers who with the auditors are involved in the issuance of financial information. All such defendants would be responsible only for the damages awarded against them according to their respective degree of fault as determined by the court.
A second concern raised by some people is that what we are asking for is not constitutional, or that the federal government does not have the authority to legislate proportionate liability ahead of the provinces.
We tabled with you, Mr. Chairman, a brief prepared by a legal adviser, an eminent constitutional expert in Canada, Mr. Neil Finkelstein, that explains the legal situation. I will not dwell on that. We had clarification from representatives of the Canadian Bar Association this morning that, indeed, it was possible for the federal government to take action now and in advance of the provinces on the issue of proportionate liability.
In our view there are two reasons for immediate action to address the problems caused by joint and several liability. First, taking action now on proportionate liability is in the public interest. As your draft interim report and other witnesses before your committee have indicated, the audit function is crucial to the continued public confidence in the capital markets in Canada, and these markets are essential for a healthy Canadian economy. Second, we believe that this is also an issue that deals with the fundamental fairness or equity in our legal and economic systems.
Before Mr. Gage speaks I would like to bring to your attention one recent development with respect to our proposal. On September 24 the CICA made a presentation to the Standing House of Commons Committee on Finance relating to this issue, and at the end of our presentation the committee chairman, Mr. Peterson, reached the conclusion:
For my part, I've heard very compelling testimony from you and having read your report and studies before to recommend that we proceed very quickly to provide to you the type of fairness and certainty that I think you need to do your jobs, and it makes sense in our world today.
I would now ask Mr. Gage to speak to you about the impact the unfairness of joint and several liability is having on the auditing profession.
Mr. Ron Gage, Past Chairman, Canadian Institute of Chartered Accountants: Mr. Chairman, members of the committee, I think it is agreed that the independent audit function adds credibility and fosters confidence and trust in our financial and economic system. It allows capital to go where it can achieve the highest return and it is a cornerstone of our free market system. The audit is essential in ensuring the integrity of corporate reporting, which is in the interests of both the public and the business community.
The most serious threat the independent audit function faces today results from the application of joint and several liability. Normally you would expect that, in addition to the obvious objectives of delivering efficient and effective and high-quality auditing services, the everyday risks faced by the auditing profession would be covered fully through the use of commercial insurance. Regrettably, as you have been hearing, that is not the case. There are a significant number of claims under way in Canada which involve actions against auditors and others. Four of these involve very substantial amounts: Castor Holdings, Standard Trust, Confederation Life and Royal Trust. These claims total in the billions of dollars.
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, if self-insurance is, indeed, a form of insurance.
To my knowledge, 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 U.S. $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 major audit firms have increased tenfold since 1989, and the cost per partner is now approximately $35,000 per year.
As I stated earlier, there are four substantial claims under way involving audit firms and others, and the problem caused by joint and several liability is that, if even one of these claims were to go to judgment and the auditors were found to be 5 per cent, 10 per cent or 15 per cent responsible, and at the same time they were the only defendant still solvent, the auditors would be responsible for paying 100 per cent of the damages. Essentially, because of joint and several liability and the deep pockets syndrome, auditors are being required to cover everybody's risk, not just the auditor's own risk.
From time to time you hear about large claims being settled by auditors. That is because, from our perspective, we are faced with a legal principle that can hold us responsible for paying 100 per cent of the damages, regardless of our degree of fault. You then combine this with the fact that we are substantially self-insured. I cannot afford to bet the farm and go to court to be found minimally at fault but responsible, nonetheless, for 100 per cent of the bill. I am not prepared to take the risk of potentially bankrupting my firm and all of my partners personally, so consequently I negotiate an affordable settlement even if it exceeds my proper proportional share of fault and damage.
Has a major accounting firm gone bankrupt in Canada? No. However, the factors that could create a bankruptcy do exist today and, as Mr. Campion testified on Monday evening, the bankruptcy of a major accounting firm is not in anyone's interest and would lessen public confidence in the Canadian capital market systems.
Another effect that the present system of joint and several liability is having on the profession is in our ability to attract and retain bright young people in the profession. It has been my experience that some of the best and brightest people in our profession, while remaining chartered accountants, will choose not to become or remain as partners in accounting firms. One of the reasons for this is the unfair liability exposure that a partner faces. Furthermore, auditors are well placed to serve the public interest and help improve corporate governance in this country by providing assurance services in areas such as internal controls, future oriented financial information, new corporate performance measures and environmental matters. However, given that we are faced with this current unfair liability exposure, we are reluctant to embrace these new services.
The difficulties have one thing in common, these problems have arisen under the rule of joint and several liability. It is clear that this unfair liability exposure impairs the ability of auditors to fulfil their role. This is not in the public interest because the audit allows credibility and fosters confidence and trust in our financial and economic system, and it is clear that moving to a proportionate liability for auditors and others involved in the issuance of financial information is in the public interest.
I would ask Mr. Broadhurst to speak to you on the research and analysis that we have done over the past five years which has formed the basis for this proposal, and about some of the support he has found from other organizations.
Mr. William Broadhurst, Chair, Legal Liability Task Force, Canadian Institute of Chartered Accountants: Mr. Chairman and members, Mike Rayner has spoken to our proposal and noted it would apply to all defendants, including directors and officers involved in the issuance of financial information by an organization. I would like to note three other matters related to that. First, our proposal does not apply to a defendant who knowingly participated in fraud. Second, auditors are fully prepared to take responsibility for losses flowing from their own negligence, but they do not believe they should have to assume financial responsibility for the negligence of others. Third, there would be no retroactive application of our proposed amendment to the claims currently before the courts, including the four that were mentioned previously.
I would like to comment on other alternatives we have considered since beginning to pursue a solution to our problem over five years ago. Alternatives explored included statutory capping, incorporation, limited liability partnerships and the restoration of the insurance market. I will speak very briefly on each.
First, I will deal with statutory capping. As you are aware, statutory capping occurs when a liability is limited to some fixed sum or a variable sum calculated in a predetermined way, for example, a multiple of fees. We have rejected capping as a solution because it is arbitrary and unfair and, in most instances, is much less protective of the public interest than is proportionate liability. Capping the liability of any defendant under a system of joint and several liability simply results in an expansion of the liability of the other defendants. Other national jurisdictions, such as the United States, Australia and the United Kingdom, have rejected capping. We note that your August 1996 report rejected capping for directors.
The question is sometimes asked: Why will limited liability partnerships, LLPs, or incorporation not solve this problem? Ms Manzer gave you a very good answer to the distinction between joint and several at the level of a partnership and joint and several at the other level. LLPs do not protect the assets of the partnership itself, they only protect the personal assets of the innocent partners not involved in a claim. They do not affect the size of awards assessed. They do not have any impact on the cost or availability of professional liability insurance. They do not deal with the inherent unfairness of the joint and several liability rule and therefore do not address the main cause of the concern about the continuing availability of high quality auditing services.
In the United States, where auditors and others in 48 states and territories can form limited liability partnerships, the federal government determined that, in the public interest, it still needed to pass legislation to replace joint and several liability with proportionate liability. Incorporation has essentially the same characteristics as described above for LLPs. It is clear to us from conversations with the Minet Group, the leading world insurance broker, capping, or the reform of joint and several liability, will help to substantially restore the availability of liability insurance for auditors. The other solutions I mention will not do that.
I would now like to comment on the most frequently heard argument put forward against proportionate liability. This is summarized in the phrase that we must keep the plaintiff whole as a matter of principle at all costs. In response to our proposal, Industry Canada officials have expressed concern about the plaintiffs' situation and have cited two reports: the Ontario Law Reform Commission Report of 1988, and the Burrows report in the United Kingdom in late 1995. The first I will comment on now, and the second I will deal with in the few words I will say about the U.K. a little later.
The Ontario Law Commission Report concluded there was no need for reform because the plaintiff must be kept whole by the defendants without regard to the culpability of the individual defendants. However, we note this justification does not apply where there is only one defendant who may be insolvent. The legislatures have shown no concern about this particular consequence. The problem is that the Law Reform Commission's justification for joint and several liability focuses entirely on the plaintiff and ignores the larger potential economic consequences resulting from its application. Most important, it fails to recognize the public interest in maintaining, in our view, high-quality auditing services.
The report also stated there was no empirical evidence to support the contention that the policy of joint and several liability is a significant factor in the diminished availability of insurance. However, in the eight years since their report, commercial liability insurance has been substantially reduced for the major accounting firms, as you have heard. Many of the causes of the auditors' liability problems had not surfaced at the time of the Ontario Law Reform Commission Report.
Other countries have addressed the two issues of public interest and fairness as they relate to joint and several liability. In late 1995, the United States Congress enacted a securities reform bill which included the replacement of joint and several liability with proportionate liability. In addition, 32 states have either abolished or modified the policy of joint and several liability.
The November 28, 1995, conference committee report of the House of Representatives and the Senate on securities legislation reform says it best. I quote:
One of the most manifestly unfair aspects of the current system of securities legislation is its imposition on one party for injury actually caused by another.
The report also noted:
... the current system of joint and several liability creates coercive pressure for entirely innocent parties to settle meritless claims rather than risk exposing themselves to liability for a grossly disproportionate share of the damages in the case.
This is the point Mr. Gage was making.
While I recognize that the U.S. judicial system is different from the Canadian system, some of the least attractive aspects of their system are gradually being imported into Canada, for example, class actions and contingency fees, but they now have the protection at the national level in securities legislation of proportionate liability.
In Australia -- and I feel I am preaching to people who have heard a lot more than I have more recently -- their inquiry in 1994-1995, concluded:
... it is fair that a defendant's liability should be limited to the degree of fault, unaffected by matters beyond the defendant's control, --
The then government stated:
... we must deal with the potential for arbitrary and unfair findings against professionals such as auditors under the current joint liability rules.
In July 1996, pursuant to the inquiry's recommendations, the present Australian government released for public comment draft legislation replacing joint and several liability with proportionate liability in cases involving economic harm and financial loss.
The Department of Trade and Industry in the United Kingdom is a considering a proposal by the accounting profession and others to replace joint and several with proportionate. Last year a report of a common-law team, headed by Professor Andrew Burrows, which was prepared for the British Law Commission, rejected the need to replace joint and several liability with proportionate liability. The Department of Trade and Industry is now in the process of analyzing responses following its request for comment.
Professor Burrows rejects the notion that the application of joint and several liability has now resulted in the substantial reduction in the availability of liability insurance. This view is contradicted by the Minet Group, the leading international insurance brokers, who have stated in their response to the Department of Trade and Industry that the concept of joint and several liability has resulted in:
... a virtual inability to obtain open market cover for the larger accountancy firms.
That is from a document dated May of 1996.
Furthermore, as noted in The Financial Times of London:
Shareholders, company directors and bankers yesterday backed a campaign by professionals to press the government into wholesale reform of the law of liability. Sixteen influential bodies -- including the Institute of Directors, the National Association of Pension Funds, the London Investment Banking Association and leading accountancy bodies -- signed a letter to Mr. Ian Lang, the Trade and Industry Secretary, saying the present law was "flawed" and damaged the economy.
The U.K. business press, in general, has not accepted the Burrows report and has called for liability reform.
Since our last appearance before this committee, we have met with a wide range of individuals and groups on the issue of proportionate liability. We are not aware of any opposition from any of the groups we met with and, in fact, a number of prominent organizations have provided written endorsement of our proposal. They include: The Coalition for CBCA Reform, whose membership comprises 10 of the largest companies in Canada; the Investment Dealers Association of Canada; the President of the Toronto Stock Exchange; the Institute of Corporate Directors; the Financial Executives Institute Canada; the Ontario Teachers' Pension Plan Board, the largest public pension fund; the Institute of Chartered Secretaries and Administrators in Canada; and The Society of Management Accountants of Canada. Copies of all these letters will be found in an appendix to the written brief.
Of great significance to us, senior officials of the Consumers Association of Canada indicated they would not oppose our request for proportionate liability for all defendants involved in the issuance of financial information. They would, however, oppose any expansion of the proportionate liability policy into the field of product liability and personal injury, which is beyond the scope of our proposal. We have their authority to make that statement.
All of these organizations and individuals supported the CICA position as we have outlined. As well, representatives of the Quebec Order of Chartered Accountants met recently with Jean Martel, chairman the Quebec Securities Commission, concerning our proposal for proportionate liability. Mr. Martel has indicated that he is not opposed to the proportionate liability regime that we are proposing be incorporated into federal legislation.
Senators, if organizations as diverse and as thoughtful as these are prepared to endorse, in writing, our position, and other organizations are not opposed to what we are posing, we ask the question: Why can it not happen now? As noted, the issue of proportionate liability has been thoroughly researched. Extensive hearings were held by the United States Senate committee in the summer of 1993, which led to the conclusion by both the House and Senate, in separate deliberations, to move to proportionate liability.
In Australia a number of independent studies were produced supporting a move to proportionate liability. In the United Kingdom the pendulum has decidedly swung away from the Burrows non-solution to a momentum for changes to proportionate liability.
In Canada the CICA has been studying this since 1991. We first approached Industry Canada in the early fall of 1994 and have provided detailed information on the matters we have already related to you.
Surely the problem, which is a worldwide problem, has been adequately studied and researched. Now is the time for action. The longer we wait the closer we will come to realizing the adverse consequences.
The Chairman: I would make one brief comment on Mr. Broadhurst's last comment and then ask one short question.
You point out in your brief, and you have stated that the issue has been thoroughly studied, and that all the options are known. You then go on to mention the fact that the U.S. legislators reached certain conclusions. It really takes me back to the question I asked Mr. Lusk at the end of his testimony when he said my observation was correct, namely, that ultimately the choice of the option one chooses is very much a public interest value judgment. I am not terribly persuaded by the fact that the values of the U.S. Senate or the U.S. House of Representatives ought to automatically become the same values we would apply in making a choice and, therefore, it seems to me we need to separate the question: Do we really know the full range of options available? from the issue of: What does a particular group of legislators in a particular country believe the public interest is? I think very reasonable people can differ on that second question. We can differ within the country. There can be partisan answers or non-partisan answers, but I am not persuaded by the fact that because other legislators have reached one conclusion it automatically follows that we ought to reach the same one. That is really an observation.
My question to you is relates to Senator Hervieux-Payette's question about LLPs, limited liability partnerships. It was pointed out that the upside of a limited liability partnership was that it prevented the partners from losing their personal assets, but it did not prevent the partnership, collectively, from going bankrupt. That immediately triggers in my mind Senator Hervieux-Payette's question, which is: Why should you be protected from going bankrupt any more than anybody else in business?
Mr. Broadhurst: Mr. Chairman, I think ,first of all, you are correct, there is a public policy issue here related to the trade-off, which would be between keeping the plaintiff whole and not keeping the plaintiff whole, so we have no doubt about that. The issue we are raising -- and you will have to make your decision on -- is, if a major public accounting firm goes bankrupt, does it have any lasting effect on the availability of high quality auditing services? Our contention would be that that kind of an incident would cast considerable confusion within the auditing profession itself and a considerable lack of confidence in people about the future of being in the auditing profession. Our brightest people in the auditing profession have lots of opportunities to do other things.
Second, we think it would create a degree of lack of confidence amongst the business public in the auditing profession. The very fact of one firm going bankrupt -- we cannot say it will result in 5000 jobs being lost because somewhere in the game that work will get done -- we feel will have a huge effect on the confidence inside the profession.
The Chairman: I must challenge on this point. I have enormous difficulty with a principle that seems to say that there is something so special about accounting that it is the one part of society that we cannot allow to go bankrupt when it seems to me a whole pile of people in a lot of other businesses run exactly the same risk all the time. I realize that, speaking as an accountant, you would regard it as undesirable, and it clearly is in the broad sense. Nobody likes to see anyone go under. I understand why it is undesirable conceptually, but I have some difficulty with the notion that a law should be changed based on the principle that one particular group in society is so important that it ought to be protected from going under.
Mr. Gage: Our concern is not about the risk of one of our firms going bankrupt as a consequence of large scale negligent work on our part where we are found to be 90 or 100 per cent to blame for the negligent act and, consequently, must incur damages of $500 million. I am prepared to be at risk for that like any other business person. Our concern is that, so frequently, we are faced with insuring the risks of all the other co-defendants and, if our degree of culpability is only 5 per cent or 10 per cent I challenge whether or not it is appropriate, in the public interest, to confront us with bankruptcy when we have to pay the damages for the other co-defendants.
The Chairman: That is a totally separate argument than the one Mr. Broadhurst made.
Mr. Gage: That is correct.
The Chairman: Would this problem be nearly as serious had the accounting profession not, over the last 15 years, gone through all of the mergers that reduced it to a very small handful of big players? I am not disputing that you did that for your own reasons, for good business reasons. I am only suggesting that, in a sense, you may be part of the source of the problem itself because if we had 500 accounting firms and one went under it would not be a major issue. If one of the big six goes under it is a problem. In a sense, having made a whole bunch of business decisions which you had absolutely every right to do and which were absolutely in your own interest, you are now saying that, in the course of doing that, you have created a problem which we ought to solve for you.
Mr. Gage: Mr. Chairman, I would suggest that the merging of the accounting firms was a major factor of the marketplace we have been serving. As the business community, the commercial enterprises themselves, have become far greater in size and in scope, and they have become global and multinational, they have at the same time demanded from us an inordinate amount of industry expertise and industry knowledge, inordinate amounts of specialized knowledge. We have had to bring technology to bear in the way we deliver services. All of these factors are in response to a changing corporate commercial marketplace which, quite frankly, a small accounting firm is not, in my judgment, capable of adequately serving today.
Senator Angus: One of my questions flows from the chairman's question on how the big six have come to be the big six. Let us take any one of your firms that you are or were affiliated with. Is there just one partnership worldwide? Is there just one legal entity, or a number of them? How does it work?
May I just add as a supplementary, in many of your briefs and submissions that have come to our attention you have used the word "auditing" as opposed to "accountancy". Is that something we should note specifically?
Mr. Rayner: With respect to the latter part of your question, it is with respect to audits, particularly of major large organizations which are capable of having major adverse economic problems and, therefore, impacts on the society, that the issue arises for us. The legal actions taken against the major public accounting firms, and for that matter smaller firms, in areas other than auditing service are not significant. It is in the area of audit that we face the great risk. That is why we are making reference to the audit function specifically.
With respect to the organization of the big six particularly but other major accounting firms that have international affiliations, typically there is an international association of national partnerships, and the national partnerships are owned by the partners within the country. Within Canada firm X has perhaps 300 or 400 Canadian partners who own the Canadian partnership, and that partnership itself has an association with other partnerships worldwide. In some cases there is an individual partner who is also a member of the international partnership, but in terms of legal separate entity status, the national partnerships tend to be the place where the legal lines are drawn.
Senator Angus: Let us take, by way of example, one of the cases you have told us about. A well-known firm in Canada and the U.S. did go into liquidation as a result of this chill that you have described so eloquently, Lavinthal and Horvath. I gather that they had a partnership in Canada and the U.S. and the case was heard in the states. By analogy you have mentioned four Canadian lawsuits that have attracted your attention. Was it the worldwide entity of Lavinthal Horowath that went under, if there was one? If not why not; and if so, why was it not only the U.S. branch that was affected?
Mr. Broadhurst: I can speak to that from personal experience. Lavinthal and Horvath went bankrupt in the United States only. There was, if you will recall, a Lavinthal and Horvath in Canada. They could no longer participate in the international market for auditing services without a major U.S. component which they lost when the bankruptcy occurred. The solution in Canada was to merge with one of the major firms. They could no longer service their international clients. They did not have to contribute in any way to the settlement, they were a separate, legal partnership in Canada.
Senator Angus: If the decision in one of these big Canadian cases goes against one of the big six does it mean that whole worldwide empire of Coopers & Lybrand goes belly up?
Mr. Broadhurst: No.
Senator Angus: It is those individual Canadian partners who pay this terrible price?
Mr. Broadhurst: There have been attempts in the legal field to export the liability into another jurisdiction. My firm had a major case in Hong Kong a number of years ago and the first attack was to say that it was a case against the London firm in England because there were a lot more assets to come to grips with there. In spite of what we have told you, that does not mean there will be no attempts to jump international boundaries.
Senator Meighen: Suppose you participated in the work to some extent but the majority of the work was done in the U.S. and it was done negligently and there was a successful lawsuit with a huge award. Is it strictly an internal matter within your firm -- given the fact that you say international partnerships tend to create fire walls -- as to whether or not you will contribute to that award having been found partly at fault?
Mr. Gage: In those circumstances the cross border debates take place at two or three levels. First of all, it is not infrequent that plaintiff's counsel tries to establish reason to bring an action in both countries, as Mr. Broadhurst mentioned. Second, once the damage has been determined and the awards have been made, you then get down to the international firm itself and it then becomes an internal matter rather than a matter for the courts to decide. It happens at two levels. It happens at the legal level when claims are first being undertaken and then ultimately it has to be resolved internally if it involved a single country.
Mr. Broadhurst: This issue is of some considerable importance. For example, if you had a major case in Canada involving an international firm, the international firm may still have very good reason to want to be represented in Canada, so they may volunteer that we must keep these people afloat. We will pay a price to do that. These would be judgment business calls. Representation in some countries may be more important than in others.
Senator Angus: You described legislation being introduced in the U.S. which met with your approval. Did that extend to other professions or only to the auditing?
Mr. Broadhurst: My understanding it extended to all people dealing with financial information coming out of matters related to the securities legislation, so it would extend beyond the auditors to include directors and others.
Senator Angus: What about lawyers, engineers, architects or doctors?
Mr. Broadhurst: I believe it extended to lawyers in those cases.
Senator Angus: It would be in the securities context?
Mr. Broadhurst: Exactly.
Senator Angus: The underwriters I have talked to draw a distinction between your general legal liability, as accountants or lawyers or whatever, and your legal liability arising from functions performed in the securities business. Should we deal with these separately? I know, Mr. Broadhurst, you have considered all of the alternatives of the scenarios you have envisaged.
Mr. Broadhurst: We came at this because we saw a problem within our profession, and that has been pointed out to you by others. In seeking advice on how to address the problem, it was clear that, if we were named in a case involving public financial information there would be other defendants. Because the financial information originated with the company and its officers it probably was processed through the board either directly or indirectly. It may have involved a lawyer along the way. The advice we were given was that proportionate liability could not apply only to the auditors when other parties did not have it. Everybody involved in the case would have to have proportionate liability.
Senator Angus: In the various states, 38 of them I believe, that enacted legislation, was it all in the securities field?
Mr. Broadhurst: No.
Senator Angus: Did it cover their general negligence statutes?
Mr. Broadhurst: Of the 30-odd states that I mentioned in the United States I believe 10 or 12 have abolished joint and several liability across the board.
Senator Angus: As a legal concept?
Mr. Broadhurst: Right. The others, in individual statutory situations, not all relating to business matters in the sense of financial information, have decided there is a policy reason to depart from joint and several liability. This list is growing in that direction.
Senator Angus: Are you familiar with the concept of contributory negligence?
Mr. Broadhurst: To a degree. I must be careful with all these lawyers in the room.
Senator Angus: The concept of contributory negligence I am referring to is the one whereby, under a certain legal doctrine of contributory negligence, a plaintiff who is only 1 per cent at fault cannot recover at all. If it can be demonstrated by the defence that the plaintiff himself contributed to the tort or to the damages, even to the extent of 1 per cent, he losses all right to claim. I find that concept to be equally unfair. Over the years, in some Canadian jurisdictions, it has been abolished, in certain domains of law, but not all. When it has been abolished, proportionate liability has been found to make more sense but there is no uniformity. Would you comment on that?
Mr. Broadhurst: I think your previous witnesses would have a better answer to that. I do know that in contributory negligence if the plaintiff was in any way found to have contributed to the problem the plaintiff was without remedy. The changes that I am aware of have moved beyond that and the plaintiff can now still recover from the others except for his proportion of fault. The trend is now to give the plaintiff some rights, and this of course is one of the judicial situations which has changed, and that underpins the kind of change we are suggesting. That was a change to a situation which seemed unfair.
Senator Angus: This is my point. I started to get a sense of that as I was listening to the Canadian Bar Association submissions this morning. By the way, I have the feeling you do not agree with very much of what they said this morning; is that fair?
Mr. Broadhurst: No, I would not say that is fair.
There is obviously some work and sorting out still to do. We are putting forward a concept. If the concept is accepted, then there is still some work to do to deal with that concept. Our problem is with the time frame for that working.
The Chairman: When you say a "concept", we have talked about two separate concepts, I want to know which one you are talking about. One is the concept that joint and several is inequitable and therefore there clearly exists a real problem and something must be done about it. The other concept that you put on the table is really a solution to the first problem so it not really a concept. Your solution is proportionate liability. I am trying to understand whether you are seeking acceptance of the fact that there is a problem that needs to be rectified -- and obviously you would like people to accept your solution <#0107> or whether, when you use the word "concept" you are referring to the problem as opposed to your solution. That is an important distinction in terms of where we go from here.
Mr. Broadhurst: I do not want to misstate our position. Our position was to have, as you suggested, the problem recognized but also, from the scope of the research that we have done and, seemingly, from the scope of research done by three other major jurisdictions, the basic answer seems to keep coming to proportionate liability or a variation of proportionate liability. When I say "concept", Senator Kirby, I really mean the two of those linked together.
Senator Angus: I was just leading up to suggesting that possibly this is a subject for the Law Reform Commission. There are so many ramifications involved. I appreciate the urgency, but a change today, unfortunately, will not affect any of the water that has gone under the bridge.
Mr. Rayner: I was very impressed by Alison Manzer's view that the matter could be well studied and dealt with within a time period of about three months. That, I suggest, is a much more reasonable and realistic time frame given the urgency of the problem than submitting it to a law reform commission whose track record in terms of delivery of briefs is somewhat longer than three months.
Senator Angus: I wanted to know just how the Burrows commission got off track, in your submission, so much and whether or not it was the recent decision in the case of ADT v. BDO Binder Hamlyn with which you must be familiar, that changed the outlook in the U.K.
Mr. Broadhurst: I would say that the decision in the Hamlyn case to which you have referred, coincided with the release of the Burrows report. It brought to the fore the potential for a reasonably major firm in the United Kingdom going bankrupt. There was an award. I presume that decision is being appealed and that there are ongoing negotiating with plaintiffs and so on. However, if such an award is upheld, individual partners would be likely to face bankruptcy. It focused attention on the whole problem just at the time of the Burrows report. I would say that Burrows has not kept up with the reality of the times. We had the Ontario Law Reform Commission report which was eight years ago. Burrows seemed to be looking at it in the time frame of the Law Reform Commission of Ontario when the business considerations were different. However, that is just a personal view, sir.
Senator Angus: This is interesting because the Australian gentleman we spoke to on Monday evening not only referred to the Ontario Law Reform Commission but also to those in Alberta and B.C. and they had taken those decisions into consideration in coming to the opposite conclusions that Burrows did.
Mr. Broadhurst: One of their studies is very complete. You are correct, they examined the Ontario Law Reform Commission report and they speak to it in their report. They also considered the one from B.C., the one done in Alberta, as well as one done in Ireland. They went through a whole range of commissions that had studied this subject and, yet, they came out with proportionate liability.
Senator Meighen: Are you satisfied, gentlemen, that everything has been done that can be done vis-a-vis the insurance market? Did you delve into that as much as you could before you came to the conclusion that coverage is just not available above a certain amount and/or that the costs are prohibitive.
Mr. Gage: Senator, in seeking to obtain and place our insurance every year my own firm, and I believe all of the big six, use Minet, the global brokerage company we have referred to. It is their task, on our behalf, to search out the international market for underwriters that are prepared to provide us with cover. Commercial coverage is available. As I said, we range between 25 and 50 per cent. In recent years, Minet has been unable to find an underwriter that would be prepared to offer us a complete blanket policy, that is, from the ground up. What they typically are able to do -- and I can only speak for my firm at this point because we do not exchange details among the big six -- is approach us each year with a handful of soft offers from underwriters offering to provide cover for us in a band of somewhere between $40 million and $60 million. They will offer to provide cover, but they will not offer to cover the whole loss. They say they will cover two-thirds of it and then they will provide some kind of a premium proposition.
We, as I say, have been unable, through the services of Minet and our own enquiries, to find anybody who will give us comprehensive insurance or give us what might be called "catastrophe" coverage beyond the U.S. $150 million to which I have made reference.
Senator Meighen: Is Minet the broker that your profession or your firm has dealt with most often?
Mr. Gage: Both my firm and the big six collectively have dealt with Minet who obviously specialize. They are not underwriters, they are brokers.
Senator Meighen: I think you have referred to this and certainly information I have indicates that, in terms of the top eight, the staff component level has gone down about 12 per cent since 1989.
Mr. Gage: That rings a bell, yes.
Senator Meighen: Is that, in your view, because of the chill or a complexity of reasons, or are you just becoming much more efficient with technological tools?
Mr. Gage: I would say that there are several principal factors which have brought that about. One, the big six have done some considerable re-engineering in their audit process and in their audit approaches. They have been seeking out more efficiency and effectiveness. Two, we have been making major investments in technology and harnessing technology very broadly into the audit delivery process. Three, there has been an absolute shrink in the size of the auditing market in Canada, which has been caused by a number of factors. There has been, obviously, a prolonged recession which has seen a lot of business failures, business combinations and, most recently, amendments to the CBCA in mid-1994 which eliminated the statutory audit requirement for most privately held companies. There have been at least three factors.
Senator Meighen: In your conclusion, the first thing you ask of us, is that we consider amending the CBCA. As I understand it, that will cover any firm incorporated under the CBCA. That is the entire field by any stretch of the imagination, is it not?
Mr. Broadhurst: Our submission on the CBCA is partly related to a couple of phrases in the now existing white paper on financial institutions legislation, which says that this issue of auditor liability was been raised but it is being dealt with in another forum. We raised the issue with Industry Canada and then with Finance and we were told that one or other would take carriage of the issue. It turns out that you received a direction from Minister Manley to look into this issue as well as others.
Our understanding is, if you decided to move forward with legislation along the lines or any related lines that we are suggesting, that the likelihood would be that similar legislation would be picked up in the financial institutions, that the process would not be repeated, and that you would be going through the process for both departments. That is our understanding.
Most suits are not likely to be against CBCA companies, they will more likely stem from financial institution situations.
Senator Meighen: You mentioned the U.S. and the fact that, of those 38 states, 11 had come to the outright abolition of joint and several. Has there, to your knowledge, been any particular forum shopping going on down there? Perhaps Mr. Gage's firm should incorporate in one of those states that has outlawed joint and several. If you incorporated or set up your headquarters there, would that not afford some protection that you do not get elsewhere?
I am really asking whether, to your knowledge, there has been forum shopping?
Mr. Gage: I am not sure how complete an answer I can give you on this. I understand that in the United States that there has been or it is expected that there will be forum shopping with respect to where the bankrupt company was incorporated, where the work was conducted, where the securities were taken to market, any hook that can be gotten by a plaintiff to assert a claim in a state which still enjoys joint and several liability.
Senator Kelleher: In giving your various reasons why you feel it is in the public interest that you be relieved of this joint and several liability and perhaps go to proportionate liability, you talk about the effect that it can have on business confidence or doing business or investing in a country. I agree with you on that point, I think it would. However, having said that and agreeing with you, are you aware of any evidence or studies which would back up that statement or prove to some degree the accuracy of that assumption? It would be helpful to us in our studies if we were aware of those kinds of studies.
Mr. Broadhurst: I think, senator, that some might describe our case as a "prospective" case. If we were sitting before you today and one of the big six had gone bankrupt, we would be able to answer that question with a great deal of assurance. We hope that we do not have to wait for that to happen to answer your question. There is no evidence other than anecdotal comments, but there is evidence of what would happen. The Lavinthal bankruptcy in the United States involved the seventh largest firm. It was not quite of the scope of the six larger firms. There is a big six and then there is a second tier. It was the largest of the second tier. I do not think we can bring to your attention evidence of exactly what would happen from the one major bankruptcy that we can point to and, as I said earlier, our fear is that we do not want to be able to bring evidence to you by having a bankruptcy occur because it is our fear that the evidence would not be what you would like to see in the sense of confidence and things of that nature.
Senator Kelleher: We have been talking a lot about the inability of large accounting firms today to secure insurance coverage. In order that this will be a balanced investigation or study we must hear the evidence of the brokers. I do not think you will disagree with that. The name of one brokerage firm was mentioned this morning, and I am sure there are others. Assuming we go ahead, it would be helpful if you could supply us with a list of brokers, insurance companies or others who we might consider calling as witnesses in this area.
Mr. Gage: I, of course, did not come prepared to do that this morning. We would be more than happy to provide that to you.
Senator Kelleher: That would be helpful.
Senator Angus: Recently I was provided with a copy of By-law 701 of the CICA which calls for mandatory insurance of members of your profession. Indeed, I believe a document has been sent around to the members indicating the availability of insurance. I would be happy to give you a copy. It outlines the various coverages available in Canada. On the face of it I would assume it is applicable to the small practitioner. Is this document designed to head off somebody who might question you when you say that there is no insurance for you? Your own association is saying it is mandatory that every CA shall have professional liability insurance. You outline the coverage and the cost.
Mr. Rayner: Senator Angus, I think the mandatory insurance by-law you are referring to is probably the by-law of one of the provincial institutes of chartered accountants which established these rules. In fact, Ontario has just recently done just that: passed a rule for mandatory insurance.
In terms of the coverage available, et cetera, the CICA, through AICA, the Association of Insured Chartered Accounts, acts as a broker to assist its members in the small end of the market to obtain insurance. It is actually underwritten at the moment by Zurich Insurance, but that insurance is limited to coverage of up to $10 million and in most cases it is providing coverage of in the order of $1 million for small accounting firms. Those underwriters on that particular plan will not provide coverage for the big six or any of the larger firms that are in the second tier to which Mr. Broadhurst referred earlier. They are simply not willing to take those risks at all.
Senator Angus: This document I have refers to AICA, to Mr. Crandell, and it refers to Zurich and other brokers in Canada. When people say that insurance readily available to you, undoubtedly you will agree, adding that this is not what your issue is about.
Mr. Rayner: Quite frequently, the senior partners of the big six firms say they would be delighted to buy insurance from Zurich and AICA, but they are simply not prepared to cover those risks.
Senator Angus: Obviously there must be a lot of folklore around about insurance, and what is said probably depends on the latest decision of a big jury trial or what settlements are being made and what capacity there is in the market. Deloitte's R&R program has now been successfully completed with the exception of few Canadian recalcitrant names. The capacity, I understand, is there but I do not understand to what degree it is restricted in the case of the big six in particular, and maybe numbers 7 to 11?
Mr. Gage: I am sorry, senator, I am not sure what your last reference was to numbers 7 to 11?
Senator Angus: I understand our problem really relates to the big six and maybe a few other large CA firms who are involved in mega deals and who are potentially exposed to mega lawsuits, in which case, if they lose jointly and severally will likely apply. You could be in big trouble and you want to head this off at the pass to ensure the availability of expertise such as your firms provide in the future. That is my understanding.
Mr. Gage: Well, again, with respect to the big six, obviously the capacity or the availability moves up and down with the circumstances of the industry and with the market. My experience indicates there has been some very modest increase in capacity in the last two or three years. The real question that I do not have an answer to today because it is prospective, is to what degree will the capacity improve over the next few years to enable a big six firm to totally insure in the commercial market? That depends on how the underwriters want to use their capacity and how they judge their risks.
The concern, as I understand, of the major underwriters is, first, the ultimate magnitude of claims which, as you know, are sometimes in the hundreds of millions or over a billion dollars, and second, the uncertainty with respect to who can bring a claim, co-defendants, and whose risk you are actually covering. As long as there are those uncertainties, my understanding is that makes the underwriting community very nervous to get back into our market to any considerable extent.
In the 1980s I am told that the worldwide insurance industry -- and I cannot verify this -- the international commercial insurance industry, lost approximately U.S. $3 billion on the worldwide accounting profession through insurance underwriting. In other words, the premiums we paid collectively over the course of the '80s, and it may have included the '70s, I am not sure, were U.S. $3 billion less than the actual awards, losses and defence costs that were laid out by the underwriters. That has apparently made them very nervous to re-enter the market.
Senator Angus: I appreciate that it is expensive. We will hear what the underwriters and the brokers have to say, but if there is a market, and let us not decided today whether or not there is one or not, the costs would be prohibitive for people at the high end.
Are there other issues quite apart from insurance? Does your case remain strong if we take the insurance issue off the table?
Mr. Rayner: Obviously, insurance is an important factor in the whole case. Our position is that we want to create a legal system in which fairness and equity apply to all people who might be involved as professional advisers in corporate decision making per se. We would argue that, if there are improvements in the insurance market, that is good. Frankly, our position and belief is that there will not be improvements in the insurance market until the issue of fair proportion or fairness of awards of damages, et cetera, is found through a new, changed system of legal liability, and proportionate liability is clearly a preference in terms of the insurance industry people to whom we have talked. They see that as a way in which they can reconsider entering the market again.
Mr. Gage: If I could just supplement that response, senator, I do not know that joint and several is necessarily the only answer. There may be other ways that this can be solved. The problems are, first of all, the enormous magnitude of the claims, $1 billion or $1.5 billion. The second problem is that the auditor particularly faces, effectively, having to ensure the risk of his co-defendants because very seldom are any of our co-defendants insured to any considerable degree or in possession of any assets of consequence. Third is the deep pockets syndrome because plaintiffs understand that we have insurance coverage and that it is very difficult for us to go to court. They also know that there is a very strong pressure on us to settle at an affordable level, whatever our proportionate contribution to the problem might have been.
Senator Meighen: On the subject of the magnitude of the claims, there is nothing we can do to persuade a plaintiff to sue for only $1 million instead of $1 billion.
However, to discuss the Canadian situation as opposed to that in United States, perhaps other lawyers here have seen billion-dollar awards, but I cannot recall it. What makes you so sure -- and you may say that you do not want to take the risk -- that any award would be anywhere near what is being claimed, given the fact that we have a judge hearing the case rather than a jury in this country?
Mr. Gage: We do have claims against the profession in Canada today that are in excess of a $.5 billion dollars, approaching $1 billion. However, I cannot tell you that a judge will ultimately award that magnitude.
Senator Meighen: Four have come up to $2 billion, have they not?
Mr. Gage: Yes, or more. Our concern is the risk that a judge could indeed make such an award. That is one of the major uncertainties.
Senator Meighen: Suppose they sued for $10 billion, the collective amount, does that mean the risk is five times as great? If I were being sued for a collective $2 billion, I would be pretty scared. Is it the size of claims that is scaring you, the amount? Suppose the total award were $50 million, would that simply mean you would be coming in front of us saying, "We dodged the bullet that time, but we are not so sure we can dodge it another time"? Alternatively, would you be saying, "Maybe we got a little hot under the collar on that one, because clearly the Canadian legal system is different from the American legal system and will not easily go along to condemn somebody to a $2 billion judgment"?
Mr. Gage: We would probably be thankful we dodged the bullet and say, "But what about the next time?" It, however, goes back to another point that the representatives from the CBA made this morning about looking at the total cost to society or the cost of the professional services delivered, because the threat of a multi-million dollar lawsuit again comes back to us having to settle, at an affordable level, claims that we think have little or no merit and where our contributory responsibility was relatively small. Quite frankly, these settlements run in the order of $5 million to $40 million dollars, so they are individually affordable, but however you slice it, it certainly escalates the cost of providing the professional service.
Mr. Broadhurst: The defendant -- in this case us -- usually has some idea of what the damages are likely to be. I mean the claim might be a billion dollars, but we know what was lost, we know what CDIC paid out, or whoever it was, so we have a quantum of damages in our mind. We know a certain figure is the most a judge could award. Even that can be pretty scary sometimes in the cases we are talking about. The claim itself is sometimes obviously built up to the highest level possible, but there is a quantum of damages you can estimate and that number is scary.
Senator Meighen: I am not disagreeing with you at all, that we are reacting to a situation that may well exist in the United States, probably does exist in the United States, but does not exist here, as yet.
Mr. Broadhurst: It exists in Australia.
Senator Meighen: I can sue you tomorrow for $10 billion and you will settle. You will draw the line somewhere.
The Chairman: Senators, we will have another hearing as soon as possible, and that probably in the next couple of weeks. We will then hear from Canadian suppliers of liability insurance. A subcommittee of the full committee will meet with underwriters of this kind of insurance in London on November 22, and we will spend half a day with Professor Burrows discussing his report. We expect to issue a report at the end of November, four weeks from now. That is our current timetable and plan. We will keep you posted if that changes substantially. I think it is fair to assume it will not.
May I also remind senators that on Monday evening at 5:00 we will be briefed by the Department of Industry on the bankruptcy bill. I think that briefing is important, and we expect is will last a couple of hours. There are some quite controversial issues that I think we need to understand before we get into the detailed hearing.
The committee adjourned.