Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 4 - Evidence
OTTAWA, Thursday, November 6, 1997
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:00 a.m. to examine the state of the financial system in Canada (professional liability).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Good morning. I see a quorum.
Honourable senators, may I remind you that we are continuing our study of joint and several liability.
Our first witness is Mr. Peter Donovan, the vice-chairman from the Financial Executives Institute of Canada. We will then hear from representatives from the Canadian Bar Association.
I have also asked the CICA to reappear for 10 or 15 minutes in response to the points made last time, specifically the point raised by Senator Kelleher. We will then go in camera to discuss the issues.
Mr. Donovan, thank you very much for coming. We appreciate your taking the time to be with us. Please proceed.
Mr. Peter D.P. Donovan, Vice-Chairman, Financial Executives Institute of Canada: Thank you for your welcome, Mr. Chairman, and good morning.
Honourable senators, thank you for the opportunity to appear before you today as part of your deliberations on the issue of joint and several liability applied to professional defendants.
As the chairman mentioned, I am the vice-chairman of the Financial Executives Institute of Canada and I am also the comptroller and treasurer of General Electric Canada Inc.
The Financial Executives Institute of Canada is a national professional association of over 1,350 senior financial officers representing more than 900 companies across Canada. Our members are responsible for the purchase of audit services for their companies and greatly depend on a high quality and viable public audit function for the successful execution of their business strategies.
We appear before you today because our members are concerned by the impact of joint and several liability on professional defendants. Specifically, I am speaking about joint and several liability for defendants in actions involving the issuance of defective financial information. I am also speaking of actions where there are more than one defendant and where only economic loss is involved.
Increasingly, auditors are being included as co-defendants in large lawsuits claiming damages from reliance on defective financial information. In many of these cases, when judgment is rendered and relative fault amongst co-defendants is assessed, the defendants other than the auditor are unavailable for their share of the damages.
The joint and several principle looks to the surviving defendant, who is very often one of the large audit firms, for restitution of full damages. In our view, this principle is inappropriate for these situations involving only economic loss from defective financial information.
It is inappropriate, unfair and does not pass the test of reasonableness, that the finding of a portion of fault can result in responsibility for 100 per cent of the damages. It is an additional cost burden paid by auditors' clients. Audit firms must ultimately recover the high cost of insurance or self-insured claims from their billing structure. There is a risk of losing audit firms and qualified professionals. We believe such a reduced capacity for audit services would seriously disrupt the important role played by this third party attest function in Canada's capital and credit markets.
There is a further risk that audit services would not be available for perceived higher risk companies. This could impact on the growth of new entrepreneurial start-up companies that are important for Canadian economic growth and job creation.
This non-insurable risk for the largest audit firms threatens the survival of the firms and, more significantly, the availability of this service to the effective functioning of the economy. The fact that it is non-insurable is market evidence of the serious potential consequences which can occur.
We believe it is appropriate, fair, reasonable and just that damages awarded by the court for defective financial information be apportioned by the court amongst the co-defendants in relation to their degree of fault and that no one defendant be responsible for any of the unpaid damages of the other defendants.
This concept of proportionate liability has replaced joint and several liability in many other countries including over 30 states in the United States. One of the implications of retaining joint and several liability is to place our business enterprises in a less competitive cost position than those of our major trading partners.
We are empathetic toward the unsatisfactory implication that full proportionate liability may result in financial losses to small investors who rely on financial information without the benefit of advice or experience in the assessment of business risks.
While the application of joint and several liability in this case is equally unfair to the defendants, it is not likely to contribute significantly to the other concerns we have expressed. We therefore support an exclusion for small investors from the proportionate liability concept.
In summary, we respectfully urge that this committee recommend to the government that a scheme of full proportionate liability in relation to the issuance of financial information be incorporated in the Canada Business Corporations Act and the federal financial institutions legislation with an exception for claims made by small investors in respect of which joint and several liability would continue to apply.
A small investor needs to be explicitly defined by some simple, easily determined measure known by the parties in advance. However, we defer to others for the most appropriate definition.
We believe such a scheme of modified proportionate liability, which is similar to option 2(b) in the options discussion paper, would resolve the serious concerns we have. Such a scheme would be fair, would contain costs ultimately borne by Canadian enterprises, would not diminish the standards of performance expected of the public auditor or his responsibility for his actions, would improve the availability of audit service to all enterprises, would assure the auditing profession remains attractive to the best people, and would ensure continuing high quality audit services for the effective functioning of the economy. In our view, action on this recommendation would strengthen Canada's economic system.
Thank you for considering our views in your deliberations and I would be pleased to answer your questions.
The Chairman: Before turning to my colleagues, at the top of page 3 you discuss the costs paid by the auditors' clients, the risk of losing qualified professionals, and so on. We received the same kind of information from the CICA. One would have expected them to make that kind of argument, given the fact that they are directly affected.
It seems to me your organization is somewhat more at arm's length in the sense that a number of members of your organization are not accountants. You might tell me whether that is right or wrong, however, my broad question is to what extent have some of these fears been exaggerated. Without suggesting that the CICA would have exaggerated, obviously it was in their interest to make a compelling argument in that direction. Do you have any sense as to whether this is a real or imaginary problem?
Mr. Donovan: This problem is real to the extent that there are $3 billion worth of claims in process.
The Chairman: In Canada?
Mr. Donovan: I believe that is what the CICA said in its presentation. If that is real, then we can draw the reasonable conclusion that our members will have to eventually pay that cost if those claims are all found through increased fees.
To the extent that number is real, it is a reasonable conclusion that audit costs will increase.
The Chairman: Thank you.
Senator Oliver: Your conclusion is that you would like to have some form of proportionate responsibility. You also say that a small investor needs to be explicitly excluded, but you do not go on to say who would be a small investor.
As you may know, we have looked at the phrase "sophisticated investor." Has your group given any consideration to how we could define a sophisticated investor? At what level does a person become sophisticated; at $100,000, $200,000, $300,000, $1 million? Could you help us with your definition of a "small investor"? What were you thinking of when you put in that phrase?
Mr. Donovan: We were thinking of an investor who does not have access to either the advice or the experience to assess business risks. It seems to me one would be required to use some monetary amount.
Senator Oliver: Is it a question of quantum?
Mr. Donovan: That is right. In the perfect world, it would be some sort of skill test, but I do not think that is appropriate. One option is whatever quantum is chosen with respect to net worth. It will be an arbitrary amount.
Senator Oliver: In securities legislation and rules, they do use words like "sophisticated investor." Have you looked at any of those thresholds?
Mr. Donovan: Approximately 14 years ago in their commodity pooling, the Ontario Securities Commission indicated $75,000 net worth exclusive of home, automobile, and furnishings. The Private Securities Litigation Reform Act of 1995 in the United States looked at $200,000 with no exclusions. That is something that could be appropriate to Canada.
We have the CDIC at $60,000. It is familiar to investors. Perhaps that is indicative of the way to go. However, our members cannot offer a particular number at the moment.
Senator Oliver: In recommending that we look at imposing some kind of a proportionate regime in relation to these financial statements, what group or class of people who provide financial statements do you think should be covered by this? Would it be auditors only?
Mr. Donovan: No, it would be all those who provide financial statements. Auditors are only one part. Mainly, it is the principal management of the companies, because they manage, but there may be others. It would be officers and directors of the company. Your discussion paper mentioned several classes, but it would be those who are involved in the production of the financial information.
Senator Oliver: Did you give any consideration to increasing or making mandatory insurance for directors of companies?
Mr. Donovan: That will certainly increase the cost of insurance to directors, but I do not think it cures the basic problem where the damages are sought from a person who is only liable for a small proportion of the damage but, because he has deep pockets or is perhaps the only defendant available, must pay 100 per cent of the damages.
Senator Kelleher: Your paper seems to address primarily auditors and members of the auditing profession. This raises some concerns because there are other professionals out there as well. What is your view on extending that to other professionals as well as the accounting profession?
Mr. Donovan: I would extend it to all professions and all people who are involved in the production of financial information which is found to be defective under which a claim of damages has been awarded.
Senator Kelleher: You are aware, of course, that we only have jurisdiction federally. A great many companies are incorporated provincially, and provincial acts deal with joint and several liability. Have you given any thought to that and what can be done in that area, and should we push on notwithstanding that provincial legislation may lag?
Mr. Donovan: It would be appropriate for the federal government to lead the way. Many of the larger firms are federally incorporated, and the very large claims would be in that arena rather than under provincial legislation.
Senator Kelleher: Mr. Chairman, I would like to make one suggestion, if I may. I do not want the witness to feel this is directed entirely at him because it seems to happen quite often.
I always find it helpful when I can read a brief before the witness appears. Many of the questions I had were cleared up by his brief. Could we emphasize to witnesses who have briefs the importance of supplying them to the clerk in time to allow the clerk to distribute them? It is helpful in formulating questions.
The Chairman: The clerk will make a note of that. Thank you.
Senator Callbeck: In your brief, you suggest that we limit liability through adopting proportional liability. If we do that, do you think we should recommend additional risk management and accountability measures?
Mr. Donovan: It is proportionate liability modified for the small investor. I do not think accountability should be modified in any way. Whoever is accountable for their actions should be made to pay. That is the essence of proportional liability.
Senator Callbeck:Are there any other measures you feel we should include?
Mr. Donovan: I do not think so.
The Chairman: Mr. Donovan, thank you for attending today. We appreciate you taking the time to be with us.
Our next witnesses are from the Canadian Bar Association; Mr. André Gervais, their president; Ms Allison Manzer, chair of their Committee on Financial Institutions Legislative Reform; and Mr. John Hoyles, executive director of the CBA.
Mr. Gervais, this is your first appearance before the committee in your capacity as president of the Canadian Bar Association, and we welcome you. We have seen many of your predecessors, and I suspect we will be seeing more of you before your term in office is over. Thank you for appearing here today.
Senators, you all have the brief. It is my understanding that Mr. Hoyles will make some opening comments and then turn the presentation over to the others.
Mr. John D.V. Hoyles, Executive Director, Canadian Bar Association: Mr. Chairman, honourable senators, the Canadian Bar Association appreciates the Senate committee's invitation to address you today on the subject of professional liability.
The Canadian Bar Association is a national association representing over 35,000 jurists, including lawyers, judges, notaries, law teachers, and students, across Canada. The association's primary objectives include improvement in the law and in the administration of justice. It is in that light that we make our remarks today.
[Translation]
I would now like to introduce Mr. André Gervais, the President of the Canadian Bar Association, who will have the honour of stating the CBA's position.
Mr. André Gervais, President, Canadian Bar Association: Mr. Chairman, exactly 53 weeks ago today, my colleagues Ms Manzer and Mr. Hoyles were testifying before your committee along with my predecessor Russell Lusk. They asked you then not to make any hasty legislative changes based on a limited view of professional liability issues. They also asked you to undertake an exhaustive review of the subject and to ensure that a balance was struck between the interests of all parties concerned, that is the plaintiffs and the co-defendants. We are grateful that you followed our recommendation.
Then as now, we believe that the primary factor to be considered in any change to the current liability regime is fairness and reasonableness of the application of law and of legal result.
We are here today to state that the time for reform is now. We call upon the federal government to adopt a regime of modified proportionate liability in its legislation governing financial and commercial institutions. Ms Manzer will outline for you in detail how we came to this recommendation. I would, however, like to say a few words as well about our conclusions.
[English]
The CBA recommends modified proportionate liability. Our brief outlines factors that should be considered in determining the balance between plaintiffs' and defendants' rights.
Lawyers face a dilemma about professional liability. We have a personal interest as professionals. We are held accountable for our actions with no corporate structure to limit our liability. We also represent the claimants and defendants, so we understand and advocate the balance that must be brought to bear in the public interest.
The scrutiny of diverse sources within the CBA resulted in our submission. Briefly, here are the steps we followed. First, a series of research papers were developed for a continuing education program presented at our recent annual conference here in Ottawa. Our Financial Institutions Committee prepared the brief. We received input from committees in British Columbia and Ontario which are continuing to study the implications of professional liability and limited liability partnerships. Then representatives of the CBA national business law, civil litigation and insurance law sections reviewed the conclusions. Finally, the Legislation and Law Reform Committee and the National Executive Committee approved the submission as official CBA policy.
This process represents extensive consultation with each lawyer bringing a particular perspective to the problem, and they agree that the balance prescribed in this paper is fair and reasonable.
We found the outline of the issues in the options discussion paper to be comprehensive, well thought out and accurately formulated. I would like to commend the Senate committee and its professional staff for such excellent work.
Ms Alison Manzer, Chair, Committee on Financial Institutions Legislative Reform, Canadian Bar Association: With the indulgence of the committee, I will be neither summarizing nor reading the submission but will rather be speaking from my own perspective to try to simplify and give a better flow and logic to why the bar reached its conclusions. I will provide typewritten notes later.
Today the Canadian Bar Association has come before you with a reasoned position. The last time we attended, it was on very short notice, having been invited with very little lead time. We, at that time, did not feel we could put forward a reasoned position on where this committee might go with either its deliberations or its conclusions.
In the 13 months that have passed between the last hearing and now, the bar has completed over 600 pages of detailed research, most of which we have made available to your professional staff. As a consequence of that, we were able to go through an evolutionary process to arrive at a recommendation.
Our position today does examine joint and several liability among defendants in an action arising from statutory liability under federal statute. That is a mouthful, but it is a very deliberate mouthful. The reason for the mouthful is that you will find, as I run through our thinking and how we came to our conclusions, that we were very cognizant throughout of the limitations of the federal authority and therefore the limitations of the deliberation of this committee.
We also would like it to be understood that the decision to even reach a position and recommendation was almost as difficult as reaching a decision. It is important that that be kept in mind in that we are perhaps fundamentally different than many of the other constituents who have come before you.
We did not come to these hearings or to the issue with either a pre-conceived agenda or a perceived imperative need for change at the federal level. Our late and invited participation starting last year speaks for itself on that issue.
Once we were requested to start on the review and did so, we quickly encountered a considerable challenge. We had to take a constituency that both advocated for and represented both of the potential beneficiaries of either the decision to change or the decision not to change. I assure you that our process was far from single-minded attention to self-protection. Each of the positions were represented by very able proponents and it is fairly obvious we had no need to call in legal assistance to help interpret what we were reviewing.
It was interesting that the more we examined the issue, the more we were able to come to a consistent view and, in the end result, consensus was easily achieved. We did emerge with a consensus without real divergence of opinion and the position that was put before you supporting modified proportionate liability was readily and easily reached. We were once again given very little lead time before attending before the committee and I, for one, being aware of the differences of views, was very concerned as to whether we could reach a conclusion for you. However, because of the research and the underlying review of the issues, we were able to do so quickly.
We came up with a consistent, but far from a rubber stamp, acceptance of the view which was put forward by the CICA. The bar came at this from a very different starting viewpoint and from different viewpoints within our constituencies, but reached essentially the same point as the other persons who have spoken before you. That is a fact worth noting.
Despite reaching this conclusion, my job is once again to give you a balanced and legally-based review of the issue and to try to explain the process and evolution, because we believe it is important. We are probably the only ones who can give a reasoned thought while putting aside much of what might be the taint of self-interest. The concerns of the bar were based very heavily in the primary precept of good law, which is fairness, and that is fairness of both concept and application. One without the other creates fundamentally flawed law.
The first thing that I felt I had to do was to understand the scope of what you could and could not deal with and whether you could effectively create modifications in law which would have a realistic and far-enough reaching effect to have any impact on the issue, because it is foolish to consider change if the change will not be effective.
I have reached the point where it is fairly easy to understand the issue of joint and several liability. Several hundred pages of writing has done that for me. However, I still was not convinced until several days ago that I understood it in the context of your deliberations or in the context of the law that you needed to consider. With your indulgence, I will try to explain how I view that part of the issue, because I think it is fundamental to understanding why the conclusion was reached and how it was reached.
The real problem was to try to simplify the scope of discussion and to put it into the relatively narrow considerations of this committee. The essentially encyclopaedic discussions on joint and several liability were simply not suitable to be put before this committee.
We considered that the limits of what we were studying would be a consideration of amendment to federal statutory provisions and, in this case, under the CBCA and financial institution legislation. We considered this suitable not only because it is the focus of this committee but because it is the most likely federal arena where we would be looking at professional liability. It gave the huge advantage of being able to look at things with a view to simplicity. I have generally found that viewing things simply makes them more effective. It also made it more manageable in dealing with many of the concerns that might otherwise distract attention from the potential for reform.
First, it helps to focus those who are reading the submissions and considering the impact on the fact that really we are dealing only with economic issues. We are dealing with damages that can arise from economic matters, from investment and similar. We are not considering the lady who gets hit by a bus where the bus driver might be jointly and severally liable with the man who left the manhole cover off. We are really dealing strictly and purely in the economic arena.
It also limits the constitutional problem. There is clear federal constitutional authority to legislate in the area. There is no real conflict with what the provinces may choose to do or not do.
I believe you have had before you a paper presented by the CICA that looks at the constitutional issues. The bar has reviewed that paper and has found that the legal conclusions reached in that paper are sound.
We are looking only at in solidum liability. We really have no choice in this forum but to look at it, but I will caution the committee that you must remember that in solidum or joint and several liability among defendants has to be looked at in the context that professionals continue to have joint and several liability as a consequence of general partnership at the provincial level.
Given that limit, what are we talking about? I have seen much discussion which appears to indicate that there may be a focus on auditors or auditors only -- one of the questions today indicated to me that this has been considered by the committee <#0107> and that we are looking potentially at only joint and several liability for the delivery of financial information. That might be easy. It makes the statutory changes easy; it makes the scope of review easy; but would it be good law?
I have a real concern that if you limit your focus to a single professional group or a limited number of professionals, and to a single issue that might arise under your statute, you are creating Band-Aid law.
I tried to think of a polite way of illustrating Band-Aid law without being marginally rude about the legislative process. The best I could come up with was the Income Tax Act. I have been at this game for over 20 years and have seen the Income Tax Act evolve from something that was reasonably comprehensible. Perhaps the average person on the street did not understand it, but certainly the average professional could follow it. The decision was made that as a problem came up with the Income Tax Act a Band-Aid would be placed on the problem. As a result, we now have an Income Tax Act that may well be effective -- but I am not sure anyone knows -- but is certainly impossible to understand. I find that to be a very poor answer to law-making. I believe that if we look at the issue in that narrow a scope when dealing with professional liability, we are starting down a track to Band-Aid law.
I felt I should try to convince you that perhaps there is a broader application to the issue. I know that the quick and easy one is to realize that there is an issue for accountants and an issue with regard to financial statements. We are dealing with statutorily created liability only, so what do the statutes contain?
I spent time the other evening going through the statutes and picking out every section that might create liability. Then I realized that would only confuse things, so I focused on the fact that there is a key section in each one of the statutes that you consider. In the Insurance Companies Act it is section 220 and in the CBCA it is section 118. These sections basically say that directors have joint and several liability for a fair range of activities. Keep in mind that this is a relatively new statement and that there was considerably expanded liability underlying that simple statement of the directors' joint and several liability. This is part of the general federal scheme that started to emerge in the early nineties of using directors as the first line of identification of a problem and, it was hoped, of defence against the problem accelerating. These relate to duties of compliance, of dealing with share issues -- issuance and redemption -- and wages.
What were the directors given? Under section 220, section 118 or the direct equivalents in all the statutes you have to consider, they were given the right to rely, first , on financial reports. That is simple. We are right back to accountants and financial statements. However, that is only half of the paragraph. The other half states that they have the right to rely on a report from accountants, actuaries, lawyers, notaries or other professionals. That clearly expands the reach of the statute to creating statutorily imposed liability on professionals other than the accountants and actuaries. This is a very strong and clear section and surely if felt the need to extend liability to those professionals, the liability must exist under the statute.
A simple example is that when audits are completed, lawyers provide audit confirmations, a key and crucial part of the audit information. We recognize at the bar that the federal statutes do not create joint and several liability, but we also recognize that federal statutes can limit it. Those who create the liability have the right to limit the liability.
We think it is necessary to recognize that this law will have to fit into the broader picture. We felt that we should explain to you that we do believe that changes at the federal level can fit with the provincial regime, whether the provincial regime amends or not. Constitutionally it can be done. Practically, in my view, it does not lead to forum shopping. There is a segregation between federally incorporated institutions that has a drive and direction from other sources of law. Banks are federal only and no jurisdiction shopping can arise.
In my view, if we await harmonization, we will be relegating the issue to non-action. We must look at what we can or cannot do at the federal level.
What is the practical effect? It is that one of three things can happen. The federal changes can be the first step because the provinces are considering the issue but have not moved on it yet. That could be the first step toward a trend to change throughout Canada that might recognize the need to limit professional liability.
Second, if it is the only step, it at least would start to bring the federal jurisdiction in line with our significant trading partners and, in fact, a very significant percentage of the rest of the world. The federal authority is the one most likely to interface with our international obligations, the corporations and financial institutions at the federal level being, by constitutional design, those which are intended to operate in the international or global forum.
Third, it means that we would be addressing the largest potential for claims, by dollar value and size, that can arise, because those will be the corporations at the financial level.
Therefore, in our view, the federal change can be practical and can be done with both legal and practical effect.
The next question is "Why?" We can do it, but why should we do it?
You must look at three factors to decide why you are going to change law initially. First, does the law continue to address the practical environment in which it has to be applied? Second, does the law continue to address the social and economic environment and the social and economic needs that were initially identified? Law cannot exist in a vacuum. It is intended to regulate and to guide social and economic conduct. Third, does it meet the rules of good law-making?
On the practical issue, this committee is significantly handicapped, as are those of us trying to assess it. The handicap is the lack of empirical evidence, a criticism that continually arises. I have never believed that lack of empirical evidence should be an impediment to good law-making when there is a plethora of anecdotal evidence, and where the international response has given a clear indication that there is a need to address the issue, and that the addressing of the issue is not to maintain the status quo.
There is growing evidence that there is an issue of insurance availability and cost. You have heard a significant amount of evidence that there is an effect on the cost and nature of professional services.
We believe that this is an appropriate area in which to intervene and consider amendments to the statue, because it appears that this method of providing restitution is becoming an economically inefficient way of providing restitution for the plaintiff. It is probably an inefficient allocation of economic resources.
In looking at the social and economic issues, we must recall that law must be periodically considered in the environment in which it is applied. Failure to do so distorts the purpose and intent.
In this case, there has been a fundamental change in the surrounding social and economic circumstances in which joint and several liability is applied. We have had the evolution of the nature of the professional firm, an evolution that has become forced upon the firms in many instances by the nationalization and globalization of the economic environment.
We have the evolution of the economic market in which professional services are provided in Canada. No longer is Canada a small, isolated backwater; it is an active and effective participant at the international level.
We have had an evolution in the nature of the consumer. The availability of class actions has increased consumer awareness and increased general education levels. This has changed the nature of the consumer of services.
To state that the same unchanged law should continue to be applied without considering the fundamentally different circumstances avoids the responsibility of law-making.
We must recognize that if law were perfectly crafted, consistently and perfectly applied, and immune from surrounding change, there would be no need for law reform. We suggest that this is not the case.
In this case, there has been an enormous surrounding change to the legal environment as well. We cannot continue to look at imposing liability in circumstances where the very basis for the imposition of that liability has changed.
I can easily think of four examples. One is contributory negligence. At the time that joint and several liability was initially imposed on professionals, contributory negligence was a complete defence and a bar to action. If the plaintiff contributed to their own damage in any manner, they were not permitted to take action.
Claims against professionals could not lie in tort. They were in contract only. Needless to say, the ability to limit the person's to whom you owe the duty of care and the nature and extent of the duty of care by contract is fundamentally different than the liability imposed by tort.
The extension of tort liability into an economic law has greatly expanded the areas in which liability can be imposed on professionals. All of the surrounding providers of services were gaining the benefit of incorporation. At the time that joint and several liability was imposed on professionals, the corporation was new. Very few corporations existed, and the vast majority of equivalent providers of services also faced joint and several liability due to the practicalities of the manner in which they were forced to operate.
With the recognition of these changes, an island has been left. Professionals have become an island while others around are able to protect themselves.
It is unrealistic to think that law which might have been fair and reasonable at the time of its imposition can survive such profound changes and remain a responsible balancing of risk and responsibility, because that is all it is.
I think that it has not been emphasized enough to the committee to consider what is happening with regard to proportionate liability or joint and several liability among defendants. Remember that the responsibility for the damage has already been allocated. I have heard persons raise the "but for" argument: But for you making the mistake, this would not have happened. However, a proper assessment and allocation of damages among defendants takes the "but for" argument into account, and part of what allocates the damages among the defendants is recognition as to whether that conduct would have prevented the damages at all.
So before we go to the issue of whether joint and several liability is applicable, the courts have already been required to allocate the responsibility for the damage, including an allocation of responsibility taking into account whether that party could have prevented the damage. Joint and several liability is purely and simply the reallocation of the risk of the insolvent or irresponsible defendant, not the reallocation of the cause of damage.
This has no basis in fault. It is really a form of lottery, and your chances in the lottery depend upon who your co-defendants are. It merely contributes to judgment-proofing among professionals, excessive caution in the provision of advice and the choice of parties whom you will act for, excessive reliance on insurance, and an unwillingness to take on certain matters. In some cases this might be for the benefit of the public, but over-caution is more often than not an increased expense for all to protect the few.
Good law making has to look at purpose and intent. It also has to consider the reality of application and strive for the greatest and most balanced fairness. You will not have perfect allocation in all circumstances.
In looking at how you would go about making changes, it seems to me that you have to look at the principles of good law. What is good law? It reflects and encourages desired social behaviour, it is a balanced and fair application, and it results in a reasonable result in the majority of applications. In this case, you are looking at an adjustment of the fundamental tort principle that the balance of fairness will be restitution for damages to the claimant, but you should recognize, when looking at this, that this is a new concept. This is not the preservation of a venerable, well-established legal principle. In this particular case, you are looking at this principle in a circumstance where there is a somewhat unplanned result because of expansion of the surrounding liability.
We need to remember that the imposition of joint and several liability, as to liability among defendants, is not targeted at the professionals. Effectively, the professionals were just left hanging because we are, in effect, the only providers of goods or services who have two levels of liability; joint and several liability among the defendants, and the secondary level of liability because we are forced to practise in a general partnership.
In our case, we looked at whether it was fair and reasonable to maintain the status quo as being the first step of consideration. We were concerned that in this particular case there is a glaring discrimination. The federal law has not particularly created it but does participate in it. Professionals are effectively the only persons under the act who, in the end result, have no due diligence or reasonable care defence. Why does this occur? Directors and officers have a due diligence and reasonable care defence. The due diligence and reasonable care defence is to pass the liability on to the professionals; that is, they get to rely on the reports of professionals.
The professional who actually undertakes the provision of the services probably does have a due diligence and reasonable care defence. As has been pointed out on many occasion, and as this committee is well aware, the law has not been unreasonable in the imposition of law on professionals. No one who has stood before you has said that the courts are fundamentally distorting the principles on which liability should be imposed. We may have personal concerns as to whether the law has gone too far in one area or another, but on balance there is probably not an unfair statement as to when liability should be imposed on a professional. However, the difference is that with professionals there are a number of parties who have no due diligence or reasonable care defence, and those are the partners of the person who has made the mistake.
Notwithstanding that those partners might have put in place reasonable, responsible practice standards and generally effective monitoring, and have acted with care and diligence in ensuring that their firm was providing the best possible professional service they could within the practicalities of the circumstances, if a partner makes a mistake, they have no due diligence or reasonable care defence. It becomes strict liability as far as those partners are concerned.
It is all well and good to say that insurance is the protection for that, but we pay for insurance; insurance is not a gift, and insurance is paid for by the innocent parties who did not make the mistake. The vast majority of professionals make no significant mistakes and no mistakes that lead to damage claims through their career.
Another problem that the professional faces is that the professional seldom gets to select the other participants; that is, their co-defendants. It is impractical to select your retainers based on the net worth of the other participants. We usually look for honesty and competence, not net worth. As a consequence of that, if we do become forced into having to consider, as a defence, that we are sure that we have solvent co-defendants, then it will become more and more difficult for audit and professional retainers to be obtained by young companies, the new firms getting going or the young professionals getting started. Everyone will flock to the large, established and wealthy. I am not sure that that is a societal result that we intended.
We also need to remember that we are applying law in an international arena now, and the others are looking at the change with favour. Changes are being made in many jurisdictions with different responses. There is a variety of answers, but they are being made.
We should now look at how to do it. We have so far looked at whether you can do it, and it seems as though you can. We have looked at why it should be done and I think there are some compelling arguments as to why you should at least consider changing the law. The next question is how to do it.
You at least have an easier question than the provinces because you are reasonably contained. In fact, given the consistency of the statutes and the relevant sections, it will probably take a single drafted section that can be applied without a great deal of concern in each of the statutes you deal with -- a much simpler job than in the provinces.
It would probably be desirable if there were coordination with provincial efforts and wording, but in my view it is not necessary. Therefore, you can probably make the amendments that you need relatively simply, and that is a good start. The question is what is to be done. That gets a lot harder. This is a very thorny patch indeed.
When I looked at the options paper, I thought I had a clear understanding of at least the problem, but when I started looking at the solutions, I realized how thorny it was. I am going to add to Mr. Gervais' comments on this. Having seen the evolution of the options paper, I think the end result is a truly excellent production. Its scope, balance and potential choices were comprehensive, well-thought-out and well-expressed, and this from someone with a lot of background on the topic. Your staff did a fabulous job.
As a matter of fact, I think they did it too well. Here was my problem: I would start reading through an option and say, "Yes, that is it. That is the effective and responsible answer to this problem -- except for." With every one I read, I had to do the same thing, because you did your job well. The problem that we have is that attached to each of those options are compelling reasons why it might be an acceptable answer, and some very stringent limitations.
So I stepped back and decided that we have four basic options. First, we can maintain the status quo. Second, we could just eliminate liability. Third, we could kick it over to the provinces and let them take the problem on. Fourth, we could consider rebalancing risk and responsibility.
At the federal level, there is only one way you can do it. You do not have other choices. You have to look at proportionate liability because it is all you have within your jurisdiction, and you have two choices there: full or modified.
Should we maintain the status quo? I would suggest that the status quo has probably degenerated from a meaningful recognition of a social, economic and legal environment to an expensive, arbitrary insurance scheme that fails to recognize the changes that surround the law.
Should we eliminate liability? That is probably not a responsible reaction. It probably harms the least able, and I think that there are still some vestiges of reason for continuing to create some sharing of liability among those who might potentially be more able to at least assess it, if not bear it.
Kicking it over to the provinces is probably irresponsible.
We end up with having to consider something in the middle ground as being the most reasoned and responsible approach.
If you are going look at rebalancing, you have to remember one fundamental, underlying precept of modern law. Society has, recently but very definitively, decided that we will provide some safety net in law by providing a protection of restitution for damages caused, and particularly for those least able to bear the damage. We then must look at the allocation of responsibility underlying that fundamental precept of "fair and reasonable." The initial balancing must be the balancing of responsibility for cause, and that is the one that exists without joint and several liability. It exists because the law is responsible when you are looking at a claim in tort liability for allocating among the persons who caused it and for considering in that allocation the "but for" argument.
Therefore, if you are looking at proportionate liability, you must not forget that this is not eliminating the fair, reasoned and reasonable allocation of responsibility for cause in the first place. Proportionate liability continues to recognize duty and responsibility for the provision of professional service. Joint and several liability probably eliminates much of the incentive to take some of the other measures. Proportionate liability removes many of the reasons why professionals would judgment-proof themselves.
As an anecdote, I sat around the board table of a rapidly breaking up professional firm that was facing considerable liabilities which, I am sure it will relieve you to know, in the end result we did pay. However, at time did not know that we could. With 30 responsible professionals in the room, I found out I was one of two who were not judgment proof.
Continuing to impose joint and several liability merely forces professionals to consider other protections that are probably socially unacceptable. Proportionate liability does not eliminate the promotion of responsibility for your own actions. You will continue to be responsible for your share of the damages that you have caused.
In my view, proportionate liability, as opposed to joint and several liability, removes this nonsense. I will exaggerate a bit to make a point. You must understand that with imposing joint and several liability you are putting in place the absolute nonsense that I as a professional should be responsible for assessing the net worth, financial capability and willingness to pay of someone I was not retained to evaluate or control. By imposing joint and several liability you ask me to assess my co-defendants to determine whether they can and will make payment of their proportionate share of the restitution. I would suggest, as a professional, that I was not retained to do that.
However, if we are looking at proportionate liability, what form should we look at? It is easy to say, given the comment I just made, full proportionate liability, but we cannot forget that fundamental precept of modern law. We moved many decades ago from caveat emptor to recognizing that we must have some network to protect those less able to protect themselves. It is a cost we all recognize in society and one that we have all been willing to bear.
In this case, when I look at a modified form that will take that into account, I cannot tell you that any model is perfect. Ms Smith did a fabulous job in giving us a number of models, but I could not choose one. We looked at a thresholds. What is a threshold? A threshold means that you will only get whacked for the little stuff and not the big stuff. We looked at capping. Capping is nothing more than another form of insurance. "Sophisticated" is the word that was used. There is no simple choice.
Therefore, we are probably best to go for something that resembles consistency in law. A number of different statutory provisions are considering the same issue; namely, who is it that requires protection? Securities law and consumer protection law does that. There are a number of areas which are reasonably compatible in concept and scope because they deal with investment and financial matters, and trying to find the appropriate means of protecting those who cannot. Given that we cannot use some of the consumer protection issues -- which is the right to put something back if you do not like it -- we are probably forced into the other model.
The model which is emerging as the most consistent is some form of assessment of sophistication through a means test. The only ones I could think of that were other than means tests were amount of loss, percentage of loss or educational levels and those have more of a degree of arbitrariness than any other would. So means probably makes as much sense as any, although I will not tell you it is perfect, because it is not. There will be the little old lady with the large estate who loses a substantial percentage and was not able to assess the situation. However, no law is perfect and no law will be applied perfectly. Nevertheless, it is the one that is most consistently emerging as the most effective test. It is being used in securities law and many other jurisdictions. Please do not ask lawyers to tell you what numbers might work. As a commercial lawyer, I have a fundamental view that numbers are not my job.
We must remember that law is never intended to protect fully. The cost to society would be exorbitant if we fully protected. Law was never meant to insure people against making a bad choice. Law, in this case, is intended to promote the means to make the choice and to provide some basic level of protection for those who are the least able. That is the reasoning that the bar association went through -- or certainly the committee that had the opportunity to listen to me on the subject -- and why we reached the conclusion that maintaining the status quo is not a reasonable approach and that some form of modified proportionate liability would most effectively represent the desire and need of law and probably provide the most reasonable and effective application of law in the current legal and societal environment.
The Chairman: I wish to thank our witnesses from the Canadian Bar Association for the effort that you put into your presentation. I also wish to thank Ms Manzer and other members of Mr. Hoyles' staff for the help you provided Margaret Smith of the committee. Between Ms Smith, yourselves and the CICA staff, we also feel that we got a paper that is a good summary of the issue. The paper was explicitly designed not to favour any option. That was to be the purpose of these hearings. We appreciate your support.
Having heard Ms Manzer for the second time, I understand why some of my friends have her as their counsel. She certainly presents a compelling argument.
You commented on the fact that changes are taking place elsewhere in the world. Clearly, changes are taking place in the United States. There is some view that changes are unlikely to take place in the U.K. Does the fact that nothing changes in the U.K. matter? If the U.K. maintains the status quo, is it practical for Canada to proceed to make the changes that you have discussed?
Ms Manzer: First, I believe you will find that there is the start of at least an underground if not an overground movement to reconsider the position in the United Kingdom. Presently, the United Kingdom is facing a net export of professional service providers to Jersey and other jurisdictions that have limited liability protection. That has brought the issue to the forefront in the U.K. and there is reassessment of the issue there.
Second, it is both practical and potentially beneficial if we step forward, follow our largest trading partner and identify a system that provides a better and a fairer balancing of liabilities.
The only effect that a jurisdiction can have -- that is, if they chose to make change -- is that they will become more consistent with the larger jurisdictions and will make the environment more effective for their own economic purposes. Those jurisdictions that fail to make change may well face what the United Kingdom is facing now; namely, a decision of many professional firms to attempt, to the extent possible, to locate outside of those jurisdictions. I believe you will see a net export of the provision of professional services outside of the jurisdictions into those with the elimination of joint and several liability.
If you are doing a global audit, it is relatively easy to station in one position. Conflicts of law provisions are such that if someone attempts to bring the action in a jurisdiction where there continues to be joint and several liability, there may be difficulty bringing the action forward because the ability to enforce law against a party performing the service elsewhere requires an equivalency of right and remedy.
The Chairman: The issue of limited liability partnerships is obviously a provincial jurisdiction and deals with the problem among partners, not among defendants. You did not comment on the limited liability partnership issue because this is obviously an issue of provincial jurisdiction.
Am I correct that in the testimony you gave at our first round of hearings last fall the bar was in favour of provinces moving to limited liability partnerships? Is it also correct that it is not covered here because it is a provincial jurisdiction issue?
Ms Manzer: You are correct. It is not covered here because it is a provincial jurisdiction issue. At the time of the hearings, the bar did not take a position on whether limited liability partnerships should be pursued. They did indicate that it was a potential solution to the problem at the provincial level.
Since those hearings, committees have been formed in Ontario and British Columbia which are looking at the issue at the provincial level and are starting to have discussions with provincial authorities advocating the formation of limited liability partnerships.
The Chairman: Are you currently at the embryonic stage?
Ms Manzer: We definitely are.
Senator Kelleher: At the outset, I should like to return the compliment Ms Manzer paid to our staff and say that she has made an excellent presentation.
It is fair to say that there is sympathy for the idea of implementing some form of proportional liability with some form of an exemption for people who may be less sophisticated, have less financial means, et cetera. What type of person do you personally see falling into the exemption category?
Ms Manzer: I have written a great deal on partnership law over the years. I tend to represent limited partnerships and limited partners in very difficult situations where they have suffered loss, so I have at least some feel for their view of the world and what they generally can or cannot bear in terms of loss.
I believe a means test is the appropriate test. I do not believe there is any other test that will be as consistently fair, although it is not completely fair.
In terms of the level of means, I would support the fundamental requirement of removing an RRSP and a house, which is what someone will need to ensure that there will be food on the table in the future.
If I were doing a means test, I would subtract from the means test the RRSPs and the home, and pension should go without saying. I do not find the level of $100,000 disturbing. I do not know whether it should be $100,000, $150,000 or $200,000, but I believe that to go less than $100,000 is probably risky.
I also advocate an either/or test, as the U.S. has done. In the U.S. it is a net worth or an income level. I personally believe that that should be used as well. Whether we like it or not, in this country a higher income tends to lead to at least the ability to access professional assistance and/or tends to arise from greater sophistication in financial affairs.
Therefore, I suggest a twofold test, being an and/or test, net worth or income. I do not know what the suitable income level is because I do not know what the average is in Canada. However, the $100,000 range does not cause me discomfort.
Senator Hervieux-Payette: Let us change the name of the company from Bre-X to Bre-Z and apply your mechanism to the lawyers, auditors, geologists, engineers and brokers. If a pension fund administrator, a lawyer and a little old lady have invested from $1,000 to $1 million and they wish to go before the court, how do you apply your modified proportional formula?
Ms Manzer: In my view, there would be a range of defendants. The court must allocate among the plaintiffs and the defendants. It must say who caused what proportion of this damage. Was the investor negligent in that the information was available but ignored? I have often sat in a room with investors who are raising extreme complaints about an investment only to discover that they have never read the offering memorandum or prospectus.
A percentage will be allocated among the plaintiffs and among defendants. I now have my percentages.
As to the plaintiffs, unless and until one of those defendants cannot satisfy it, proportionate liability and means is irrelevant. A judgment has been delivered and they will try to get their 10 per cent from one person and 25 per cent from another. If all parties can satisfy the judgment, there is no issue.
In this example we will assume that the engineer cannot satisfy the judgment. Proportionate liability then comes into play only because I have to reallocate this $1 million, for example.
I then go back and look at my plaintiff group. Those plaintiffs who do not meet the need for protection test simply do not get to look at that lost amount. That lost amount is gone for those people because it has been decided that all of these people are innocent of the responsibility of this person.
We return to the plaintiffs and say that because certain of them should have been able to understand this and bear this, we are not going to help those plaintiffs as a result of the fact that this person could not ante up the cheque. However, there is a group of plaintiffs who we have decided need more protection than the others, so we will reallocate among that group of people as a result of the fact that the cheque was not written by the geologist. If the geologist's share was $100,000 and the unsophisticated people had lost only $10,000 of it, that is 10 per cent. We take 10 per cent of what the geologist should have anted up and divide it proportionately among the unsophisticated people. That is how it works.
Therefore we have a group of plaintiffs who will recover against those they can recover against in the right percentage; we will just not give them the extra advantage of dipping against the unsophisticated group if someone cannot ante up. The interest of the unsophisticated group in what the geologist did not pay will be kicked in in the proportion of the loss on this side.
This formula is not difficult to apply. There is not a great deal of complexity to its application. It is formulas once the initial damages are set by the court, which they must be.
Senator Hervieux-Payette: The judge will set the percentage?
Ms Manzer: The judge must allocate the percentage of responsibility for damage. There is no choice to that. That was a misunderstanding in some earlier presentations in that people said this would add to complexity. It does not. There must be an allocation.
Senator Oliver: You have talked about some of the legislative things that can perhaps be done. At the same time that we legislators have been looking at this particular problem, so also have our courts. I should like to hear from you the effects of some of the court decisions such as Hercules on the liability of auditors, what has gone on after Hercules, where you see the courts going, and how you were influenced, if at all, by what the Supreme Court is doing in cases like Hercules in the conclusions you reach today.
Ms Manzer: If you were a provincial authority, that would be a very difficult question. However, given the scope and limitations of what we are reviewing today, the answer is quite simple. The court is focusing on the imposition of liability in the first place. That is the first thing we illustrated, that the courts must decide, first, whether you caused a damage. Second, they must decide, if a damage was caused, whether you were part of the cause and, if so, to what percentage. The third thing they must decide is whether the person claiming to be able to recover is a person to whom you owed a duty.
That is all the courts have dealt with and effectively all the courts can deal with. The court can only say that the person before it has the right to recover a certain percentage of damage in a certain proportion from certain people. The court then goes away.
What is left is whether the person the court said must give some of the money can do so. That has nothing to do with the court. The court has no influence on it; the court has no say in it. It is simply a matter of fact. Can one of the defendants that was tagged with liability write the cheque, or will they write the cheque?
The fact that we have, at best, temporary stabilization of the circumstances in which liability will be imposed does not really affect the present discussion. Because professionals are forced to practise in general partnership, we have a number of wholly innocent parties who have no due diligence or reasonable care defence. Those are the persons who, in the end result, you are placing the liability upon. That is why this was retitled, I suspect. Although no one discussed it with me, my assumption was that it was a recognition that proportionate liability has a disproportionate effect in interest to professionals because of our second tier of liability, which is our joint and several liability at the partnership level.
With respect, I do not think the court trend has much effect on the discussion here today because we are talking about what happens after the court has made the decision that the partner in Vancouver, when I sit in Toronto, has made a mistake. Perhaps the circumstances in which the mistake will be applied is a little better understood and more stable, but it certainly does not change the effect on me, the innocent party in Toronto, that I am now jointly and severally liable, and not only with my partner but with other defendants. It also does not affect the concern I have raised that with joint and several liability among defendants you are asking me to be the caretaker of co-defendants who I often do not choose. The fact that the courts are stabilizing when we might be liable does not change that at all. It means that you are asking me to be responsible for the nature of co-defendants and both their willingness and ability to pay.
Senator Oliver: If the court decides how far they will extend the duty, they may extend it to this person that you want to give the means test to, or the sophisticated investor, so the courts keep extending the duty to include more of those people.
Ms Manzer: There is absolutely no question that that has happened. There is no question there has been an expansion of responsibility. The stabilization as to the tests that need to be met for the due diligence defence are of help, but only to the individual actor. With respect, we are not here to discuss the responsibility of the individual actor. We have all accepted that responsibility. Professionals have at no time made any representation that we should be relieved from responsibility or liability for our personal actions or personal capabilities. We have simply stated that we think there is a growing fundamental unfairness in that the duties and responsibilities of others are visited on me as a partner.
Senator Callbeck: I compliment you on your presentation. You mentioned that we should not avoid making changes because there is no empirical evidence to show that joint and several liability creates problems, but that there is a great deal of anecdotal evidence. Can you be specific there?
Ms Manzer: One of the criticisms that has regularly been levelled at the proponents of change is that no one has been able to bring out statistically significant evidence that there has been an increase either in the cost of insurance for professional services or a decrease in the availability of insurance coverage.
I attempted over the summer to speak to a number of members of the insurance industry because my genuine belief is that some information probably does exist but it will simply not be disseminated. The insurance industry will not share whatever statistical information it might have.
I have done a fairly good examination around the world, as best you can through the Internet and the abilities of students, to determine whether empirical evidence has been gathered anywhere so that I could say that between 1970 and 1990, because of the imposition of this, insurance premiums have increased X amount or there has been this net increase in professional services.
First, it does not exist. Second, I have some doubts as to whether that type of statistical analysis can be effectively done because there are so many other issues that impact on the cost and expense of delivery of services.
I have been trying to interest academics in completing the research. I have been trying to convince some universities to let me do a part-time Ph.D. I said I would do the research if they let me do that, but I have not been successful.
The empirical evidence does not exist. I do not know whether it can exist. When empirical or statistical evidence does not exist, you are forced to consider anecdotal evidence, and I think it is foolish to ignore such a proliferation of anecdotal evidence. If you have a consistent and significant voice telling you that this is increasing the cost of the provision of professional services, this is resulting in an increase of cost of insurance, this is resulting in a decrease in availability of insurance, after a while you have to start believing it even though no one can point to a chart and show you a trend.
The Chairman: You responded to Senator Kelleher when he asked you to give your personal judgment, not the official judgement of the bar, on what the means test ought to be. When you used the $100,000 to $200,000 range, were you using that in the context of the U.S. model, which is a net worth test, or in the context of a CDIC test, which has nothing to do with net worth but has to do with the amount that an individual, regardless of their net worth, gets, and it is proportional beyond that? I could have read your answer either way and I want to be sure I understand.
Ms Manzer: I definitely meant a net worth test.
The Chairman: I suspected the obfuscation was not accidental.
I understand that the U.S. law and some Canadian securities law applies a net worth test. On one hand, it is the kind of law that makes sense. On the other hand, if you look in terms of Canadian financial institutions, the CDIC rule is essentially an insurance rule which is not a net worth test but a maximum amount of insurance. What do you see as the pros and cons between those two models? Frankly, I can argue either one quite convincingly to myself.
Ms Manzer: Unfortunately, so can I.
The Chairman: It seems to me that the CDIC one has the advantage that Canadians are used to it and it is a common model. However, it also adds up pretty quickly. Precedent elsewhere, like in the United States and in Canadian securities laws, would argue for a net worth test.
Ms Manzer: The decision which has been made in many jurisdictions to go with a net worth test is probably less arbitrary and probably a better reflection of what it is intended to reflect. I personally accept that that is likely the case. Either one is will be rough and ready. Either one will result in rough justice that will have, on either end of it, a misapplication or unfairness. There is unfortunately not much you can do about that.
In my view, whether we like it or not, with the way society rewards success and results, the net worth test will probably more effectively get at the individual who will be better able to understand and assess and absorb risk than the insurance model of the net flat amount. Of the two probably acceptable models, I felt it weighed more heavily toward what you are trying to achieve.
Second, the models that are closest, in terms of the law that is similar, are the models that use net worth. There is some good argument in law-making for consistency. The securities model is probably the closer model if you look at what gives rise to liability in this case which is, fundamentally, matters dealing with shareholdings and investment.
If you look at those sections of the CBCA and the Insurance Companies Act, you will see that by and large they do relate to the financial affairs of the corporation or the institution from an investment viewpoint, so I suspect that consistency is better achieved by going with the model that relates to investment.
The Chairman: I wish to thank the witnesses very much for appearing here today. You have been very helpful.
In our last session Senator Kelleher raised the CDIC model and asked the CICA to respond to it. I thought the simplest way to get that response would be hear them briefly now. We asked them particularly for their numbers.
Mr. Walker and Mr. Wilkinson are here to make that specific response only.
Mr. Ross Walker, Chairman, Legal Liability Task Force, Canadian Institute of Chartered Accountants: I have some brief remarks reflecting on our discussion of two weeks ago and our subsequent re-examination of our proposal.
It is our position that full proportionate liability is the appropriate and most fair method in all circumstances to rectify the problem of joint and several liability. We have, however, been persuaded by your committee that a modified proportionate liability regime is required to protect the small investor. By "small investor" we mean an investor, lender or creditor who is an individual who often does not have the wherewithal to make well-reasoned risk assessments and investment decisions.
I would like to mention briefly again matters that Mr. Donovan and Ms Manzer drew to your attention this morning; that is, that joint and several liability is a problem and creates unfairness only when co-defendants are unable to pay their proportion of a judgment. In cases where all co-defendants have sufficient resources, all plaintiffs will be fully paid in accordance with the court's decision.
In our modified proportionate liability proposal, where some co-defendants are unable to pay, joint and several liability would apply to small individual investors and proportionate liability would apply to others.
When we last met, we proposed a net worth test as a method of clarifying the type of investor. You asked us to think about the possibility of using something which was referred to as the CDIC approach or, to put it another way, covering a certain amount of loss of any investor.
We have spent a considerable amount of time examining this. We have concluded that it is not a sound way to proceed. It does not focus on the situation that we are all trying to address, that of the small investor. It is a very broad approach that would cover very wealthy individuals and corporations who, in most cases, have ample ability to make reasoned investment decisions.
As well, the CDIC protection is an insurance program where substantial premiums are paid into a fund to look after claims. In our situation, there would be no premiums and no fund. The economics of such a proposal just do not hold together.
We also have serious concerns about this approach because, over time, it would become known in the marketplace that auditors will make investors or creditors whole, up to such fixed amount of money. In other words, the auditors will become insurers for all investors, including large investors, and continue to be the deep pockets available to satisfy judgments, and all of this would apply against a backdrop of virtually no commercial liability insurance being available to the major accounting firms.
The CDIC approach would also be out of sync with the way in which modified proportionate liability has been handled by our major trading partner which adopted a net worth test. This CDIC approach would sweep in so many claims that it would provide very little help in addressing the existing unfairness and we have therefore concluded that it is not sound.
Using a net worth test to distinguish between classes of investors is a well-entrenched concept in Canada. There are numerous examples in legislation, regulations and policy statements of the use of a net worth approach. Canadians are regularly required to provide net worth estimates to bankers and other lenders.
Accordingly, after reflection, we still believe that a net worth test is the most effective means of identifying a small investor. It works because it targets the group we are both trying to protect. The issue then is to determine the details of the net worth test. Our original net worth proposal of $100,000 excluded the principal residence, home furnishings and automobiles of the plaintiff.
We also suggested that the plaintiff would have to have lost more than 10 per cent of their net worth to qualify. We proposed this believing that most people could stand to lose 10 per cent of their assets excluding, of course, their house, furnishings and automobile, without the loss impacting materially on their lifestyle or net worth. We understand that this 10-per-cent test may be giving some of you difficulty. We are therefore prepared to eliminate it which would mean that even the smallest losses would have the benefit of joint and several liability.
We also heard your committee's concern that, because Canadians have a reasonable amount invested in Registered Retirement Savings Plans or registered pension plans with their employers, the value of these assets should be considered in calculating net worth. We now propose that these assets be excluded in the proposed test with the added benefit of making the determination of net worth much simpler and more straightforward.
With these modifications, we propose a net worth test of $100,000 which would exclude five of the most significant assets owned by Canadians -- the principal residence, home furnishings, automobiles, Registered Retirement Savings Plans and pension plans. This is a significant broadening of the definition of small investors who would continue to benefit from the protection of joint and several liability.
We have been doing some work on determining the net worth of the average Canadian. Based on a review of the 1996 estimates on the national balance sheet accounts, according to Statistics Canada the average net worth of Canadians is $85,000. This amount includes all assets; the principal residence, cars, household furnishings, Registered Retirement Savings Plans and registered pension plans. Given that this $85,000 figure includes the five major assets which we have excluded from our proposal, we believe that a net worth test of $100,000 would bring in virtually all the small investors that we are both seeking to protect.
We are pleased that the committee appears to be sympathetic to the need to reform joint and several liability. As indicated in much of the testimony before you, this is a necessity in Canada. The exact details of the modifications are up to you to decide. We respectfully submit that the appropriate method to identify a small investor is the net worth test, and we have given you our best advice on how this test should be calculated.
Our proposal today is a significant broadening from our proposal of two weeks ago, and we believe that our revised proposal is a fair and reasonable one for both plaintiffs and defendants.
We look forward to the conclusion of your deliberations and thank you for inviting us to appear before you again today. We would be happy to respond to any questions.
Senator Kelleher: I wish to make the observation that the two weeks of reflection time has been well spent, and I commend the witnesses for that.
The Chairman: I have a technical question. Your analysis of the data is helpful to us. I understand why you went to the $85,000 number, which is the wealth of the average Canadian. It is the easiest number to get at. On the other hand, the average Canadian does not get caught in these problems because the average Canadian is not involved in investing.
It would be helpful if we could get a corresponding figure on the net worth of Canadians who are likely to be affected by the change in the law. Canadians who will be affected by the change in the law are largely people involved in making investments or are active in some kind of investment program outside of RRSPs, obviously, because they will be excluded anyway.
I do not know that it is possible for StatsCan to give us that data, but will you look at that very narrow question? I am attempting to get a better definition. I do not dispute anything you said about the $85,000 or its implications. I would like to get a closer definition that would enable us to understand the percentage of Canadians who would be affected by this change and whether we are picking up most of them or just a few of them. My instinct is that we are probably picking up a lot, but I would like to quantify "a lot" if that is possible.
Mr. Walker: We will do some further work and provide the answer to your staff.
The Chairman: When this committee, on two separate occasions -- both to no avail -- recommended to the government that it have the political courage to go to co-insurance with respect to deposit insurance, we were moved by the fact that 90 per cent of the people who have money invested in deposit-taking institutions have less than $30,000 invested. Our view was that if you give 100-per-cent protection on the first $30,000 and have a sliding scale thereafter, right away you cover 90 per cent of the people who will be affected anyway. The others make an increasing contribution as they receive more. I am attempting to make some sense of those numbers.
I understand from StatsCan that that may not be possible to do, but if you could look at that over the next week that would be very helpful.
Mr. Walker: We will.
The Chairman: Thank you for appearing today. As Senator Kelleher said, the time for reflection was obviously as helpful to you as it was to us.
The committee continued in camera.