Proceedings of the Standing Senate Committee on
Banking, Trade and
Issue 12 - Evidence - October 28 Sitting
OTTAWA, Monday, October 28, 1996
The Standing Senate Committee on Banking, Trade and Commerce met this day at
5:05 p.m. to examine the state of the financial system in Canada (professional
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: Our topic this evening is joint and several liability, which
senators will recall arose out of the blue in Calgary several months ago. We
will be holding hearings today, tomorrow morning and Thursday morning on this
Our first witness, for purposes of giving us background information on the
study, is Mr. John Campion of the law firm Faskin, Calvin.
Mr. John Campion, Barrister and Solicitor: Good evening. I am accompanied this
evening by Ms Victoria Stewart.
The Chairman: In light of the fact that we are due to go to Australia via video
conferencing, perhaps, Mr. Campion, you could use the half hour to give us an
overview of the issue.
When we have completed our discussions with the individuals from Australia, we
may continue, either formally or informally, with Mr. Campion and Ms Stewart. I
would be quite happy to do that, depending on their flight schedules.
Mr. Campion: Senators, you may wish to use the brief as a guide as I give you a
brief overview of how it is organized.
Under tab 1, I have set out the primary goals and 10 propositions which I
believe you should consider when grappling with this issue. Behind tab 1 are a
series of reports and more expansive discussions around which the propositions
Part A, as you can see, deals with the audit function and the role of an
auditor. I am presuming that is now well behind you, but when you come to
making your decisions, this part may be of some assistance.
Part B outlines problems facing the audit profession, which you have heard about
for some considerable time. I will not spend time on that.
Part C is more important because it deals with factors contributing to the
liability problem. I deal with this on the basis that I have looked at, in
particular, former Mr. Justice Estey's report from the CICA and I am, in
effect, commenting upon it. In so doing, I conclude that the problem arises from
joint and several liability. However, joint and several liability is only a
factor, there is more to it.
Part D deals with generally accepted auditing standards and generally accepted
accounting principles, known as GAAS and GAAP in the industry.
GAAS and GAAP represent a strait-jacket within which auditors perform their
work. If they stay within that strait-jacket, they are unlikely to be found
liable. That provides a defence in most actions, because those standards which
are written, are clear and known. I will come back to that.
Part E contains the context within which you will need to understand the urgency
of the problem or the lack of urgency of the problem. I will come back to that
fairly extensively, but since it is summarized under propositions, I do not
propose to go through it now. It is a complex backdrop which you must have in
order to understand the problem of joint and several liability, and
proportionate liability, which is only a small portion of a much larger issue.
The proposed solution is described under tab F. That section contains some
philosophical problems which I do not have time to go into.
Senator Angus: On whose proposed solution are you commenting? That is not your
Mr. Campion: That is the proposal of Mr. Justice Estey. I have a recommendation
to make, not a solution to offer. When I get to proposition 10 you will
understand exactly what I mean.
The factors to consider if proportionate liability were to be adopted begin at
page 54. There is a lengthy discussion of those. They are set up in a fashion
to be found easily in tab F. You can see some of the issues which may arise if
you went to a proportionate liability system. That is a critique and an
overview of the benefits.
Page 62 sets out modified forms of proportionate liability in which you may have
some concern and interest. I will deal with those in my propositions.
Thus far, we have dealt with proportionate liability, its context, whether it
should be put forward or not at all, and some variations of it.
Tabs G, H and I examine alternatives which could be either concurrently dealt
with in this issue, or could be used to replace the notion of proportionate
liability. Each of them is discussed and criticized. They are complex and can,
you will see, give you some broad understanding, rather than trying to tie them
down to the individual circumstances where they have been used.
There is a discussion of contractual limits of liability, and what that concept
may mean. Then there is a discussion of directors' and officers' insurance, in
short, creating a permanent, second, deep pocket against which, regardless of
the personal circumstances of a director and officer, or of the corporation,
there would remain a second fund against which to claim in the event that the
financial information of a particular company is somehow wrong.
That is the structure.
The Chairman: Let me thank you for the incredible amount of work which has gone
into this. Regardless of the outcome of these hearings, this issue will not go
away in the immediate short term. As a background document, this will be most
helpful to us. Thank you for taking the time to put it together.
Mr. Campion: Thank you, senator. I would like to mention, before I turn to tab
1, the people who helped me deal with this. Victoria Stewart, who is with me
this evening, is a barrister at Fasken Campbell Godfrey, and a former law clerk
in the Supreme Court of Canada. Robin Roddey is a barrister at the same firm,
and a former law clerk at the Ontario Court of Appeal. Louise Greig is a
barrister and research lawyer at our firm. They have made varying contributions,
all of them excellent. The mistakes are mine and the good parts are theirs in
dealing with the appendices.
Senator Angus: I have not studied your paper, but I agree that it looks like a
most useful document. From listening to your introductory remarks, your focus
appears to be chartered accountants and responsibility for wrong financial
information, as opposed to joint and several liability in the larger sense, the
liability of engineers, architects, lawyers under civil law. You confine your
perspective to the particular amendment that former Justice Estey was
advocating at our Calgary meeting.
Mr. Campion: I do.
Senator Angus: That is a fairly narrow perspective. We have tried to broaden it,
but I think that much of what you say will be applicable in the larger sense.
You may find us asking you to broaden your focus.
Mr. Campion: I understand. I am prepared to deal with it in the broader context.
Some of the same principles apply. There are hooks around which, in my view,
your analysis should be made. If there is any value here in the broad overview
that you will get in the next half hour, it is to look at those hooks and to
assess whether they are the right kinds of hooks for the broad view. In my view,
they are. Let me deal with them now.
I deal with my goals at page 1 of Tab 1. I do not propose to discuss them here.
I will simply leave them with you.
Let me deal with Proposition 1, which I think is important.
The CICA, in my view -- and I have considered this at great length -- has
identified a significant problem affecting the legal position of auditors in
our commercial life in Canada. Their problems are unique when compared to all
other professions because they face indeterminate liability from an
indeterminate number of people more often, and that as part of their regular,
everyday business affairs. They are the intermediary between management and
corporate boards of directors and a viewing public, whoever they may be,
lenders, shareholders, investors, or people who might want to purchase a
Because of the size of the capitalization of these businesses, and the fact that
auditors are the last clear chance between one group and another group, and
take on such serious responsibilities in rendering their opinions, they are
unlike every other profession. It does not mean that the principles are not
applicable elsewhere, but auditors have a unique problem. All that means, in my
view, is that you should deal with it with an immediate and sustained plan of
an integrated type.
I will say this with respect to former Justice Estey's report: I characterize
the problem differently. I think it is less severe than he has said in some
respects, and I think the answer to it lies in a more sophisticated analysis
and proposal. That being said, the auditors have identified the problem and, in
my view, if you can -- and I make a proposal in part 10 -- you should deal with
it. I say this over all the other professions who might have similar claims of
concerns, because of the audit function being so important commercially on one
side and being so precariously positioned on the other, ever since a serious
legal change. As I am sure you are well aware, in 1964, it became possible to
collect damages for economic loss for negligent misrepresentation. I will come
back to that in a moment, but this problem, therefore, for auditors, has
clearly been identified since that time in Canada, and not before, because
there was not the ability to claim economic loss for negligent misrepresentation
prior to that time.
The crescendo of issues is relatively recent, and the law has been struggling
against it. The question now is: Have we reached a high water mark or not? I
leave that to you, but there are some things which I think you should consider
in considering that question.
I would ask you to turn to Proposition 2. The so-called liability crisis, upon
which the CICA founds its plea -- and they use that word -- should be
considered in a broader, historical, legal and economic context. That will
change the urgency of the problem and the scope of the solution, but it does not
change, in my view, the need to deal with it now.
In Canada, successful cases, after trial, against auditors are very rare. This
is in contrast to the United States where there are more such cases. There is
obviously a fundamental difference in our legal systems as well. There is no
jury system in Canada for these kinds of claims. The jury system, as we know,
in the United States is an instrument of oppression and high risk that most
companies with deep pockets can afford to sustain. We do not have that here in
Canada. A trial of this complexity would normally be before a single judge who
would bring a more conservative and balanced approach, in the main, to these
issues. That is particularly so with respect to deep pocket liability.
Let me make this second point in contrast to the CICA position. The existing
series of lawsuits, which the CICA raise, in which extremely large damages have
been recently claimed against them, arose, in my respectful view, in large
measure, although not completely, out of an extraordinary market occurrence,
that is, the dramatic and unprecedented failure of the real property market on a
worldwide basis. In economic terms, in my view, the level of this market
failure ranks with the events of the South Sea bubble and the stock market
failure of 1929, and any number of such dramatic failures that we have seen
since the beginning of real capitalism in the 1600s to today's date. These and
other events were driven by excessive speculation and occur very rarely. That is
significant. Absent this failure, there is a concern over the auditors'
liability crisis, but it is a longer view, and it should be urgently dealt with
for a whole host of reasons, not only for the benefit of the auditors. I come
back to that in Proposition 3.
I then deal on page 3 with the gravamen of the auditors' concerns, which I
believe are real, but they have an intermediate problem attached to them,
absent those big claims due to the market property melt-down.
Turning to Proposition 3, this is one of the hooks. I believe the starting point
of all your analyses should be to ask the question: What is the public interest
that you are trying to deal with here, and what flows from that public
interest? Let me deal with some of the points, so that they can be understood.
There is no doubt that in the first four points I deal with the role of auditors
and their significance in our society. For the first three points, it is beyond
controversy. You have a heard them all before, and I do not propose to deal
with them again.
With respect to the fourth point, an expression of opinion which is wrong is a
misrepresentation, and if it has been done negligently, it is negligent
misrepresentation. As soon as you have those factors and economic loss, it has
been long recognized from the very outset of these cases -- from 1932 forward
when Mr. Justice Cardozo in the New York Court of Appeal dealt with it -- that
indeterminate losses were a high danger and a risk against which there had to be
safeguards. The common law has presented safeguards. There are many of them on
the liability side in particular and to some extent in reliance and causation
on damages. However, there still remains, from time to time, this continuing
concern that the indeterminate nature of the losses is the high risk and takes
away from the capacity to have insurance.
The other aspects of the public interest include not just the auditors that I
listed on page 6 of tab 1 but also shareholders, lenders, purchasers and other
investors -- you would expect them -- and regulators of business enterprises.
I am sure you have heard about the impact of these proposed changes on other
potential defendants. However, there are also other miscellaneous participants,
such as directors, employers and regulators.
When I come to Part B -- shareholders, lenders and purchasers -- one has to deal
with reasonable expectations of those participants in the marketplace. If it
turns out that they have reasonable expectations, as matters now turn, that
they will have a recovery against auditors if the opinion is wrong and that
there will be money to support that, then the public is working, arguably, from
a wrong premise. The issue of proportionate liability raises the need to
somehow make sure that the public understands what these are and what value
they have. For instance, if auditors generally do not have insurance and
self-insurance is limited, then there is a de facto cap. In large market
capitalizations that may be a concern when a lender, a shareholder or an
investor makes his decision. If that knowledge were out there, it could
undercut the capital market. However, the fact is that it is apparent from the
evidence we have that they do not have insurance and their self-insurance has
limits. That is why they are here. Dealing with proportionate liability will not
only help auditors; it will actually protect a public which probably does not
understand the full nature of these issues.
Turning to Proposition 4, under tab C, I deal with a number of factors within
the context of commercial realities for an auditor that have given rise to this
problem. I deal with a very important point. At page 9, I quote Mr. Justice
Estey dealing with the collapse of the CCB and the Northland Bank. I deal with
his report in part. He deals with the auditors at the bottom of page 9. He
points out the fact that the auditors accepted management's operational
decisions and that the scale of certain practices were known to the auditors,
but the auditors did not stand back and add a credibility test to everything
that was going on.
Let me tell you why I think that occurred and why it is so significant.
Sometimes the auditors raised a question, but they never prevailed in the face
of management, saying "No, no, there is no problem," or "Do not
touch that" or, "Do not change this." On page 10 Mr. Justice
Estey states that the auditors:
...folded their hands to await whatever action the regulators or the Board of
Directors might care to take. However, the Bank Act puts certain obligations
upon auditors to report satisfactory conditions. Here the auditors made no such
reports. The silence, plus the positive act of certification, induced in the
submissions of the directors a false sense of security on their part.
At the bottom of the page, he stated:
Thus the triangle has become a self-absolving cycle wherein each member of the
group of three might fail in some aspect of their duty, but nonetheless all is
considered to be cured by the fact that the next person on the cycle committed
a sequential and perhaps even greater breach of duty.
I raise that issue for this reason: I stress from time to time in this series of
propositions that the case-by-case analysis of certain courts and individual
circumstances is very important because it not only holds auditors to standards
but, far more importantly, auditors often fail where they are compelled by
management to make tough decisions because they have been long-term auditors.
They have other business relationships, and now there is a judgment to be
rendered. Filing to sign an opinion in an unconditional way leaves a business
enterprise completely at sea. The pressure on auditors is enormous. The fact
that there is a potential liability for them is actually a defence against that
pressure. That can be very important. This was noted by Mr. Justice Estey, as he
then was, and forms a very significant part of maintaining forms of liability
of the kind we are talking about here, although the nature of it is obviously
Let me then turn to Proposition 5. It is here that I deal with the legal
context. I deal with the -- as does the entirety of Chapter E -- very complex
series of defences that auditors can raise. They fall into a number of
categories. They relate to negligent misrepresentation claims for pure economic
loss. These defences are exceedingly powerful, making actions against auditors
First, with respect to the standard of care, GAAS and GAAP provide
strait-jackets within which they act. If they act within those strait-jackets,
they may not be liable. There is a possibility of being liable when they step
out of those strait-jackets, but they provide a terrific defence for them. If
they follow the rules, they cannot be liable, even if the statements are wrong.
Second, the most important one is the duty of care. The CICA took the position
that the common law could not help. That is simply not so. The common law has
been evolving and trying to deal with who can claim under the duty of care
principle. Who is in the magic circle? That magic circle has become tighter and
tighter recently as an answer to the indeterminate nature of these claims. The
common law has moved, but it has not possibly moved enough on the damages side.
There is a powerful set of laws, and I deal with this in broad terms in
Proposition 5 and in detailed terms under tab E.
The remaining defences, other than duty of care and standard of care, are
causation for the damages and reliance. Reliance, again, has been the subject
of judicial change. There has been a narrowing of the gap. I deal with it
broadly in Proposition 5, and I deal with it extensively under tab E. I will not
deal with the details of that, although I think it is a context that you must
have in order to see that proportionate liability is one of many things going
on in this territory to reduce the exposure of people responsible for economic
loss with negligent misrepresentation as the category.
Let me turn to the proposed solution and issues you should consider. This is at
Proposition 6. I think it very important that you have these handles, as I am
sure you do. Under Proposition 6, I would ask you to turn to what I think is
most important point. At page 11, the second point refers to where we change
from joint and several liability to a scheme of full proportionate liability. It
is a fundamental public policy shift. It changes the risk of a defendant's
insolvency from other defendants to the plaintiffs. That is a context which I
am sure you are aware of, but it is the starting point. You must say to
yourselves, what interests are being affected negatively by this? Is it
something, therefore, that you wish to go forward with and recommend?
I also point out at the second last bullet on page 11 that a proportionate
liability scheme, if properly refined, does have a series of advantages. It is
simple. It appears to represent fairness to the auditors and can be applied on
a case-by-case basis and with a great deal of success to the glory of the common
law. I do not exclude civil law in this regard. It gives rise to fairness and
flexibility. If a variety of circumstances arise, no legislator can contemplate
all the circumstances. I am telling you the obvious.
It is very important that the tort regime in some way be maintained because of
the flexibility of dealing with not only new circumstances but also old
circumstances in a different manner.
The last point on page 11 is that the constitutional issue can be extremely
complex if the recommendation is that the federal government act alone. While
the issues are complex and it may not be a good sign of cooperative federalism
to act alone, they do not represent an impossible hurdle. However, great care
must be taken on this point. Your solution must be measured against the
effectiveness of the impact that, for instance, a proportionate liability scheme
will have on the Securities Act in Ontario and elsewhere, where auditors'
liability is included, for example, in prospectuses where they are dealing with
In Proposition 6, I deal with the limited liability issue. My second point is
very important, namely, that proportionate liability may not represent enough
protection because the losses may continue to be indeterminate.
Do not forget that auditors stand as the "last clear chance" to
discover whether or not the financial statements properly reflect the true
financial condition of the business enterprise. Therefore, it is likely that
they could be responsible for 50-and-more per cent of the loss. The fact that
management has defrauded someone does not mean that the last person who should
have been providing the protection may be 100 per cent responsible.
Proportionate liability may mean that judges will hand down a whole series of
decisions where proportionate liability is at the 50-per-cent level every time.
If you are talking about claims of $800 million against auditors, whether it is
$800 or $400 million is almost irrelevant for the solvency of most accounting
firms in Canada because they do not have insurance past $150 million, whether
they are self-insured or not. I am sure that they do not have personal assets
to cover the rest. If you received only two of those claims in your lifetime and
you are auditing thousands of companies, you can see that proportionate
liability is not the only factor to be considered in getting rid of that
indeterminacy. It is only one factor of many.
The notion of "last clear chance" is dealt with in paragraph (b) on
page 10 of Proposition 6.
There are great complexities in dealing with a situation where a complainant
claims against the auditor and does not claim against others. Do you attribute
notional shares to people who are not represented? Does one sue against the
auditors and then sue against others? The complexity of these issues is
enormous and the position of the auditor may not be greatly assisted, depending
on what regime you adopt.
The proposed wording -- and, I note this at page 10 under Proposition 6 of the
CICA recommendation -- includes "auditors, lawyers, management, directors,
accountants giving tax advice, property valuators, engineers" <#0107>
those who go in and look at inventory <#0107> "brokers" --
those who give out financial disclosure -- and "tax advisors". A whole
host of people are captured by the general principle the CICA puts forward.
The CICA would like you to recognize a problem. They would like you to recognize
that a solution needs to be found in the short term, not in the long term. I
urge you to find a solution in the relatively short term, having regard to
legislative change as well. It must be one that has a more sophisticated view
than the one represented. I do not mean to say that it is unsophisticated, but
it is such a broad topic which contains so many impacts that great care must be
taken before you adopt that proposal. I believe you will hear from them that
they wish to put a far more detailed proposal before you. They want you to
accept the principles, to give your moral weight to them and, thereafter, to
organize some form of solution. Perhaps I should not be stating what they want
to say. However, recognizing the problem and beginning the process toward
finding a solution would be a great step forward.
Proposition 7 deals with variations on the proposal for proportionate liability.
I deal with three which are lengthy and complex. One is to maintain joint and
several liability only in circumstances where the plaintiff was not
Each one of these things is extremely complicated in terms of the positives and
negatives attached to it. Where the plaintiff is partly negligent, you go to
proportionate liability; if the plaintiff is partly responsible, you switch it
around a bit. That is a little simplistic, but that is one form of proportionate
The second proposal would limit proportionate liability to a peripheral
defendant or tort feasor. That begs the question: What does that mean?
The third proposal is somewhat akin to the one adopted in the United States
dealing with securities issues there. That is, they would retain joint and
several liability for primary wrongdoers and those who substantially assist
those who are primarily wrong, or those involved in fraud, or for certain kinds
of claims such as those for small investors. But proportionate liability would
replace joint and several liability otherwise. However, if one defendant
defaults, they allow for a reapportionment of the part that was not claimed, up
to a cap, namely, 50 per cent of the defendant's own proportionate liability.
That is a very sophisticated regime of proportionate liability. In that series
of choices there are a tonne of public policy choices that you must make. Who
are you trying to protect; what are you trying to accomplish?
Proposition 8 lists the alternatives. I will not deal with them at this time,
rather, I will wait for your questions regarding statutory capping, contractual
exclusions and limitations on liability and mandatory insurance.
Regarding Proposition 9, I wish to point out that we should not be disconsonate
with our major trading partners. By that, I particularly mean those that have
securities-type issues involved in their jurisdictions. I include some examples
in North America, but I could mention other areas. We must consider what the
United States is doing at the federal level and what the states of Delaware, New
York, and California are dealing with, in particular, because it is there where
a great number of American enterprises are incorporated. They have considered
many of these matters from a public policy prospective, albeit in a different
legal context, namely, the jury system, and in a far more aggressive
atmosphere. However, we do not want to be too far one way or another for fear
that people either lose confidence in the Canadian audit or they lose
confidence in other audits and Canada, or Ontario, or Quebec, becomes the
jurisdiction of choice, as the case may be. That is a broad, general principle
around which you may look.
Let me deal now with my summary and recommendations in Proposition 10. There is
a clear history of and a realistic future concern supporting a potential risk
of a serious financial failure of one or more of the auditing firms in Canada.
This risk is partly affected by the existence of joint and several liability.
The risk identified -- that is, the indeterminacy -- affects the availability of
insurance and the attractiveness of the profession for new entrants. It may be
partly because there is so much publicity about these matters. That may subside
over time, but it will continue to be of real concern. I do not think the risk
is so high that auditing will stop or reach that highly difficult stage, but the
potential exists, and it is urging us to deal with these issues in a
comprehensive manner now.
The audit function is a central commercial concern, and I will not deal with
that point any further.
The goal is to give some determination to these risks but still maintain the
case-by-case, common law or civil law scrutiny by the courts.
Some characteristics of a solution are that it be flexible, simple, fair,
effective, predictable, in concert with our major Canadian trading partners and
applicable on a case-by-case basis.
The next point deals with the careful and sophisticated nature of these issues,
which is obvious.
I then give you my two recommendations -- that is, to the extent they can be of
any assistance, and acknowledging the fact that you can see these as easily as
First, if possible, a joint federal and provincial effort to create a unified
comprehensive regime is important. Limited liability, effects on securities
regulation and on corporate legislation are all significant, if it were
possible to have a unified approach.
For instance, if you give a whole series of new, protective measures dealing
with proportionate liability and limited liability to auditors, should you
enforce further and higher standards on auditors to enforce things against
their own? Should they have quicker, earlier hearings? Should they have time
limits? Should the public be involved in those hearings -- that is, in the
criticism of them? How do they create higher standards? Do they lose some of
their self-regulation by getting extra protections? That is a concern. I do not
know how you deal with it, but it is something that you might wish to consider.
I recommend that, if possible, a small, experienced and volunteer -- in order
that it not cost a fortune -- ad hoc group be made up of industry,
professional, provincial and federal persons. It should be under the auspices
of one or more member of this committee in order that it actually operates. You
must identify the actual issues to be discussed by a date certain. I used
December 31, but that may be too ambitious. You should invite written
submissions specifically on those issues and in the order in which they have
been raised by that committee so that you will have a series of responses.
All solutions exist somewhere. It is a matter of going to the candy store and
choosing them with regard to what you see as the public policy considerations
which will effect them. You want an organized, serious review of these by as
many interested parties as possible. I think that a draft recommendation as a
result of those written submission should be submitted in a reasonable time. I
set dates in my report.
My final recommendation is that this committee should reconvene to review the
choices made for the reasons given and make their recommendations.
Those are my submissions. I am much obliged.
The Chairman: Mr. Campion, thank you for a comprehensive document and a very
thorough review of the issues.
Senator Angus: That was a very good presentation, Mr. Campion. I take it that
you are not for the status quo.
Mr. Campion: I am not for the status quo. This needs a review. However, after
choices are made, it may turn out that the status quo was the best way to go
all along, but I think not.
Senator Angus: Mr. Campion, although you are a member of the Law Society, can I
assume that you do not represent any client or clients at this particular
Mr. Campion: I was asked by this committee to be your witness, so I presume I am
Senator Angus: I just wanted to be sure of that because of your strong
orientation to the accountants' arguments as opposed to a broader area of
Mr. Campion: That had to do with my mandate. My mandate was to comment on the
Estey evidence and not to deal with this in the broader context.
Senator Angus: Having said that, in your view, was there ever any valid public
policy or other justification for having a regime of joint and several
Mr. Campion: There are justifications. To some extent, it just happened. You had
joint and several liability. They then struggled, as the world became more
complex financially, with this notion of granting economic loss damages and
then foreign negligent misrepresentation, recognizing that was the one area
that really brought you into the area of indeterminate losses to an
indeterminate number of people.
From the beginning they tried to create barriers that were exceptional;
different from physical property loss or personal injury where joint and
several liability works far more powerfully in favour of a plaintiff because
they are innocent victims of an event, for instance, whereas in this case there
is a risk factor in making an investment and, if the auditors were always the
object of full recovery, you would have, in effect, an insurer in the system
when the investor is taking a risk. The question is whether they were taking
the risk just on those financial statements or other factors, and that is where
there has always been this incredible ambivalence about having granted it in the
first place then, having granted it, taking great care in dealing with it. The
question now is: Are the damages now so great that the indeterminacy needs
Senator Angus: I asked if you felt there was any justification in the status
quo, which is a widely prevalent system of joint and several liability for
civil responsibility. There is always a great danger, which is why we are
taking so much care with this particular issue, when one views it from the
perspective of one particular group. I think you would agree with that. The
accountants have done a wonderful job. They have brought to the attention of
everyone the fact that there may be a problem.
My fear is that there may be some myths and fallacies. For example, I have read
of the great injustice where an accounting firm, which is held 1 per cent at
fault, may have to pay 100 per cent of the damages, whereas in fact, if I
understand the law correctly, all of the defendants under that kind of a regime
of civil responsibility are 100 per cent responsible to the plaintiff. Rarely is
there a 1-per-cent finding.
I am most anxious that we get away from this almost reductio ad absurdum. People
are feeling sorry for these poor accounting firms which have been found to be 1
per cent at fault and have this huge responsibilty. However, if they have in
fact made false statements and not adhered to GAAS or GAAP, if they have not
done their jobs properly and other financial organizations go belly-up because
of that information, in my view they should be more than 1 per cent to blame.
The underlying reason for joint and several responsibility is that the
plaintiff, the aggrieved party, should be entitled to full indemnity.
You mentioned in passing the regime of contributory negligence. I believe that
might be an area where we can find our solution. There is a tendency to remove
the old rule of contributory negligence where a plaintiff, if he is even 1 per
cent liable, gets no recovery. Why should the coin not be reversed for
Mr. Campion: In my opinion, having litigated in this area, thought about it and
written about it, this is very important. I did start with a degree of
skepticism of the kind you started with. However, consider the value and,
indeed, the limitations on a proportionate liability scheme in that they
arguably do not provide that much protection, for the very reason you have just
said. If they are 100 per cent liable, the 1 per cent is easy. Normally they
will be 50 to 100 per cent liable in these circumstances. Proportionate
liability may not be all that beneficial. It does, however, make the risks more
determinant, although not completely determinant.
It may be only part of a solution, but having considered it all I believe there
is a problem. I believe that proportionate liability must be seriously
considered as one of the tools to reduce the liability potential of auditors,
and that it is fair and urgent that it be considered. However, I did struggle
with it, as you have just done.
Senator Angus: I just wanted to put the suggestion on the table that there may
not be problem. I am not saying that is my view. If there is a vast explosion,
such as in the Chernobyl situation, because some person or collectivity of
persons makes a mistake, our system is that the person or persons responsible
shall pay. The damages can be huge. In the vein of the Chernobyl analogy, Dow
Chemical and other such companies have huge insurance. The large accounting
firms are vast multinational empires and they have insurance. It is fallacy to
suggest that they do not have insurance.
My concern is a case is being built on that kind of clay. I can bring forward 10
witnesses who will say that there is plenty of insurance available for them. It
looks bad when you read: "Ernst & Young condemned to $50 million".
You see those kinds of headlines every day in the U.S. Maybe there should be a
capping, or perhaps the jury system should change. There is a major problem in
the U.S. courts, but it does not seem to extend to Canada.
I am playing the devil's advocate.
Mr. Campion: The Dow Chemical case that you use as an example is unrealistic
because it is not cited and relied upon every day by an indeterminate number of
potential and actual investors with large capitalization.
They can pretty well predict their losses from an explosion, albeit catastrophic
and high. However, they do not have one of those every day whereas auditors
Senator St. Germain: Further to Senator Angus' questions, you made mention of
GAAS and GAAP in your initial remarks and said that, often, these firms are
pressured into signing. Did I understand you correctly in that regard?
Mr. Campion: I would not want to say quite that.
Senator St. Germain: They are forced into signing situations due to the size of
their clients, the size of the account, et cetera. Based on that premise,
should we be making any changes? I am not a lawyer, unlike most at this table.
Did I hear you correctly in that regard?
Mr. Campion: Let me put it this way, senator: You heard me correctly, but I
would not have characterized it in that fashion. Let me put the point this way:
There is a natural tension that auditors face to give their opinions in a
fashion that they are unqualified to do. When there is a continuing
relationship with a client, there are arguments between the management and the
auditors about what judgment should be rendered on any particular point.
Management will put their point forward in the ordinary course, which is
perfectly legitimate, and auditors will state their view.
It happens in rare cases that such tension goes to the extreme. That is to say,
the auditors lose their normal sense of professional conservatism and adopt the
view of management, which is what was dealt with in the comment made by Mr.
Justice Estey concerning the CCB and Northland Bank. The existence of a tort
regime gives a reason for the auditors to avoid that pressure. It is natural and
ordinary. It is all part of doing business. There is nothing wrong with it.
There has to be pressure brought to bear to prevent the tension from shifting
too far against the auditors, since they have to keep good relations. It is not
just a matter of wrong opinions; the problem is that they may be pushed further
than they might have otherwise gone.
Senator Angus: I know how much research you have done, sir. When you add that to
what our researcher Margaret Smith has done, we have some very good material. I
have done my best in the last three days to read it all. One report I did read
is the U.K. report which comes down on the side of the status quo. I am sure
you have read it. One of the items mentioned in the report is that, if there
were a change to proportionate liability, then there would be a danger that
judges, who are inherently fair, which is the nature of that calling, would end
up going after the defendant with the deepest pockets. Have you considered that
element? We might be creating a monster.
Mr. Campion: I grant you that, senator, which is why I say you should have as
many people as possible put forward their solutions in an organized way. Then
you will be able to view the situation across the board. First, you decide if
you will to go to the candy store; after that you must decide what you want
once you get there. After choosing the route, you then have to ask: Does it have
to be highly sophisticated or not?
After thinking the matter through in a sensible fashion, which no doubt you
will, you can create a system of proportionate liability that will work. There
is always the risk that there will be results you did not expect. However, in
my view, it is possible to do it. The English context may be different from the
Senator Hervieux-Payette: Mr. Chairman, one of the proposals is that the
provinces examine this problem. Coming from Quebec, as I do, that is one of the
most important recommendations. If we act alone, then a strange situation will
Do the other provinces have regulatory bodies equivalent to those we have in
Quebec which govern accountants, engineers, lawyers, et cetera? We will have to
have something along the same lines in every province. We cannot have one
tailor-made regime which would provide different services. If that were so, it
would be like it is in the area of the environment -- one is tempted to go where
there are fewer regulations.
How could we apply that to cases such as Royal Trust and others? What would
happen under a new regime for auditors in such a case? After all, there is a
long chain of command.
Of course, the auditors' report would be a key element for the outsiders, as
well as the insiders. If you at the top and you receive a report from your
auditors that there are some strange happenings in your corporation, you can at
least limit the damages.
However, in my case, I had but a few cents in Royal Trust. At one point, I had
the impression that the information that was being given was not quite
accurate. Who else could give out accurate information other than the auditors?
Mr. Campion: You are absolutely right, who else could do it? That is why they
stand in such a critical spot. That is why they are so commercially
significant. That is why they are in so much danger. Obviously, the
capitalization of these companies is much greater than the relief any insurance
scheme could ever provide. To some extent, the public stands at risk by not
knowing that there are these limitations. You cannot just read financial
statements and say, "I will be able to recover against the auditors if
they are wrong." If the Royal Trust case were combined with one or two
others, and they were all in the same audit firm, there would be no money left
Therefore, that will accomplish nothing. The public will have been at risk with
the false understanding of what might have been available to them.
The question then is: Do you want at least to review this problem in an
organized fashion at the provincial and the federal levels to ensure that the
regime of liability is not only present but also reasonably funded? The
auditors are saying that, because of the size of the risks and the number of the
claims, they are no longer reasonably funded. That potentially affects their
continued operation. It also affects the public's disappointment at the end of
the rainbow in that they cannot recover.
Senator Hervieux-Payette: Have they discussed this situation with other
professions? We cannot implement a regime whereby only one group of
professionals would be covered. This should cover the other professions you
mentioned, such as engineers, architects, lawyers and so on.
There is a specific group which says they are more at risk than others. How do
we address that when others are not necessarily saying the same thing? Is there
an alternative other than doing that for the whole range of professions in
order to cover one group which has a specific problem?
Mr. Campion: Because they stand at such a central position in the economy, this
problem must be addressed. It must be addressed before there is, indeed, a
collapse of an accounting firm. That would not help anyone, by the way. If a
firm collapses, it will just create a lack of confidence in the system. I am
not saying that that is on the horizon. That is not the issue here.
Auditors sit in a different spot from other professions. That does not mean that
others do not have a fair claim; they have just not been pressing their point.
Senator Oliver: In your brief, you talk about the 1932 Donoghue v. Stevenson
case, and then you bring us up to 1964 with the Hedley Byrne & Co. Ltd. v.
Heller & Partners Ltd., case. Do you know of any cases pending in any
superior court, in the U.K., Canada or elsewhere, which will help us to deal
with these issues of negligent misstatement and liability?
Mr. Campion: Yes, sir.
Senator Oliver: Will those cases help resolve the problem which this committee
is setting out to analyze? If so, what are those cases?
Mr. Campion: The cases are listed in my paper. One dealing with auditors is
ongoing in the Supreme Court of Canada. The issues cover negligent misstatement
and economic loss. You have seen judicial conservatism protecting the auditors
from this indeterminacy, not involving the size of the loss level but whether
one gets past the gate at all to claim anything. Who is within the "magic
circle" of people who can claim under the duty of care?
There are a host of cases at the trial level, some of which have been the
subject of early motions for summary judgment and commentary. Those are listed
There is a Manitoba case which will be heard by the Supreme Court of Canada. I
do not know when it will be heard, but I suspect it will be sometime in the
There is a lot of judicial action. Is it sufficient to answer all of the
problems? Probably not.
The Chairman: As I listen to the comments, I do not have a concrete feeling for
the seriousness of this problem. The analogy that keeps running through my mind
is that Vancouver happens to be built on a fault line and yet we went ahead and
built that city.
I am a little uneasy. On the one hand, I hear you making the argument and giving
your proposition about the seriousness of this problem; on the other, when we
ask you about the number of concrete examples and the seriousness of the risk,
I get a different sense of the seriousness of the problem. Your briefing gives
the same impressions.
Does someone have a compendium of the actual cases and judgments thus far which
the committee could use to form its own judgment on the extent of the potential
problem to which we must react? Is it like my Vancouver earthquake problem --
extremely low probability but still it is out there? Or are we really being
asked to react to a problem where there is some serious possibility that it will
Mr. Campion: The analogy would be more akin to a Los Angeles earthquake problem.
It has happened.
The Chairman: In Canada?
Mr. Campion: You wanted a characterization. My position is that you are right to
capture the ambiguity. I meant to be ambiguous.
The Chairman: You were extremely successful.
Mr. Campion: I meant it because there is a serious issue, but the
characterization is not as serious or as urgent as the CICA would have us
believe. A serious and coordinated review is needed. It should not be left to a
long-term, in-the-ether solution.
Senator Meighen: Do you know, Mr. Campion, if there is an inability to obtain
insurance now, as we are led to believe by the accounting firms?
Mr. Campion: I make the point here that you should call an insurance expert.
This is a very tricky business. I am not a qualified expert. I try to stay
within my expertise. I am told that that is so, but I am not the witness to
answer that. If you are going to embark upon the kind of recommendation I made,
you should hear from such other experts.
The Chairman: Mr. Campion, thank you.
Senators, we see before us, by way of electronic communications, Mr. Ian Govey
and Professor Jim Davis from the Australian National University.
Mr. Govey and Professor Davis, can you tell us how the government reached the
conclusion to move in the direction of proportionate liability? Where do you
presently stand in that implementation policy? What were some of other options
you considered and rejected, and why did you reject them?
Mr. Ian Govey, Principal Adviser, Business Law Division, Australian Treasury: I
can provide you with some of the background as to what led the Commonwealth
government, in particular, but also the New South Wales government, to be
interested in reform in this area and, hopefully, in the process, deal with the
questions you have raised. Then Professor Davis will talk in more detail about
the report, of which he is the author, and provide some of the details of the
considerations that led to the conclusions in that report.
The current government, that is the Howard government that was elected in March,
has not formed any policy position in relation to the report or the
implementation of that report by way of legislation. The report was released
for public comment in July. I will come to that in more detail in a moment but
I think it is important to make that clear at the outset.
The Commonwealth's involvement in this issue arose from the concerns raised in
the 1980s about the level of claims against professionals, particularly arising
out of some spectacular corporate collapses. Many of these claims were against
auditors, and in that respect, from what I can understand, the position is not
all that different in other jurisdictions, no doubt including Canada.
In essence, these collapses resulted in litigation against the auditors, for
negligence in the preparation of their annual audit report or, in a number of
cases, in the preparation of special financial reports, for example, where a
takeover was about to take place.
Most of these claims have been settled without court judgment but the
settlements have clearly been for very large sums. Insurance has played a key
role and, when you look at the potential defendants, the auditors have been
foremost amongst those who were carrying insurance. They have also been
prominent in the sense that they were very often members of large firms, and
therefore, both the assets of themselves and their partners were potentially on
The coverage of insurance, though, has led to large increases in insurance
premiums, and that has also been a matter of concern. Overall, I think it is
clear enough that the auditors have been targeted because they have had the
deep pockets. Potential defendants of other kinds, in particular company
directors, have not been targeted very often because they were impecunious as a
result of the corporate collapse.
Joint and several liability is, of course, an integral part of that process
because even a defendant who is blameworthy only to a small extent is going to
be held liable for the full amount of the loss and, again, that is where the
focus on auditors has come about.
Of course, the argument is not all one way. In Australia, many people have said
that the auditors have brought many of these problems upon themselves by not
being sufficiently diligent in carrying out their professional functions but,
overall, the issue which the previous government faced, and I think the current
government faces, is to consider whether or not the present system is fair in
that, as a matter of practice, professionals have carried responsibility for
much of the loss that occurred through these corporate collapses. Certainly,
the professionals have been arguing very strenuously for a number of years that
the current system is deficient.
I think it is important for your country, as well as ours, to work out where the
responsibilities lie. At the Commonwealth level, the concerns have centred on
two pieces of legislation. The first is the Corporations Law which provides a
system of national regulations for companies and securities through a
cooperative Commonwealth-state system. Legislation is enacted through the
Commonwealth but takes effect as state legislation throughout all of the
The second piece of legislation is the Trade Practices Act which provides rules
for competition and also for consumer protection. On the consumer protection
side, section 52 of our legislation provides a civil remedy for false and
misleading conduct in the course of trade and commerce. That particular
provision has been the centrepiece of a number of actions for, in effect,
negligence, but really for providing false information in the course of
The Corporations Law also has a similar provision which relates to dealings in
securities, where there is misleading and deceptive conduct in respect of those
dealings in securities. The Corporations Law also provides an obligation for an
annual audit of public companies, and it is this audit which has provided the
basis for a number of the claims. The claims are brought in tort or in contract.
At the state and territory level, the concerns have been somewhat wider. As well
as the Corporations Law and consumer protection issues, concerns have been
expressed about claims, particularly in relation to buildings and also in
relation to some of the local government functions such as providing municipal
swimming pools and playgrounds. In Australia, we have, in addition to
accountants, engineers, architects, lawyers, and builders all lobbying for
change in the present system.
It is also worth noting that as a separate exercise in the building area, three
of the jurisdictions, that is Victoria, South Australia and the Northern
Territory, have actually introduced legislation in recent years to provide for
proportionate liability in respect of building claims. If there is interest in
that, I can go into a little more detail later on.
Another key reform that has been sought has been providing a cap or a specified
monetary limit to provide an upper level on liability. Again, we can go into
that in more detail later.
Accountants have also been seeking incorporation as a permissible form of
practice. At the moment, auditors can only be registered as company auditors if
they are practising as individuals or as part of a professional partnership.
They are seeking incorporation facilities so they can operate with limited
The possibility of introducing capping legislation was examined quite closely by
the former federal government in conjunction with some of the state
governments. However, at least at the federal level, it was not an option that
was favoured. In particular, it was considered that introducing capping would
lead to unfair and arbitrary results because inevitably the setting of the cap
would involve the arbitrary selection of an upper limit.
However, one Australian jurisdiction, New South Wales, has actually passed
legislation to provide for capping of professional liability which provides a
mechanism for the New South Wales Attorney General to approve a capping scheme
developed by a professional standards council. A number of professions are
actively seeking to develop a mechanism or a scheme for approval but, at this
stage, no such approval has been given and so, as a matter of practice, there
is no capping regime in operation.
Previous federal governments supported an examination of reform of joint and
several liability on the basis that that would be a preferable option to
capping. It does not have to be implemented as a alternative. New South Wales,
which as I mentioned has this capping regime in place, has also been actively
looking at the joint and several liability reform. They see it as an additional
reform to a capping mechanism, not as a alternative.
It was because of the joint interest on the part of the New South Wales and
Commonwealth governments that the former New South Wales Attorney General and
the former federal Attorney General combined to commission the report by
Professor Davis. The report was prepared in two stages. The first stage
examined the feasibility of altering the rules on joint and several liability.
The second stage, which I hope you have, looked at specific changes in this
The final report had two essential recommendations. The first was that joint and
several liability of defendants in actions for negligence causing property
damage or purely economic loss should be replaced by liability which is
proportionate to each defendant's degree of fault. That was essentially the
common law aspect of the reform. The second recommendation relates to statutory
reform, and that is that liability for loss arising from misleading conduct in
contravention of the Trade Practices Act and the Corporations Law provisions
that I mentioned be proportionate to each defendant's degree of responsibility
for that loss.
The states and territories also have consumer protection equivalent to the Trade
Practices Act, and Professor Davis's recommendation was for those to be also
subject to this proportionate liability reform.
Following the completion of that report, state and Commonwealth ministers agreed
that further work should be carried out to prepare the draft legislation.
Again, New South Wales and the Commonwealth took prime responsibility for this
The net result was the release in July of this year of draft model provisions
designed to give effect to the main recommendations from the Davis report.
Those model provisions were released for three-month public comment. That
period ended around about the middle of October of this month. We have received
in the order of 20 to 25 submissions. We are still receiving submissions. They
have come in from a range of organizations including, naturally enough, all
those representing professional groups. In essence, the professions, as well as
a number of other organizations that have provided submissions, have been
strongly supportive of the proposals for reform. Support has been expressed
along the way in this exercise.
However, the draft bill does give rise to a number of quite difficult technical
issues. Different views have been expressed in some of the submissions on what
issues should be adopted. At this stage, we are still at the preliminary point
in the exercise. We have not gone into great detail in examining those detailed
If implemented, the draft provisions would involve amendments to the common law
and also to Commonwealth, state and territory legislation. For that reason, the
whole issue is on the agenda for our Standing Committee of Attorneys-General.
That is a body which, as its name implies, is a committee of all our state,
territory and Commonwealth attorneys-general. It generally has a role in
promoting uniform law reform exercises, particularly in areas of interest to the
Following the change of government in March, responsibility for corporate law
and business law was transferred to the treasury. Now at the Commonwealth
level, the Treasurer has on-going responsibility for reform in this area.
If there is agreement through the standing committee on the desirability of the
changes being made as a matter of principle, then it could be expected that the
standing committee would meet and seek to agree on uniform legislation for
consideration in each of the Commonwealth, state and territory parliaments.
It might be useful if I briefly summarize the way in which the legislation goes
about carrying out the reform. In essence, the draft provisions would limit the
liability of defendants to the amount of loss the court considers just, having
regard to the state of the loss for which the court regards those defendants as
responsible. This would apply to what is called "apportionable claims",
which would involve loss caused by two or more concurrent wrongdoers; that is,
people whose individual acts or omissions would independently have caused the
Apportionable claims are those claims which I mentioned earlier involving
economic loss or property damage arising from a failure to exercise reasonable
care. They will therefore cover claims arising in contract law or in tort.
However, claims arising out of personal injury were not part of the mandate
given to Professor Davis, and they are not covered by the reforms in the draft
The second batch of apportionable claims are those which I mentioned earlier
arising out of misleading or deceptive conduct under the Corporations Law, the
Trade Practices Act, and the State and Territory Fair Trading Acts, which are
the equivalent of the consumer protection provisions in the Trade Practices
There are some exclusions where apportionable liability would not apply. In
particular, it would not apply to vicarious liability. It would not apply to
liability which arose because a person was a partner or someone was subject to
a claim. As well, it would not apply to any act of Parliament or contract
imposing several liability on a person that would otherwise be apportionable.
Under the bill, the court would be able to take into account the comparative
responsibility of any concurrent wrongdoer who is not a party to the
proceedings. That assessment would then be used to limit the liability of the
defendant who is subject to the claim. The defendant would be able to seek
leave for one or more persons to be joined as defendants so that the defendants
against whom the primary claim is brought would have the opportunity to bring
other relevant people before the court to have an overall assessment made of
Plaintiffs would be able to bring subsequent actions against other defendants
who contributed to their loss in order to achieve complete compensation. If
someone were not available for some reason or out of the jurisdiction when the
original claim was brought, they could bring that claim subsequently.
Finally, unsuccessful defendants would not be able to seek contributions from
their co-defendants in the same or subsequent proceedings. This is an attempt
to bring the proceedings to an end.
Key issues arose, in particular, whether or not consumer claims should be
excluded on the basis that consumers deserve priority in any attempt to ensure
Another significant issue is whether or not the model provisions should only
apply to causes of action that accrue after the commencement of legislation or
whether they should apply retrospectively.
I would now invite Professor Davis to talk about the report in more detail.
Mr. Jim Davis, Professor, Australian National University: I will try to
highlight what the report is about.
We started off with the text that in all the states and territories in Australia
at the moment, at least, imposes joint and several liability. If two or more
people may together be responsible for the same damage, it is up to the
plaintiff to decide who to sue. Of those defendants, if one is insured and the
rest are not insured, then clearly the plaintiff will choose the insured person
to ensure proper recompense for the injury suffered.
Joint and several liability, which is the current law here, is very much
plaintiff oriented. The purpose of it is that the plaintiff, in all possible
situations, will be awarded full compensation.
Our report does not deal at all with personal injury. In personal injury cases
it is believed that plaintiffs should be in a position to recover full and true
In cases of pure economic loss and in cases of property damage, the feeling is
that there must be some better way. There must be a way of sharing the loss
instead of imposing the whole of the loss on one defendant and having the
plaintiff recover everything. It was felt that there must be some better way of
sharing that loss among the various people who were responsible.
When I first looked into the matter, I rapidly discovered that this question of
whether joint and several liability should remain or should be changed to some
other system had been considered in a number of jurisdictions. It was
considered, for instance, by the Alberta Law Reform Commission. It was
considered by the Ontario Law Reform Commission.
In both cases it was rejected, principally because no distinction was drawn
between negligence causing purely personal injury and negligence causing purely
economic loss. I, for one, fully agree that, in a case of personal injury, the
plaintiff deserves to have a priority position.
It is interesting that in British Columbia, for instance, no one realized until
about 1986 that the legislation was framed in such a way that the court was
able to interpret it to give effect to a form of proportionate liability. The
court was able to come to the conclusion that, if two or more people were
responsible for personal injury, for economic loss, for property damage; and if
the plaintiff was also contributorily negligent -- that is, partly at fault,
himself or herself -- then that liability could be shared among the various
The British Columbia Law Reform Commission recommended that that judicial
interpretation be overthrown. However, the Government of British Columbia has
not acted on that. Clearly, they believe that the original interpretation is
adequate in the circumstances.
Similarly, there is a system of proportionate liability in Ireland. Once again,
it applies only when the plaintiff has been, to some extent, at fault. It
applies in cases of personal injury as well as in cases of economic loss and
In Australia, there was a report from the New South Wales Law Reform Commission
that dealt with the question of moving away from joint and several liability in
terms of sharing the loss more equitably among all the people incurring the
loss. However, the New South Wales Law Reform Commission, like the Alberta and
Ontario commissions, came down in favour of the existing law, principally
because they also were concerned with roles that applied to physical and
personal injury, as well as to economic loss.
In our report, we have confined the whole question to cases of purely economic
loss and cases of property damage. We believe that, in considering areas where
the actions of two or three people which affect someone only in their
pocketbook, there is no necessarily fair solution which gives the plaintiff
everything and which imposes liability quite possibly on just one of many
defendants simply because that defendant happens to be insured. That is the
result of joint and several liability. We felt that there should be a way of
sharing that liability among the various people involved.
One possibility that was canvassed was to say that if the plaintiff -- that is,
the person injured -- is at fault to some extent, then that is a good enough
reason to share the liability among everyone. But then the point was made: Why
limit the sharing of liability solely when the plaintiff is at fault? Why not
look at all cases where there are a number of people who have contributed to the
particular loss? Why not put forward the proposal that we have, which is that
if more than one person is responsible for a particular economic loss or
property damage you must first decide to what proportion each particular person
has contributed to that loss. Then each person is liable for his or her
proportion of the loss and no more.
In the case of a company that goes under because, first, the auditors failed to
spot what the directors were doing; and, second, because the directors were at
fault in failing to control the activities of some other employee, if you
decide that the directors are 80 per cent to blame and the auditors 20 per cent
to blame, then 80 per cent of the loss is slated to the directors, whether or
not they are insured; and 20 per cent of the loss is applied to the auditors
even though, in all probability, they are the only insured defendants. In that
sort of case, the plaintiff -- normally the liquidator of the company -- may not
be able to collect that 80 per cent of the loss that has been attributed to the
directors of the company.
The answer to that type of situation is: If there is only one person to blame
for a particular loss and that person is not insured, the plaintiff must bear
that loss. The plaintiff can bring an action against the defendant, but if the
defendant is not insured, it is unlikely that there will be any real
compensation. If that is the case where there is just one defendant, why should
it make a difference if there is more than one defendant? Why should the
plaintiff derive all the benefit simply because there are two or more
defendants, one of whom happens to be insured? Hence, the proposal is put
forward to share the loss. The first task for the court would be to determine
what proportion each party to the action bore of the total loss and then to
divide the damages according to that proportion and, thereby, limit the
liability any particular defendant might have to bear.
I will be pleased to answer any questions you may have.
The Chairman: Before turning to Senator Angus, I have one brief question. Either
of you gentlemen should feel free to answer a question without it being
directed to one of you specifically.
On the basis of what you have both said, I have a question to direct to Mr.
Govey. I will have others later.
In talking about your process, you said you received 20 or 25 responses to the
draft legislation. To what extent does your process allow people who are
potentially plaintiffs to have an opinion? My instinct tells me that those 25
briefs you received all came from interested parties who stand to benefit from
getting rid of joint and several liability. Is there any way to get balance into
the process, or is all of your solicited input likely to be skewed to one side?
Mr. Govey: Obviously, that is an important issue which often arises in our law
reform work. Those who have a particular vested interest provide submissions
and others, who could be affected as consumers or as investors and who are
rather less organized, provide less input. To some extent, that has certainly
applied in this area. On the other hand, there are consumer organizations who
have had the opportunity to add their comments. There are also states and
commonwealth trading or consumer protection agencies who have the opportunity
to comment. Finally, there are often professionals, particularly lawyers, who
will adopt a public interest approach to law reform and put submissions
I cannot be precise about the extent to which that happened on this occasion,
but I do know that the other side of the debate has had its voice heard along
the way at earlier stages. For example, at the various stages in the
preparation of Mr. Davis' report we were made aware of contrary arguments. I
think it is true to say that Mr. Davis took those into account in formulating
his report. Certainly, once the decision reaches the political arena, that is
something which public servants who are keen to brief ministers will want to
take into account.
The Chairman: I have one question for Professor Davis. I have always regarded
the fact that I am not a lawyer as one of my saving graces. Nonetheless, I
obviously follow legal issues. The Australian legal system is much closer to
Canada's than ours or yours is to the U.S. system.
Can you give us a quantitative feel for how serious the joint and several issue
is? I am trying to understand whether it is a theoretical problem which has a
one-in-a-trillion chance of occurring and causing a serious problem for an
auditing company, or whether it is in fact a problem which has enough of a
probability of occurring that one genuinely ought to be seized of it?
I say that because, looking at U.S. judgments and U.S. jury-awarded damages, one
might come to a quite different conclusion on that question in the United
States than you would in respect of Canada or Australia.
Do you have any sense of how serious the problem is?
Mr. Davis: The only sense that I have is from talking to accounting firms. After
Stage 1 of the report appeared and at least the possibilities for change were
canvassed, those firms certainly expressed the view that it was extremely
important that there should be this change to joint and several liability.
I was approached by a number of the big international auditing firms, pointing
out that their insurance only covered them to something like $20 million or $30
million and that they were getting hit with claims for $100 million to $200
million simply because they were the only insured defendants.
Certainly, there were many financial disasters in Australia in the late 1980s.
It is only now that the legal ramifications of those disasters are being worked
out and the liquidators of the failed companies are starting to take action,
not only against auditors but against solicitors also.
Professional people generally feel that this sort of question is very important
and that it is necessary that reforms be seriously considered.
Senator Angus: Gentlemen, thank you very much for your participation this
evening. This is quite a remarkable technological occurrence.
I am quite amazed at your intimate knowledge of Canadian law. You mentioned the
Alberta, Ontario and B.C law reform commissions.
Is it your sense that our two regimes and two legal environments are fairly
Mr. Davis: They are very close indeed. We are very fortunate at the Australian
National University in having a good collection of legal materials from Canada.
We certainly pride ourselves in providing ourselves with the background to do
this sort of research.
I might also add that the High Court of Australia, the equivalent of the Supreme
Court of Canada, is more and more turning to Canada as well as to the United
States and New Zealand to look for examples of the way in which the law might
There is a very close relationship, I would say, between the law in Canada and
the law in Australia, apart from Quebec, which is attributable to the fact that
Quebec has a civil law system rather than a common law system.
Our judges look to Canada for illustrations of how the law is developing.
Academics also find the Canadian jurisprudence a very rich field of examples of
the way in which the law might develop in this country.
Senator Angus: I have an association with a law firm in Quebec and we are
opening an office in Sydney, Australia on January 2 of this year. I am
wondering how big the lawsuits against solicitors are in Australia.
Mr. Govey: If it is any comfort, the traditional pattern is that claims against
solicitors in Australia are more frequent than those against auditors, but for
much lower amounts. The claims against the accounting profession have been less
frequent but for much larger amounts, indeed going up to $1 billion in
Senator Angus: There really only are, in the international corporate
environment, six to nine large accounting firms, whereas there are thousands of
We recently saw a huge lawsuit against Clifford Chance, one of the mega law
firms in the world. The numbers in that lawsuit are similar to those cases
Have you considered the element that it is really a matter of degree?
Mr. Govey: To some extent it is a matter of degree. Of course, there are also
many small accounting firms. However, the typical claim against lawyers in
Australia is for things like negligently preparing documents, negligently
failing to take account of the statute of limitations in respect to road
accident claims and the like. Those are claims which arise out of a typical
suburban practice and will not give rise to the same level of damages as those
against auditors where, just by virtue of the sorts of companies they are
dealing with, the figures can run into the hundreds of millions of dollars when
there is a spectacular corporate collapse.
Mr. Davis: If I could add to that, to some extent, the law firms in Australia
and around the world are attempting to merge like the accounting firms. In
Australia, there are about a dozen mega law firms which have branches in every
capital city; and some of them are an Australian arm of an international law
Although many claims against solicitors are for things like overlooking the
statute of limitations, I have heard from colleagues in practice that
solicitors are becoming more and more worried about their possible liability in
providing advice for the preparation of a prospectus for floating a company, in
providing advice in a takeover deal, and in all sorts of big financial
transactions where the lawyers are becoming very heavily involved these days
and where the sums of money involved can be quite large if things go wrong.
I fear that Australian accountants and solicitors may be heading down the same
path as their colleagues in the United States in that they will be defendants
in law suits involving millions of dollars.
Mr. Govey: I agree entirely with what Professor Davis said about the potential
for large claims against law firms. Indeed, at the moment in Australia there
are several outstanding claims against lawyers, particularly joined with other
defendants, where the potential liability is very large indeed.
Senator Angus: If current trends continue, the exposure for the law profession
would be in the same order of magnitude as it is for the auditors and others.
Listening to your submissions this evening and having read your report, I find
that one of your major arguments for supporting radical change to the present
law of joint and several liability is the element of fairness. If that is
indeed the case, would you agree with me that perhaps it would not be fair to
amend the present law to relieve only one profession, the accountants?
Mr. Govey: That is certainly something that figured very strongly in the former
government's concerns about a capping regime. Inevitably, a capping regime
focuses on imposing a monetary limit on a profession-by-profession basis, which
is where the element of unfairness was considered to be very high indeed.
Mr. Davis: We must consider the way in which legal principles will apportion
liability. Whether one of the defendants is a builder, a solicitor or an
accountant, it makes no difference. In each case, the builder is partly
responsible, as is the solicitor and the accountant. If in each case that
particular defendant is only partly responsible, then why should that person's
insurance company have to bear the whole of the loss simply because their
client is insured? That was why we did not deal with the matter profession by
profession. In approaching it as a matter of principle, we could not really see
any way to indicate why one particular profession should be treated, as we
regarded it, more fairly than others.
Senator Angus: I have a bit of a problem coming to grips with the concept of
proportionate fault. There are a number of arguments with which I am sure you
are familiar. Is that not, perhaps, why you have looked to other solutions in
your draft legislation, including a recommendation which would place a cap on
the legal liability of professionals?
I am not sure you are recommending this; but I wonder to what extent the
problems can be defused and alleviated by introducing and permitting limited
liability in terms of professional associations or partnerships.
Mr. Govey: To some extent the concerns could be met by allowing incorporation;
however, that is a pretty extreme situation. By that I mean, if the limited
liability is to be availed of, then it really means that the company will be
taken through insolvency proceedings and wound up. Obviously, from the point of
view of a professional partnership, that is an extreme outcome and not one which
would be favoured. It could also lead to the incorporated body deciding that
there is no need to carry the same degree of insurance as it would if there was
unlimited liability, even through proportionate liability. Arguments have been
made that that is not a solution for proportionate liability because it does not
provide the same degree of protection in practice, or because it might not
provide the same degree of protection in practice as proportionate liability
with unlimited liability.
As far as the cap is concerned, I was involved in a working party some years ago
which looked in some detail at the various arguments for and against capping.
At least at the Commonwealth level, we concluded that the option of a cap would
be unfair and arbitrary.
In particular, how do you go about setting the limit? If you set the limit at $5
million, for example, then somebody who suffers $10 million worth of loss will
only recover 50 cents on the dollar, whereas somebody who suffered a $4 million
loss will make full recovery. There seemed to be no principle that was
applicable to the setting of the cap or its operation in practice.
Another major problem is that often there are two defendants, say, a director
and an auditor, and it may well be a situation where only the auditor has the
benefit of the cap, in which case the system will also operate unfairly for the
other defendant who does not have that same capping facility.
Mr. Davis: I wish to comment on limited liability partnerships. Certainly, a
number of the professions who may well stand to benefit from proportionate
liability do, indeed, form partnerships. However, an architect could be just as
likely to be, at the moment, joint and severally liable with, say, the builder
and the local authority. That was one of the examples we used in the report. It
is one area in which the legislation in Victoria, South Australia and the
Northern Territory has already moved to proportionate liability. If you happen
to have an architect who is not in partnership, he does not have the benefit of
that limited liability, whereas another architect who is, perhaps, just as
negligent or just as careful, the one in the partnership has the benefit of
limited liability. Once again, that does not seem to be necessarily fair. I
suppose if you extend that illustration of the house that collapses eight or
nine years after it was built because the architect, the builder and the local
authority were all negligent, which all led to that collapse, and the local
authority and the builder cannot possibly limit their liability, then why
should the architect as the only professional who has the benefit of a limited
liability partnership be able to do so?
Senator Angus: Why do you say it is any fairer for a defendant in a personal
injury case to be held jointly and severally liable whereas in a commercial
matter they get the benefit of proportionate fault?
Mr. Davis: The answer is that the law must pay a much higher regard to personal
injury, bodily integrity, than damage to the pocketbook.
I have no problem at all with continuing the joint and several liability for
personal injury. As a tort lawyer, I am well aware of the fact that the law of
torts is already a very inadequate mechanism for compensating people who are
injured in road accidents and who suffer industrial injuries.
Insofar as purely financial loss is concerned, I cannot help feeling that anyone
who suffers that financial loss -- if it is in the area of companies going bust
or into liquidation -- might have to deal with the further risk of some of the
defendants not being insured. On balance, I find that acceptable, whereas no
one ought to take the risk of being run into by an uninsured car driver.
Senator Angus: I am sure you know that some members of Lloyd's suffered such
horrendous financial losses that they jumped from a window and suffered
unbelievable personal injury.
The Chairman: Am I right in saying that fundamentally underlying your argument
for the distinction between what cases ought to be joint and several and what
ought to be proportionate is a value judgment that a plaintiff who has a
personal injury claim ought to be treated differently from a plaintiff who has
simply lost money? Frankly, that value judgment is inherently an assumption from
which everything else follows.
Mr. Davis: Yes, indeed, that is perfectly correct. Personal injury, I think, is
something quite different.
The law of torts is fairly inadequate in properly compensating for serious
personal injury, whereas purely financial loss stands on a different plane. It
is a value judgment, I agree. There is no fair, legal principle to which one
can point. It is the value judgment that underlies the whole of our report.
Senator St. Germain: My question relates to auditors. It appears that the
Canadian Institute of Chartered Accountants, as well as the accountants in your
country, have been the initiators of these studies which are being done on
proposed changes to legislation.
Has there been any research of the level of diligence of auditors in eras such
as the 1980s? Have these auditors relaxed their standards to satisfy their
large clients and thus exposed themselves to these lawsuits? By that I mean
have they deviated from what is considered generally accepted auditing
standards or generally accepted accounting principles? Have you any information
on that, gentlemen?
Mr. Davis: I am afraid I cannot recall any empirical evidence on that. There has
been some apocryphal, anecdotal evidence that, in the latter half of the 1980s,
the financial boom was running at such a pace that work was heaped on the
auditors and that some of the auditing work may have been passed on to a junior
partner or a junior employee. There might have been some slipping of standards.
Perhaps hidden behind your question is the comment that all auditors or lawyers
need do is to be careful and they will not expose themselves to liability
I do not think that is a realistic view. The problem is that, when a collapse
occurs, when someone suffers severe financial injury and they start thinking
about litigation, then it is always a matter of looking with hindsight at what
the accountant might have done, what the solicitor might have done. Of course,
we all know that hindsight is 20/20. It is always far too easy to say that you
should have done that or done the other whereas, at the time, the deadline
pressures may have caused something to slip through which may not have slipped
through in a perfect world.
I do not know of any empirical evidence which sheds light on whether standards
have been maintained in accounting firms. With any financial collapse, the
liquidator will always turn to the auditor and sift through the conduct of the
auditing firm with a fine-tooth comb, trying to find something on which to pin
a case of negligence.
One cannot necessarily say that, simply because an auditor is found liable
either in negligence or under our consumer protection legislation, that
standards have fallen below what they ought to be.
Mr. Govey: I am not aware of any empirical studies in this area. I do think
senior members of the accounting profession would readily acknowledge that a
good deal of the problems which emerged in the 1980s, as shown in the cases I
have referenced, did exhibit quite clear lapses of auditing standards for both
the reasons mentioned by Professor Davis: too few resources and inexperienced
people being assigned to that work.
In those cases where judgments have been given, the conclusions reached do
demonstrate quite serious lapses of negligence on the part of the particular
It was also clear that the auditors were not the only parties to blame. There
were other people, in particular, the entrepreneurs involved, who were at least
as much and probably much more to blame than the auditors for the financial
losses suffered by investors and creditors. However, the evidence which comes
out of the litigation in relation to those collapses demonstrates that the
auditors and their insurers have been the ones held responsible in terms of
court settlements and judgments for the vast majority of the losses.
Senator St. Germain: To summarize, do you not think that we should be
considering the standards and the principles, rather than changing our laws to
meet the requirements? I hear what you are saying. Often the entrepreneur is no
longer available to be pursued.
The question of standards and principles is something which I insist on
addressing when I sit on the audit committee of any board. It is a grey area to
some degree. As a business person but not a lawyer, I believe that is something
we should be pursuing.
Mr. Govey: It is a fair comment. It is, however, beyond the role of Parliament
to set those standards, but I do know that the accounting profession and the
two professional accounting bodies have placed enormous emphasis on increasing
the professional standards.
Substantial attention has been paid to raising professional standards through
increased focus on professional training, education. Disciplinary action has
been brought both by the professional bodies themselves and by our statutory
body which is set up to hear cases brought by the corporate regulator where
there are serious cases of misconduct by auditors and liquidators. We have heard
general anecdotal evidence that standards have improved considerably.
To turn to your underlying point, I think the auditors would say that there is a
limit to the right sorts of incentives for proper professional conduct which
can be gained through a litigation system and a liability system. I do not
necessarily agree with that, but there is something to the point that if you are
liable for a $50-million loss, that is about as much incentive as you can
provide for proper adherence to professional standards. Facing a professional
liability of $150 million then, to speak hypothetically, would probably not add
much to that incentive to act with proper professional care.
Mr. Davis: I agree that certainly standards need to be raised.
Another problem is that the legal system is always working five, six, seven,
perhaps ten years behind the times. It is only now in Australia that some of
the cases from the mid-1980s are actually coming to light, exposing the
entrepreneurs' attempts to make a fast buck at the expense of investors. Only
now are those questions coming before the courts.
It is only now that these questions of proportionate liability may be
Any increase in standards, while admirable, would only start to have an effect
on legal liability perhaps five or even 10 years down the track. As Mr. Govey
says, one needs, in the meantime, the incentive of the legal system as an added
means of seeking to ensure those increased standards.
Senator Oliver: I was interested in your comments about the High Court of
Australia and how it is turning to Canada to see how the law might develop.
In your previous answers, you have already alluded to the fact that it takes a
while for some of these issues to come to court.
Can you tell us what is happening in Australia in 1996 in terms of the nature
and types of cases that have come before your high courts, and have they, in
fact, attempted to draw some type of line delineating proportional liability
for auditors and other professions in any of those cases?
Mr. Davis: No cases have gone before the High Court, and very few cases have
come before the state courts which have actually raised this question of
liability of a number of different defendants.
At present, at least, if the courts do hear cases involving a number of
different defendants, they have to apply the current law of joint and several
liability. If a number of the people who were, in fact, responsible for the
loss are not, in fact, sued, or are not, in fact, before the courts, then the
court cannot require them to be added, and the whole of the loss must still be
borne by the one or two defendants who are being sued.
Senator Meighen: I confess, gentlemen, that I am a lawyer, so I can see both
sides and do not know which one to support. They both have great merit.
To come back to the question the chairman asked, I suppose some of us who have
some passing acquaintance with politics realize that it is amazing what a
well-organized and eloquent lobby can achieve.
Are you gentleman both entirely satisfied that you are facing a crisis, either a
monetary crisis or a fairness crisis, by retaining joint and several liability?
Or, in the absence of any concrete judgments and evidence, are you trying to do
what you alluded to a few minutes ago, that is, get the law out in front of
what you perceive to be the trend of the day?
I know we have six or seven international accounting firms. Are they in danger,
in your view, of going under, and is there empirical evidence to support that
Mr. Davis: There is no evidence to support the view that six or seven
international accounting firms are about to go under.
I would not say there is a crisis of fairness in retaining joint and several
liability. I realized at the time I was writing the report that any process of
law reform is a long, drawn-out business. I fully accept that the report has
been prepared, draft legislation has been prepared, submissions have been heard,
but, at the end of the day, it is a matter to be decided by the state and
territory governments in the way they choose.
All that an academic can do is point out where it appears that there is some
unfairness in the law and to propose a system which does create fairness in the
limited area to which it is directed.
Even if no change comes about at the moment, there is at least the report and
the draft legislation. At least the topic exists for discussion and for
consideration. The matter does not just disappear.
You ask if the six or seven major accounting firms are liable to go under.
Another question is whether they will pull out of Australia because Australia
retains joint and several liability. The answer to that must be no, for the
following reason: Back in the mid-1970s, the New Zealand Court of Appeal handed
down a judgment which extended auditors' liability quite considerably. They
found that the auditor owed a duty of care not only to their clients but also
to the person who had read the annual reports and had launched a takeover bid
based on that annual report.
Many economists say that the economically rational auditor, as a result of that
decision, would promptly get out of auditing because the only person who pays
the auditor is the client, but the auditor will be liable to a whole range of
people other than the client. If that were the case, then the whole of the
auditing profession in New Zealand ought to have closed down in the last 20
years. I can guarantee, as a former New Zealander and one who goes back there
regularly to visit my family, the auditing profession is still in very fine
form in New Zealand and has paid no attention to the economic rationalists.
That is a fairly long way of answering your question. There is no crisis in this
country. The auditing firms will not pull out of Australia. At least if a move
can be made which, in my view, provides for a fairer sharing of the liability
in these sorts of cases, then it is worth pushing to the extent that an
academic lawyer can push these views.
Mr. Govey: I think I need to avoid the substance of your question, because, as I
mentioned, the government does not have a policy position on this. However, I
can add that, as far as the auditing profession and auditing services are
concerned, they would say that there is some sort of a crisis, in two respects.
The first one is that the size of the claims, some of which are still
outstanding, would mean that, if they were pursued to judgment, the individual
partners of those firms would be subject to bankruptcy and, therefore,
exclusion from their profession, even though those particular auditors would
not have had any real means of affecting the particular audit, given the size of
the partnership. That is partly a question of fairness as well.
The second aspect of it is that insurance premiums have increased enormously. I
cannot remember the actual figures, but we have been talking about increases of
four or five fold over a period of five to 10 years and, of course, those costs
have to be passed back to the clients.
If the premise of the report by Mr. Davis is right in that there is a skewing or
an unfairness of the present liability regime such that some of these
professions are paying an unfair amount of damages, then there is also a
skewing of the cost structure for providing these auditing services.
The other point that must be made is that the vast majority of these claims are
settled probably just as everyone knows they will be settled. The real impact
of a change to proportionate liability is to provide an increased mechanism for
auditors and other professions to negotiate a lower settlement than would
otherwise be the case.
All of this litigation involves massive uncertainties about the law. That tends
to be factored into the litigation settlement process. On the other side of the
spectrum, if you know that once you have established liability on the part of
one of these professions, they are liable for the lot, that acts very much in
the other direction to increase the level of the settlement; whereas a change to
allow proportionate liability will have very much the opposite impact on
Senator Meighen: I was intrigued by the report of Professor Davis on what
happened in New Zealand or what did not happen in New Zealand.
From a public policy point of view, Mr. Govey, do you not think some
jurisdictional shopping will be indulged in if we end up with one jurisdiction
with joint and several liability, one jurisdiction with none, one jurisdiction
with capping, and so on? Obviously, perhaps to a greater degree than
yourselves, we must be very concerned in this country with what happens south of
the 49th parallel. They are obviously putting their feet into the waters of
proportionate liability with the legislation that came down in 1995 in the
securities area. I believe 48 states have subscribed to the 1995 legislation.
If they go full bore there, I think it will be awfully difficult for us to
resist that siren call of proportionate liability. Are you concerned about the
situation with your closest trading partner?
Mr. Govey: It is more a question of making sure that all the Australian
jurisdictions have the same rules. In previous discussions, that is something
which state, territory and Commonwealth ministers have been sensitive to.
Indeed, one of the reasons the matter is being handled through the Standing
Committee of Attorneys-General is to have uniformity. Having said that, only one
jurisdiction at the moment is working on a capping regime. One of the issues
which has always been raised in respect of that legislation has been precisely
what you have raised -- that is, the probability of some form of shopping
The concerns expressed in Australia have not so much dealt with what might
happen in overseas jurisdictions but, rather, they have been limited to the
Mr. Davis: This is where we are perhaps fortunate in being a large island, even
though New Zealand is very close, in many ways to Australia, and its law is
very similar. There are growing legal ties between the two countries. Indeed,
the New Zealand Law Reform Commission has been kept aware of the progress of
this report and what is going on.
So long as all the states and territories in Australia adopt proportionate
liability, I cannot see how that would make any difference in New Zealand.
Likewise, if New Zealand were to adopt proportionate liability and if most
states in Australia were to do the same, I cannot see that there would be any
movements of accounting or legal services across the Tasman Sea.
We are not really concerned with the legal regimes in other countries, except,
as you say, that the United States is going very far down this road of
proportionate liability. It appears, given a Republican majority at the moment
in both the Senate and House of Representatives, that draft bills on
proportionate liability are much more likely to be viewed favourably.
I cannot see that would make much difference in this country except, perhaps,
that the major accounting firms being Australian branches of U.S. firms might
use that as a further lever in putting their arguments to governments for a
change in the law.
Senator Meighen: As a matter of fact, three days ago a partner in one of those
international firms suggested to me that, if the U.K. adopted a proportionate
regime, he thought there may be some legal authority to support the contention
that they could set up there and merely come and practice in Canada on a branch
basis or on an individual basis and thereby benefit from the proportionate
regime in the United Kingdom.
When you find out how to get all the Australian states working together, let us
know the secret. I can see an island somewhat smaller than your island called
Prince Edward Island setting up a proportionate regime in this country, and we
would have more accountants than there are cows in Prince Edward Island.
The Chairman: Mr. Govey, I would like to ask you two questions based on your
analysis of the insurance situation. You talked about premiums going up four-
and five-fold over the period of a decade. To what extent is that a failure of
the insurance market rather than anything else? I mean, one can make an
argument that liability insurance is available. That much we know. We had
evidence to that effect in a different set of hearings a few months ago. To
what extent is the increase in premiums a real factor in terms of something
needing to be done about the problem versus a market failure, in some sense, in
the insurance business?
You also talked about the incentives that result from moving to proportionate
liability from joint and several liability. Certainly, if you are likely under
a joint and several system to be responsible for the entire cost, your
motivation to settle out of court is much greater than if you are only going to
be responsible, for example, for 5 per cent of the cost. Moving to
proportionate liability may, therefore, work to the disadvantage of the
plaintiff in two ways: First, it will mean he will not get 100 per cent or some
settlement out of court for a large number; and, second, if there is only one
group with deep pockets and they are only responsible for a small portion of
the liability, their motivation to settle out of court would become much less
than it is today. In fact, the poor plaintiff would lose in both scenarios. To
what extent is that description a likelihood, and to what extent have you
considered that in your policy discussions?
Mr. Govey: I think your analysis on the second point is right in suggesting that
there would be less incentive to settle because the ultimate loss would,
arguably, be lower. However, in our experience, litigation is such an uncertain
beast and there are so many uncertainties -- including whether or not you will
be found liable for only a small proportion or whether that proportion will be
large -- that the incentive to settle will still be quite great. Of course,
part of the reason for that are the usual costs carried by any defendant in
running a case and having to pay for legal representation, particularly at the
court hearing stage.
I suppose the other consideration that professionals, in particular, find it
very difficult to run with litigation because, first, it brings unwarranted and
unwanted publicity and, second, it is a huge distraction for the professionals
themselves. It takes them away from their earning capacity.
As far as insurance premiums are concerned, I am far from an expert in this
area, but when we were working at a more detailed level with insurance
companies and auditors a couple of years ago, they produced evidence about the
level of claims and the level of insurance premiums which, at least in their
eyes, demonstrated quite a close link between the increased payouts and the
level of insurance premiums.
It is also worth mentioning -- and, I think this applies internationally -- that
a significant part of the insurance carried by auditing firms or accounting
firms is on the basis of mutual insurance where the firms themselves
I would have thought -- and, again I must qualify what I am saying by stating
that I am not an expert -- that if you are talking about that sort of mutual
insurance, it is much more difficult to point to a market failure because a
certain proportion of the premiums is being paid in by the firms, and that
money is included in any pay out. Once it is gone, it must be topped up.
Mr. Davis: In discussions with accounting firms in the course of preparing this
report, a couple of the major international firms said that they could no
longer find insurance companies to carry the risk at the levels they required
to provide insurance. Therefore, they had gone almost exclusively into mutual
insurance among the major firms themselves.
I agree with Mr. Govey. I do not think you can say that it is a failure of the
insurance market. One is concerned here with liability insurance, and that will
always be a very difficult issue. Whoever is carrying that insurance, it will
always be impossible to estimate the extent of any firm's liability over the
next year. The insurance company must make a best-guess possible and then add
another 20 per cent to allow for possible bad guesses and come up with a
Senator Hervieux-Payette: You seem to recommend a blanket solution for
proportional liability. We are talking about certain high-risk areas. Have you
contemplated a solution that would address these high-risk assessments? It
seems that this solution is more for the benefit of the auditors and the
lawyers. You are suggesting a blanket solution for all the professions when only
5 per cent of the companies are causing the debt risk to these professions. Is
there any other, more tailor-made mechanism which would respond to this limited
number of situations?
Mr. Davis: The main impetus for any proposals for change has been found among
the accounting and the auditing professions. The apparent need for change arose
from a particular financial crisis. The sort of claims that were being made
against the government made me realize that the same principles apply if it is
a solicitor who is liable, along with two or three other people, for a
particular loss -- that is, if it is an architect, a builder and a local
counsellor, as I mentioned earlier.
In each case, there are "normally" professionals involved because
those cases concern purely financial loss. They are not cases of personal
injury. However, it is a matter of looking at the principle of the matter, how
it affects auditors, solicitors, other professionals, engineers, architects, et
cetera, and trying to achieve some measure of fairness in relation to all those
Mr. Govey: We have been talking about auditors and accountants primarily, but it
is true that the concerns have been felt right across the board -- at least in
Australia <#0107> by all of the professions? We have received submissions
from engineers, architects, a body called the "Council of Professions",
actuaries, lawyers and accountants. We have also had support from company
directors and company secretaries. This wide-ranging level of concern has led
to this issue being considered by government here, even if the catalyst came
from the auditing area.
Senator Hervieux-Payette: All the options may have been considered but, for
instance, there could have been a joint and several insurance policy for each
profession so that you would have a two-tier insurance. You have many players,
so they could do that. I have the feeling that we are not limiting the damages,
we are just redistributing the damages. That makes life difficult. We are
protecting the defendant, but the plaintiff will not benefit. To create a more
balanced system, I would have considered ways of ensuring that the plaintiff
would receive full payment of his claim, not ways to ensure that a plaintiff
would only receive a 5-per-cent share of his judgment. In what way would
plaintiffs benefit? I do not think this is a balanced approach.
Mr. Davis: I do not necessarily agree that it is not balanced, but I agree that
proportionate liability does pay the defendants; joint and several liability
pays the plaintiffs.
One answer to the problem might be to require compulsory insurance for anyone
who might be involved. That was one of the solutions that was considered and
may have been adopted in relation to the building industry. There is now
legislation in Victoria which imposes proportionate liability on anyone
involved in the building industry.
At the same time, builders and local authorities and, I presume, the relevant
professions -- that is, architects and engineers -- were obliged to take out
insurance so that the liability was apportioned in accordance with the
particular fault of each party. But the plaintiff still got full damages
because, even though all the people responsible had to be sued, each of them
was insured and, therefore, each of them was able to pay the damages.
One answer in taking that any further is simply the pragmatic one of insisting
on compulsory insurance for, say, the auditing profession or the legal
profession. One would then ask what other professions or other persons might
possibly be defendants in a case like this and where else a proportion of
liability might apply.
The answer, as the lawyer-senator from Prince Edward Island has pointed out, is
a matter of balancing one against the other. The balance that the brief
suggested is that if it is a case of financial loss, then the plaintiff has
already taken a risk. In virtually all cases, the plaintiff has taken something
of a risk in entering into some transaction which has turned out bad.
If the plaintiff has really taken something of a risk in that who knows what
might happen to the economy, this is simply adding one more risk to the
plaintiff and, at the same time, sharing the cost in a way that we see as fair
among the various people who have brought about that loss.
The Chairman: Professor Davis, I am intrigued by your rejection of the
compulsory insurance approach. I say that because in this country you cannot
get a car licensed unless the car has insurance so that, if there is an
accident, the plaintiff is assured that he will be covered by the insurance
company of the other driver, assuming that the other driver was at fault.
It is interesting that in this country we are prepared to apply that policy to
automobiles. All of the logic of the argument you used to reach the opposite
conclusion with respect to professions is precisely the argument that has been
used in this country in compulsory insurance for automobiles.
Do you want to run through your argument again?
Mr. Davis: From a purely practical point of view it is not at all difficult to
make quite sure that every automobile on the road is insured and, if it is not
insured, to provide a system, as we do in this country, where the insurance
companies come together and provide compensation.
In Canada, you have the single tangible thing, the automobile, and before it can
go on the road, or before you as a driver can go on the road, you must get
insurance. I would not like to hazard a guess at the number of situations that
might arise in the future where, if proportionate liability is adopted, a
defendant might make use of that proportionate liability.
To provide the same protection for financial loss as is provided for automobile
accidents, one would have to legislate that everyone in the country be
compulsorily insured for any economic loss they might cover. What sort of
insurance company will be able to assess the risks involved? At least for third
party automobile insurance it is a matter of determining what claims have been
over the previous year, dividing that among the number of automobiles or the
number of licensed drivers, and imposing that cost on either drivers or
As a purely practical matter, I cannot see how one could extend that argument to
cover liability for purely economic loss.
Mr. Govey: Consistent with the high priority attached to retaining joint
liability for personal injury, at least in Australia, the parliaments have
regarded it as important to have mandatory insurance for personal injuries
arising out of automobile accidents. By contrast, in the commercial arena it has
not been regarded as appropriate for the legislature to intervene and mandate
insurance for commercial transactions, even where there is insurance in
practice. For example, in the accounting and legal areas there is insurance,
but for the most part that arises from professional bodies setting standards
through their self-regulatory systems rather than through systems mandated by
Senator Kelleher: I would like to follow up on something delved into somewhat by
Senator Meighen with respect to trade agreements and what effect, if any,
changes in legislation of this nature might have on them. We have now entered
into a very comprehensive trade agreement with the United States and Mexico. Of
course, 80 per cent of our exports go to the United States, so we are very
dependent for our prosperity on our relationship with them. We have to be very
careful to see that we do not become discordant with them in this area.
I was hoping you might have done something is this area. I will admit that I am
a little disappointed because when we were formulating the basis for the Free
Trade Agreement between Canada and the United States one of the models we
looked at was the agreement between New Zealand and Australia, because your
situation was comparable to ours. One country is 10 times the size of the other
with 10 times the GDP and 10 times the population. That is very similar to the
situation we faced here in Canada. Yet, you said that you had not really
considered that and that you do not think it will cause too much of a problem
because New Zealand is pretty much the same as you are.
However, if you are going to change your law in this regard, has anyone looked
to see what effect, if any, this might have? It is something that we must
consider. Do you consider this to be an important issue which should be
considered by a government in our particular position?
Mr. Davis: This is a fascinating issue. Your question raises a matter of private
international law, conflict of laws, which I happen to lecture in also, I am
very thankful to say in light of your question.
In this area, if all the states in Australia took on proportionate liability but
New Zealand stayed with joint and several liability, I cannot see how a
plaintiff who had suffered loss in Australia as the result of negligence of the
Australian office of an international accounting firm could bring proceedings in
New Zealand and try to take advantage of joint and several liability there
because, both in New Zealand and here, and also in Canada as the result of a
decision of the Supreme Court of Canada last year, in any interstate or
international tort claim one looks primarily to the law of the place where the
tort was committed. In the example I have given, the tort was committed
somewhere in Australia and I doubt very much, even if proceedings were brought
in New Zealand, whether the New Zealand system of joint and several liability
would be applicable.
That is an opinion off the top of my head, and at fairly short notice. However,
it is a fascinating question.
Certainly, the question was not considered. The only extent to which the
possible relationship between the law in Australia and the law in New Zealand
was considered was that, as the inquiry progressed in this country, the New
Zealand Law Commission was kept fully informed. Indeed, I happened to be in New
Zealand after we had produced the second stage of the report and I spent a
couple of hours in a briefing session with the New Zealand Law Commission. That
is the extent to which the international ramifications of the proposals have
The Chairman: From a public policy standpoint, have you given any consideration
to the following potential situation? Let us say that you are to decrease
liability under proportionate liability, to auditors, for example, then I think
one could, at least in theory, make an argument that, since their risks have
gone down, their attention to detail could also conceivably become at least
somewhat more relaxed in the sense that they are exposed to less risk.
Therefore, I think one could argue that the quid pro quo with a switch to
proportionate liability could, in fact, be substantially tougher regulation on
the profession. I am trying to understand whether, from an enforcement
standpoint, you are attempting to balance the two.
Mr. Govey: Again, that is a very pertinent question. I do not think there is any
formal link being made. However, I think it is true to say that the professions
themselves, as well as the corporate regulator, have, in advance of any change
and quite separate from any discussion of change, moved to tighten up the
regulation and the professional standards in this area quite considerably. They
did that having regard to the experience of the 1980s and seeing some of the
less than satisfactory situations that emerged from it.
As I say, to a large extent that has already been happening. Whether it would be
appropriate to go further in light of any change in this area, is something
that I am not really qualified to talk about.
As far as the incentives are concerned, I go back to something I said earlier. I
am not sure there is any evidence to suggest that the incentives for careful
actions is increased significantly by the prospect of being jointly liable or
severally liable as opposed to being liable for the proportion of your blame.
It seems to me that the potential for professionals to be held liable to the
extent that they are blameworthy is a very high incentive, and probably about
as high an incentive as you are going to extract from the litigation and
liability system. However, I accept that there could be arguments about that.
It is something which is obviously inherently very difficult to quantify.
The Chairman: By way of explanation, you used the term "corporate regulator".
That is a term with which I am not familiar. I do not think it is a common term
here in Canada. What position is that in your system?
Mr. Govey: The corporate regulator is the Australian Securities Commission which
came into being in 1991 when we adopted a national scheme for formal regulation
in this country. It is the equivalent of your securities regulators.
Senator Angus: I have often wrestled with the possibility of contracting out the
responsibility. In other words, a CA firm can take on an assignment, whatever
it is, undertake the usual certificate in terms of the GAAP, the generally
accepted auditing standards and so forth but, at the same time, contract out
and have a non-responsibility clause. Is that possible under Australian law?
Where I live you cannot contract out of what we call "gross negligence"
but you can contract out of "regular negligence".
Mr. Govey: I will start by talking about corporations law. In corporations law,
there is a restriction on the extent to which auditors can contract out of
liability. In a practical sense, the auditor is not permitted by law to
contract out of the liabilities they have in this area. There are limits on
contracting out of liability in an area where so much of the liability arises
from tort and not just contract.
Mr. Davis: Certainly, you can contract out of even tort liability. In the
Commonwealth system we do not have the distinction between "negligence"
and "gross negligence". Therefore, one can contract out of negligence
liability. The only area of liability that you cannot contract out of is fraud.
This does not necessarily help the auditors in this sort of case, however,
because the auditors contract is with the company. If a third party relied on
the auditors' report, for example, then that third party is not a party to the
contract. Hence, there is no restriction on the third party suing the auditor
and not being limited to any extent by that contract that the auditor has
Senator Angus: I thought that was probably the case. By the way, do you have
jury trials in civil responsibility or in commercial cases?
Mr. Davis: No. Jury trials are limited mainly to defamation cases and the
occasion personal injury case in some states. In the sort of case we are
talking about, it would be judge alone.
Senator Angus: In Australia, do you have punitive damages as they do in the
United States or an even more onerous measure such as a Rico-type statute?
Mr. Davis: There are exemplary damages, which are the same as punitive damages,
which are the same as those in the provinces in Canada. They are unlimited in
amount and designed simply to make an example of the defendants to ensure that
the defendant realizes that his or her illegal conduct does not pay.
Generally speaking, exemplary damages are usually not available in a simple
negligence claim. There have been one or two cases, but normally exemplary
damages are limited to cases involving defamation or trespass.
Mr. Govey: In essence, you have to say that the punitive damage system in
Australia is very different from that of the U.S. We do not have an equivalent
of the Rico legislation.
Senator Angus: The megadollar settlements that you referred to that we do not
always hear about against accounting firms often have escalated numbers because
of Rico and/or exemplary punitive damages. In your country, as well as in ours,
we have not had this kind of escalation, at least so far. I think, perhaps, the
thin edge of the wedge is becoming evident in our courts. However, the problem
is not the same in these jurisdictions. Would you agree with that?
Mr. Govey: Yes, except that all those big claims that we have talked about have
all been on the basis of actual losses suffered. As we mentioned, the highest
claim was $1 billion, but there have been a number of claims in excess of $50
million Australian, as well as several settlements. I think the highest
settlement was over $100 million. Certainly, a significant number of settlements
have run into the millions of dollars. As I have said, they are based on actual
loss with no punitive damages element.
The Chairman: On behalf of the Senate Banking Committee and, indeed, the
Canadian Senate as a whole, I want to thank you for taking two hours out of
your time to speak with us. Your testimony has been very helpful to us. As we
proceed down the road on this issue, we may be in touch with you again.
The committee adjourned.