One of the primary aims of civil litigation is to compensate plaintiffs for harm or loss incurred by them on account of wrongdoing by others. At common law, tort damages are meant to provide compensation for the tort victim’s loss. When a wrongdoer causes harm, damage or loss, the aim of awarding damages is to require the defendant to pay for everything necessary to make the specific plaintiff whole. This purpose must be kept in mind when assessing various options for reform. Moreover, the objective of compensation must be read in relation to other policy goals such as fairness, as discussed below.
There are two ways to view the issue of deterrence when discussing professional liability: (1) deterring a particular wrongdoer from engaging in further misconduct and inflicting further loss (specific deterrence) and also deterring professionals more generally from engaging in misconduct (general deterrence); and (2) deterring professionals from engaging in work where the risk of liability is too high. The first view of deterrence or put in another way, inducing law abiding behaviour, is one of the main policy rationales of civil liability. Civil liability or private enforcement acts to create strong incentives for professionals such as auditors, directors and lawyers, for fulfil their statutory or contractual duties to corporations and other stakeholders. For deterrence to be effective, the threat of liability must be credible and substantial. Where litigation risk is diminished, financially negligible or lower than the expected return from acquiescence to, or active involvement in, say, earnings management, then the threat is diminished.
Alternatively, if the risk of unlimited liability is too high, for example, with a scheme of unlimited joint and several liability, well-qualified professionals may be discouraged from entering the market. This could have the result of decreasing the quality of professional services and undermining the gate-keeping function of corporate accountability. The decreasing number of Canadian auditing firms may be an indication of this type of deterrence. For example, in 2001 there were 400 public company audit firms in Canada. In 2008, that number had been reduced to 230. The Institute of Chartered Accountants recently conducted a survey of just over 1,700 small to mid-sized firms and sole practitioners. Among the findings, 73 percent of respondents stated that they have faced a moderate to significant increase in liability insurance costs over the last five years, while 64 percent of respondents said they are being deterred from taking on assurance engagements. Fifty-eight percent said that the liability crisis in creating difficulty for clients to access assurance services.
As with deterrence, there are two ways to view the issue of fairness when discussing professional liability: (1) fairness to the plaintiff; and (2) fairness to the defendant. Whether the focus is on the plaintiff or the defendant will heavily influence the type of regime that is considered preferable for reform. One of the central arguments in favour of joint and several liability is based on fairness to the plaintiff. If two or more persons are the cause of an economic or financial loss suffered by another, they should be liable for the full extent of those consequences. In other words, it would be unfair to a plaintiff to shift to the plaintiff the risk of a defendant’s inability to pay damages. That risk ought to be borne by the defendant(s) because they have caused the financial or economic loss.
Alternatively, the principal argument in favour of proportionate liability is also based on fairness; however the focus shifts to fairness to the defendant. It is argued that it is unfair for a defendant, whose degree of fault is minor when compared to that of other defendants, to have to fully compensate a plaintiff should the other defendants be insolvent or otherwise unavailable. In theory, the less blameworthy defendants can recover contribution from the more blameworthy defendants; however, in practice the former, particularly where they are insured professionals, are left to bear the majority share of liability when other defendants are insolvent or unavailable.
Many participants at the Roundtable raised fairness as a factor in determining policy. Audit professionals advanced the case that fairness requires a move away from joint and several liability to some other framework that limits their loss exposure to the loss that they actually caused, as opposed to other co-defendants. They also indicated that a fairer liability regime would make Ontario more competitive. On the other hand, plaintiff-side lawyers suggested that it would not be fair to plaintiffs if they had to seek individual recovery from each defendant in a lawsuit based on the proportion of the harm each caused. This issue will be explored in the draft report to be prepared by the LCO and comments on the issue of fairness, to whom and why are welcomed.
Cost is another factor for consideration and it was raised repeatedly at the Roundtable. Some liability regimes may increase the overall costs of litigation if there is a need for multiple or protracted proceedings. Similarly, costs may be increased to take into account liability premiums and may have an impact on the pricing of professional services.
E. Concern for Certainty
Some types of liability regimes, for example, capped liability, provide for greater certainty with respect to the overall quantum of damages that a co-defendant will be liable for if other co-defendants are insolvent, financially limited or unavailable.
F. Competition for Capital
Another policy consideration concerns the potential transfer of capital to other jurisdictions that allow for greater recovery. As an alternative to focusing on the risk to service providers, one participant at the Roundtable, from an institutional investor perspective, emphasized the risk to capital providers. It was suggested that attention be given to the flow of capital to other markets that allow for greater recovery. For example, if a Canadian company is inter-listed on the New York Stock Exchange, this institutional investor is more likely to trade their shares on the New York Stock Exchange as the U.S. allows for greater and easier recovery. In other words, if foreign liability regimes are more beneficial, investors will transfer their investments to those jurisdictions to take advantage of such regimes.
How should the policy goals of compensation, deterrence and fairness be balanced and/or prioritized when considering liability models?
Are there other policy considerations that are important in determining an appropriate liability model?
What is the relationship of liability models to substantive standards of liability (such as duty of care)?
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