V. OPTIONS FOR REFORM2017-03-03T18:33:22+00:00

A.        General Comments
 

This project is focused on the OBCA. At the Roundtable, however, several participants raised questions as to the appropriate scope of reform for professional liability. Given the constitutional jurisdiction over civil liability, the province of Ontario has many options. Four general areas for potential reform for professional liability regimes were proposed: (1) general subject matter legislation (such as the Negligence Act); (2) profession-specific legislation (such as the Public Accountants Act); (3) securities legislation; and (4) corporate legislation.

 

Several commentators believed that the starting point for reform should be with the Negligence Act. It was thought that reforming corporate legislation was a poor choice given the plethora of statutes and regulations that would need to be concurrently amended. Reform to profession-specific legislation was considered to be too limiting and had the potential of leaving out other professions (such as medical professionals and engineers) who could also claim that they were at risk of being exploited under the joint and several liability regime.

 

In response to suggestions for reforming the Negligence Act, there was a discussion about the importance of the distinction between personal injury and economic loss. A liability regime that compensates a plaintiff for personal injuries may have significantly different policy objectives and/or considerations than a liability regime that compensates for economic loss or property damage. It was suggested that, if a proportionate liability regime is proposed as part of a broader reform to the Negligence Act, a special carve out is necessary for personal injury.

 

B.        Keeping the Status Quo: Joint and Several Liability


The current joint and several liability model favours full compensation for plaintiffs as well as fairness and ease of recovery for plaintiffs at the expense of, some would argue, fairness and certainty to defendants.

 The central argument in favour of the joint and several liability regime is based on full compensation to plaintiffs and fairness to plaintiffs. 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.

 

One of the main practical arguments for retaining joint and several liability concerns the extent to which, where there is potentially more than one defendant, the plaintiff would be obliged to proceed against all of them in order to recover full damages. To do so would increase the plaintiff’s involvement in litigation and negotiating settlement of claims and ultimately increase costs.  It is suggested that a move away from joint and several liability will be at the cost of full compensation to plaintiffs.

 

It is also argued that joint and several liability acts as a proper deterrent for misconduct by professionals.   Knowing that they will be held fully accountable, parties are more likely to implement measures to avoid liability.  It has been suggested that replacing joint and several liability with a proportionate liability regime might adversely affect the risk management behaviour of potential defendants; if defendants are liable for their portion of the damages only, the incentive to develop, adhere to and improve professional standards may decline.

 

Proponents of joint and several liability argue that it is less complex than an alternate system of proportionate liability or a capped hybrid system of liability.  Under joint and several liability, a plaintiff’s claim can be dealt with without having to take apportionment among the defendants into consideration. While this may be true in relation to the main action, however, the question of apportionment must still be considered in subsequent contribution proceedings.  Therefore, proponents of reform suggest that the disappearance of such contribution hearings under a proportionate liability regime may be an advantage. 

 

A general concern that is raised by the auditing industry is that joint and several liability inhibits the overall quality of the auditing profession. While it was recognized that large audit firms maintain a number of safeguards to ensure the delivery of high quality standards (for example, quality control reviews and external oversight), none of the firms carries sufficient insurance to cover catastrophic losses. Even if enough insurance was available, it is felt  that the costs to cover such insurance would make auditing services prohibitive. 

 

Along the same vein, auditing professionals argue that it is increasingly difficult to attract and retain young high quality professionals to the auditing industry and that fewer firms are willing to risk auditing large public companies. One of the panellists at the Roundtable  representing the small to mid-tier auditing industry noted that mid-tier firms are also at a disadvantage under a joint and several liability regime, particularly with respect to employee recruitment and the ability to help smaller companies and not-for-profit enterprises. In general, participants from large audit firms are of the view  that it is  unfair that auditors be treated like guarantors to other parties as a consequence of joint and several liability.

 

C.        Proportionate Liability


A proportionate liability regime is regarded as providing reasonable  compensation to plaintiffs (noting that in some cases it will not be full compensation because one or more of the defendants may not be able to satisfy their proportionate share of the judgement). This regime would be considered more costly and less efficient from the perspective of the plaintiff because the plaintiff has to obtain recovery from each defendant, as opposed to a single defendant. However, this system would be regarded as providing greater fairness and certainty to defendants since their liability exposure is proportionate to their fault. It is uncertain what the impact on deterrence would be.

There are a number of arguments in favour of and against full proportionate liability. For the most part, they focus on issues relating to fairness, the effect on the availability and cost of liability insurance, the costs and certainty associated with litigation and the question of deterrence. The principal argument in favour of proportionate liability is also based on fairness; however the focus is on fairness to the defendant. It is argued that it is unfair for a defendant, whose degree of fault is minor in when compared to that of other defendants, to have to fully compensate a plaintiff should the other defendants be insolvent or 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.

 

Proponents of proportionate liability contend that joint and several liability encourages plaintiffs to unfairly target defendants who are known or perceived to be insured or solvent. For example, the accounting industry argues that, because auditors are known to be insured, plaintiffs seek them out as defendants. The same can be said for lawyers and other professionals. Given that plaintiffs decide when, where and whom to sue, it is argued that plaintiffs will sue persons who they believe afford the best opportunity for recovery.

 

It has also been suggested that the likelihood of having to pay an entire damages award puts pressure on deep pocket defendants, such as auditors, lawyers or other professionals, to avoid protracted, expensive litigation by settling for amounts that may be excessive. A scheme of proportionate liability would prevent, to some measure, such strategic behaviour.

It has been suggested that the level of sophistication of the plaintiff should be a factor when considering the application of proportionate liability. Some industry groups argue that the notion of fairness and making the plaintiff whole has less relevance to claims for financial loss resulting from negligent misrepresentation where sophisticated plaintiffs are aware of the inherent risks associated with business and financial decisions. 

 

For sophisticated business plaintiffs, the possibility of professional negligence should be one more commercial factor to be taken into account when making an investment decision. A small, unsophisticated investor, however, may not necessarily be aware of these risks. Some, therefore, argue that it is fair and appropriate for a proportionate liability regime to make a distinction between sophisticated and small investors, along the lines of the model used in the CBCA.

 

On the other hand, it has been argued that proportionate liability may increase the cost of litigation because it will produce more uncertainty for parities when attempting to reach a settlement.  Parties would not only have to ascertain the likelihood of liability being found, and the extent of damages, but also the degree of liability to be assigned to each defendant. However, it has also been suggested that joint and several liability increases the overall cost of litigation because it involves two sets of proceedings: one to determine the liability for the loss and one to establish the measure of contribution among co-defendants.  With proportionate liability, both issues would be settled in one trial, potentially saving time and money.

 

It should be noted that many of the arguments for and against full proportionate liability also apply to the various forms of modified proportionate liability that are set out in Section II.B.1 above.

 

It was noted by several plaintiff-side litigators at the Roundtable that proportionate liability may be beneficial to certain defendants who wish to settle when other co-defendants do not. Proportionate liability facilitates the settlement process in this context by allowing defendants to analyse their potential liability and propose reasonable settlements based on that analysis.

 

A participant representing institutional investors at the Roundtable indicated support for a scheme based on proportionate liability on the basis that joint and several liability creates perverse incentives; the broad efficiencies and perverse insurance costs when one minor defendant is involved must be taken into account. This participant also noted that the liability regime should not only focus on compensating plaintiffs but also guiding behaviour, and that therefore, consistency of liability regimes across the country should be important.

 

D.        Caps on Liability
 

There are a number of advantages and disadvantages to a capped liability scheme. Caps on liability would similarly provide greater fairness and certainty to defendants but this benefit would potentially come at the expense of compensation to plaintiffs for harm suffered.  It is uncertain whether deterrence would be impacted by capping recovery, and this would in part, depend on the monetary level of the caps.

 

Proponents of capped liability argue that a statutory cap would limit exposure to the risk of huge damage awards by stabilizing the level of such awards, thereby making it easier for insurers to predict their potential exposure.  Provided that the cap was set at a sufficiently high level to cover the majority of claims and to limit recovery only on the largest, it would continue to deter professional negligence. A cap might also alleviate the concerns expressed by some professions, particularly auditors, about the unfairness of the present system of joint and several liability.

 

Opponents of capped liability, on the other hand, argued that a cap might diminish the deterrent effect of full liability and reduce the incentive to settle actions through negotiations. They argue that a cap would represent a significant move away from the principle that a plaintiff should be fully compensated for his or her loss. In this respect, the concept could be inherently unfair to a plaintiff.  It might also be unfair to other defendants who would continue to be exposed to full liability. Another disadvantage of the capping system is the inherent element of arbitrariness associated with fixing a level of a cap appropriate to all cases. Such a cap will have to be reviewed and updated at regular intervals.

 

Representatives from the auditing industry suggested that the OBCA be reformed away from the joint and several liability regime to one of capped-proportional liability. It was thought that a proportional approach would be more equitable and would bring Ontario closer in line with current practices in other jurisdictions. A statutory cap on liability, it was felt, should address the potential for catastrophic claims. However, it was noted by another participant that audit firms may be hard pressed to provide disclosure of the firm’s profitability in order to assess their potential risks and setting appropriate caps.

 

The auditing profession is of the view that  a capped-proportionate liability regime would benefit audit quality by changing current reporting models, which may lead to more detailed reporting and an ability to give assurance on a broader range of matters. This, in turn would provide more public information and an expansion of the audit procedure which would assist investors.  It was noted that, under the current joint and several liability regime, this is not possible.

 

E.        Limiting Liability by Contract


Limiting liability by contract would in most instances result in less than full compensation for a plaintiff suing in contract. Contractual limitations would be  fair for both the contracting plaintiff and the defendant so long as the contract is entered into with full information and on the basis of relatively equal bargaining power. However, it would not be fair to enforce a liability limitation against a third party who is not privy to the contract; hence, joint and several liability would continue for those suing in tort based on negligence. While contractual limitations provide some certainty for defendants in relation to contracting plaintiffs, the uncertainty associated with the quantum of liability continues in the context of plaintiffs suing in tort/negligence.  

 

Contractual limitations on professional liability might provide a reasonable and negotiated balance between the professional’s engagement and the level of risk that a professional can reasonably be expected to bear. Limiting liability by contract also affords some certainty as to the upper limit of the risk of exposure.  On the other hand, there is a risk that contractual limitations may undermine the credibility of a professional’s opinion and create a perception that professional services rendered under the protection of limitation clauses are of lesser quality than those that are not. Concerns may also arise in respect of contractual limitations when a professional is sued concurrently for breach of contract and in tort for negligence. Another concern is the impact of contractual limitations of liability on third parties.

 

 

What are the advantages and disadvantages of a contractual approach to limiting liability for professionals? 

In what circumstances might, say an auditor, be sued by a third party without having an opportunity to disclaim liability? 

Are these circumstances significant from a risk management perspective?

 

 

F.         Hybrid System


In addition to the modified versions of proportionate liability discussed above, there are a number of other hybrid models that may be developed that may achieve a better balance of compensation, deterrence, fairness to plaintiffs and defendants, costs, certainty and competition for capital.  Hybrid models of apportioning liability among co-defendants may provide greater flexibility than, say full proportionate liability or joint and several liability and may be more acceptable to a greater range of stakeholders that are impacted by this issue The option exists to adopt preferred aspects of each approach and develop a system that caters to the unique regulatory framework of Ontario.

 

G.        Exceptions for Fraud


Providing for joint and several liability in cases involving fraudulent conduct by the defendant(s) favours full compensation for the plaintiff. The egregious behaviour of the defendant(s) allows a policy decision to be made that results in greater fairness to the plaintiff and ease of recovery for him/her.

 

Having an exception for cases where a defendant is found liable for fraudulent conduct may strike a balance between joint and several liability and alternate models for reform. This exception would allow for damages in ordinary negligence cases to be apportioned on the basis of proportionate liability (or some modified version thereof); however, in cases where the defendants are found guilty of fraud (or fraudulent misrepresentation), the damages would be apportioned jointly and severally

 

 

What system of liability is best suited for the OBCA? 

If a recommendation is made to move away from joint and several liability in the OBCA, how should the recommended model be structured?

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