Ontario’s Business Corporations Act contains corporate law rules that govern the relationship between the corporation and its directors, officers, shareholders and stakeholders. Legal claims involving these parties take place in a system of joint and several liability: any one co-defendant is liable to pay the whole of a plaintiff’s loss and the risk of a co-defendant’s insolvency, unavailability or inability to pay falls on the co-defendants. Some jurisdictions have implemented a proportionate liability regime: co-defendants are only liable for the portion of their loss for which they were found to be at fault. Other jurisdictions use statutory limits (“caps”) on damages, often in conjunction with proportionate liability.
The purpose of this Report is to analyze whether the system of joint and several liability that operates for claims relating to OBCA corporations should be reformed to some version of proportionate liability and/or a statutory cap on damages.
The LCO considered the issue of liability reform by reviewing key policies and rationales underlying the tort system, including compensation, deterrence and fairness, and also addressed joint and several liability and alternatives in the broader context of proof of the substantive elements of tort law and professional negligence.
The study also considered the key advantages and disadvantages of different forms of liability, including joint and several liability, and alternatives, including proportionate liability, capped liability and contractual limitations.
The LCO notes that many professional advisors to all types of OBCA corporations use contractual caps to limit their liability vis-à-vis the corporation. The will of private parties in this context should generally be given effect through the fundamental principles of common law. The LCO also notes that professional advisors to OBCA corporations have the ability to contractually cap their liability vis-à-vis the corporation and the shareholders if all the shareholders expressly consent in writing to the liability cap, and that this option is most practical for non-offering OBCA corporations.
The LCO also notes that professional advisors who have been concerned about rising third-party insurance premiums and coverage limitations have negotiated larger retentions or deductibles with their insurers and have pursued self-insurance for certain layers of risk and liability exposure where it is more cost-effective to do so. In addition, a growing body of literature highlights the ability of novel market-based mechanisms, such as financial statement insurance and catastrophic bond securitization, to deal with audit failure.
After reviewing and analyzing arguments for retention of the status quo of joint and several liability, reform to a system of proportionate liability and/or statutory caps, as well as market based mechanisms that professionals can use for addressing liability concerns, the LCO recommends that the provisions of joint and several liability should continue to operate for OBCA corporations. The LCO reaches this conclusion on the basis that (i) the common law tests for professional negligence sufficiently address concerns about excessive or unfair liability; (ii) the available evidence on the specific deleterious effects of joint and several liability on insurance premiums, insurance coverage, pricing of audit services, and entry into the professions does not justify a change; and (iii) trends in other jurisdictions toward proportionate liability, particularly the United States, do not provide a sufficient grounding for reform, particularly in light of the more litigious environment in the United States.
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