III. MODELS FOR REFORM2017-03-03T18:33:23+00:00

This part of the report briefly reviews proportionate liability, caps and contractual limitations of liability.

 

A.   Proportionate Liability

 

The systems of proportionate liability are described in detail below.

 

1.                 Full Proportionate Liability

 

A system of full proportionate liability limits the liability of each co-defendant to the proportion of the loss for which he or she was found to be responsible. Per the above example (in which D1 is responsible for 70% of loss, D2 for 20% and D3 for 10%), under this system D2 will only be responsible for $20,000 of the $100,000 judgment: equal to 20% of his or her share of the liability. Likewise, D1 and D3 will be responsible for $70,000 and $10,000, respectively. If D1 and D3 are insolvent, unavailable or otherwise unable to pay, the plaintiff will only recover $20,000 from D2.

 

2.                 Proportionate Liability where Plaintiff is Contributorily Negligent

 

This variation of proportionate liability would retain joint and several liability when involving a blameless plaintiff, but would abolish or modify the rule where the plaintiff contributed to his or her loss. Per the first example, suppose the plaintiff (P) contributed to 20% of his or her $100,000 loss, while D1, D2 and D3 were responsible for 50%, 20% and 10%, respectively. If D1 and D3 remain unavailable, P and D2 will each be responsible for their $20,000 shares. The plaintiff will remain responsible for the $60,000 shortfall as a result of the absent co-defendants’ non-payment.

 

3.                 Proportionate Liability where Plaintiff is Contributorily Negligent with a Proportionate Reallocation of an Insolvent, Financially Limited or Unavailable Defendant’s Share

 

The plaintiff and remaining co-defendants share the risk of a defendant’s non-payment in this variation of proportionate liability. The plaintiff and co-defendants are responsible for any shortfall in proportion to their respective degrees of fault. Using the numbers in the previous example, with a shortfall of $50,000 from an absent D1 and $10,000 from an absent D3, P and D2 must account for the missing $60,000. P and D2 had equally-apportioned liability, and will thus be responsible for half of each shortfall, or $25,000 and $5,000 from each non-paying defendant. The burden is shared between the plaintiff and remaining defendants.

 

4.                 Proportionate Liability with a Peripheral Wrongdoer

 

Under this approach, a defendant will be proportionately liable only if his or her share of the liability falls below a specified percentage, above which liability would be joint and several. Using the above numbers, if the threshold amount of liability is set at 25%, D2 and D3 would only be responsible for 20% and 10% of the compensation, respectively, regardless of whether they are the only available or named defendants, while D1 is potentially liable for 100% if it is the only available or named defendant.

 

While this system favours defendants responsible for a relatively small portion of the loss, the determination of the proper threshold amount between joint and several liability and proportionate liability is somewhat arbitrary.

 

5.                 Proportionate Liability with a Reallocation of Some or All of an Insolvent or Unavailable Defendant’s Share

 

This variant provides for reallocating the liability of a non-paying defendant among the remaining defendants in proportion to their respective degrees of fault. The plaintiff’s contributory negligence does not impact the application of this reallocation, and joint and several liability would continue to apply in cases of fraud or where laws were knowingly violated.

 

6.                 Court Discretion

 

Similar to the fraud exception in the variant above, a final modified approach to proportionate liability may be to give the courts discretion to apply various forms of liability depending upon the facts and circumstances of the case. For example, despite operating in a joint and several liability system, if a particular co-defendant’s share of the fault was relatively minor the court would have discretion to limit that defendant’s liability to some appropriate portion. As discussed below, while the CBCA uses proportionate liability, there is residual court discretion in some instances.

 

B.   Legislative Cap on Liability

 

Liability concerns for professionals could be addressed by introducing a cap on the amount of damages available for claims for economic loss in connection with certain types of work. Such a cap could be implemented independent of any reform to the broader liability scheme. This cap could operate in a number of ways, including:

 

a single monetary amount;
a percentage or multiplier of the fee charged by the professional; and
a percentage of damages awarded.
 

The cap could be modified by or entirely limited to certain kinds of work. For example, audit professionals drafting an audit report could be capped differently from professional engineers performing a geological survey.

 

The OSA framework for secondary market misrepresentations contains a statutory cap on liability based on a percentage of a company’s market value or the professional’s earnings over the time period. For example, Australia has a fixed statutory liability cap of $75 million AUD. These caps are further discussed in Part IV of this Report.

 

C.    Hybrid

 

A number of jurisdictions provide a hybrid system of proportionate liability and caps on damages. Co-defendants are liable for their portion of the damages, but the maximum total amount payable by each co-defendant is capped to a certain statutory limit.

 

D.   Contractual Limitations on Liability

 

Parties may also contract to accept limitations on liability. A contractual limitation may have the parties agree that, in the case of loss, there would be a cap on damages to the amount of fees paid.

 

Private parties are generally free to agree to a contractual cap on liability. However, legislation governing certain professions or professional conduct rules may prohibit some professionals from limiting their liability in certain circumstances. For example, in Canada, corporate law statues provide that directors and officers cannot contract out of their statutory duties, including the duty to exercise care, and related liabilities. Similarly, the Solicitors Act[32] says lawyers cannot contractually limit their liability.[33]   Such a restriction does not exist in Canadian legislation governing audit professionals. The LCO further understands that audit professionals routinely cap their liability in their engagement letters.

 

It is important to note that contractual liability caps only potentially address the issue of damage claims above the cap for causes of action based on breach of contract. Caps on damages agreed to by contract do not prevent causes of action based in tort. Parties not privy to the contract with the co-defendant, including shareholders, creditors or consumers, as the case may be, could pursue a cause of action in tort and related damages, even in the face of a contractual cap. 

 

The United Kingdom has adopted a novel approach whereby shareholders may approve a contractual liability cap between an auditor and its client company. This is discussed in further detail in Part IV of this Report.

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