IV. LEGISLATIVE AND OTHER DEVELOPMENTS

IV. LEGISLATIVE AND OTHER DEVELOPMENTS2017-03-03T18:33:23+00:00

This part of the report reviews recent legislative developments in Canada as well as other reports and commissions in Canada that have considered the issue of liability. Trends in other jurisdictions are also discussed.

 

A.   Canadian Statutory Reform

 

1.                 Canada Business Corporations Act

 

The 2001 amendments to the CBCA that came into force on November 24, 2002 changed the regime of joint and several liability among co-defendants to a modified proportionate liability regime with respect to certain financial information of a CBCA corporation. Under the CBCA, subject to some qualifications, a defendant who is found responsible for a financial loss that arises out of an error, omission or misstatement in financial information that is required by the CBCA is liable to the plaintiff only for the portion of damages corresponding to the defendant’s degree of responsibility for the loss.[34]

 

The proportionate liability scheme in the CBCA is limited in several ways. First, the 2001 amendments apply only to misconduct in relation to the CBCA, and accordingly not to securities law breaches.[35] Secondly, joint and several liability continues to apply in cases of fraud.[36] Third, in situations where one of the defendants (such as the issuer company) is insolvent, financially limited or unavailable, there is a provision for the court to apportion that defendant’s liability to the other co-defendants up to a cap equal to 50% of the amount originally awarded against the co-defendant.[37]

 

In addition, certain plaintiffs are specifically excluded from the proportionate liability regime, including Crown corporations, certain charitable organizations, unsecured trade creditors in respect of goods and services that the creditor provided to the corporation and individual plaintiffs whose investment is less than $20,000.[38] The rationale is that these individuals or organizations may not or do not have the wherewithal to make well-reasoned risk assessments or investment decisions or may suffer unduly from financial loss. Such plaintiffs can continue to collect under the joint and several liability scheme.

 

Finally, there is residual court discretion: courts have the option to award joint and several liability where it is just and reasonable to do so.[39]

 

A large number of submissions were critical of the CBCA provisions. The submission of the OTLA, for example, observed that the changes implemented by the 2001 amendments are “highly technical,” narrow in scope and application, complicated and confusing. The CBCA reforms in the OTLA’s view create uncertainty for litigants and seem, in some cases, arbitrary.[40]

 

Several submissions asked whether the 2001 CBCA amendments have in fact addressed any of the ills identified when the amendments were drafted.  The OTLA states:

 

[I]t is imperative, before any recommendation can be made, that an analysis be completed of the specific impact and force of the 2001 amendments. Whatever the experience has been, it cannot be ignored if similar, or related proposals are being considered for the Ontario model. [41]

 

It is unknown what practical effects the CBCA amendments have had in their eight years of operation. There has been no judicial consideration of, or direct judicial reference to, the CBCA amendments, and the LCO found no studies demonstrating a reversal of the “liability crisis” identified in the years following the amendments.

 

The bcIMC has publicly called for the CBCA to abolish its proportionate liability regime, “believing that the corporate statute should codify the best (i.e. strongest) corporate governance practices so that they become mandatory for federal corporations.”[42]

 

2.                 Ontario Securities Act

 

A public company has two important duties under the OSA.  First, when it “goes public”, the company must prepare and file a prospectus.  A prospectus is a disclosure document that must contain full, true and plain disclosure of all “material facts” and provide information that investors would want to see and that would reasonably be expected to have a significant effect on the value of the securities. Second, the company must make continuous and periodic disclosures to the market.  The company must periodically release financial statements and other documents that affect its financial position and make disclosure of any material changes.

 

Misrepresentations in prospectus disclosure potentially expose a company and its advisors to public enforcement by regulators and private litigation.  In the context of prospectus misrepresentation, a plaintiff could pursue a common law cause of action or base his/her claim on the statutory liability regime for prospectus misrepresentations. The rule of joint and several liability operates for common law claims as well as claims for prospectus misrepresentations under the statutory civil liability provisions in the Securities Act.[43]

 

Misrepresentations in continuous disclosure also expose a company and its professional advisors to public and private enforcement, but until 2005 plaintiffs could only base their claim in the common law, as there was no statutory cause of action for continuous disclosure violations. On December 31, 2005, the Securities Act (Ontario) was amended to create new statutory causes of action in favour of the “secondary market” against directors, officers and experts for misrepresentation and failure to comply with disclosure obligations.[44]

 

The statutory provisions were a compromise between plaintiffs’ interests and defendants’ interests. They provide plaintiffs with a statutory cause of action that is easier to establish than the common law cause of action of misrepresentation which requires proof of reliance on the misrepresentation. In contrast, the statutory cause of action does not require the plaintiff to prove reliance on the negligent misrepresentation. However, the statutory provisions also limit the damages that will be paid out once the statutory cause of action is proven, providing some benefit to defendants, as compared to the common law which provides for joint and several liability. The damages are limited in three ways under the statutory provisions, as discussed below.[45]

 

First, the damages must be calculated in accordance with the formulae set out in the Securities Act.

 

Second, the court is required to fix the proportionate share of those damages payable by each defendant found liable, recovery against each defendant being limited to its respective share of the total damages assessed for all plaintiffs.

 

Third, the amount payable by each particular defendant found liable may be further limited, provided that they did not have knowledge of the misrepresentation or fail to make timely disclosure of a material change, to various liability limits specific to each category of defendant.

 

The legislative caps are as follows. A company’s liability may not exceed the greater of $1 million and 5% of its market capitalization. The liability of an individual (other than an expert), such as a director or officer, is limited to the greater of $25,000 and 50% of his or her total compensation from the company and its affiliates during the preceding 12 months (including the value of any options, pensions benefits and stock appreciation rights granted during that period).[46]

 

An expert’s liability is limited to the greater of $1 million and the fees earned by the expert from the company and its affiliates during the preceding 12 months.[47]

 

The liability limits and proportionate liability provisions in the OSA do not apply to a defendant (other than a company) if the plaintiff proves that the defendant knowingly authorized, permitted or acquiesced in the making of the misrepresentation or the failure to make timely disclosure of a material change. In such cases, defendants are jointly and severally liable for the full amount of damages assessed in the action.[48]

 

Both the written submissions received and the comments of participants at the Roundtable suggested that practical effects of the reforms to the OSA were modest.

 

The submission of The Advocates Society states that the statutory secondary market liability amendment is a modest and incomplete remedy for investors harmed by misconduct of others in the secondary market.[49] It notes that there has been little litigation under these amendments made six years ago.

 

There is simply no case to be made that there have been massive increases in the liability of auditors, directors and/or officers to public shareholders and/or other third parties who rely upon financial statements provided by their corporations as a result of these OSA amendments and/or similar legislative amendments in other provinces.[50]

 

The Advocates Society submission also notes that the OSA amendments provided for a new substantive right for investors while also providing for proportionate liability as opposed to joint and several liability.

 

[I]n the consultation paper, there is no reference to any corresponding statutory rights and remedies to the OBCA shareholders and other corporate stakeholders being offered by the proponents of change to those introduced in the aforementioned OSA amendments. Instead, the Consultation Paper appears only to raise the prospect of limits to be placed on existing OBCA shareholders’ and other stakeholders’ rights.[51]

 

Siskinds’ submission agrees that the statutory secondary market regime is “an incomplete remedy for investors harmed by misconduct because of the pro-defendant barriers embedded in the statutory scheme.”[52] Siskinds also notes that the experience with these provisions has been rather uneventful. It states:

 

When Part XXIII.1 was enacted, advocates for the business community, principally major Bay Street law firms, warned of dire consequences and the likelihood of an avalanche of securities class actions. Those consequences have simply not materialized. Indeed, since Part XXIII.1 was called into force on December 31, 2005, there have been filed, to our knowledge, approximately 17 class actions seeking to assert claims under Part XXIII.1. That amounts to approximately 4 class actions per year. To our knowledge, an auditing firm was named as a defendant in only one of those actions, and ultimately agreed to settle the claims asserted against it for $500,000.[53]

 

B.   Previous Consideration of Joint and Several Liability in Canada

 

Reform of joint and several liability has been examined several times in recent Canadian history and reform to proportionate liability has been rejected a majority of the time.

 

In 1979 the Alberta Law Reform Commission recommended retention of joint and several liability.[54] The Uniform Law Conference of Canada came to the same conclusion in 1985,[55] as did the British Columbia Law Reform Commission in 1986[56] and the Ontario Law Reform Commission in 1988.[57] Concerned by the possibility of a “liability crisis”, the 1986 Slater Report recommended that joint and several liability should be re-examined, but often noted the lack of data to support claims of a crisis.[58]

 

The legal environment has changed significantly since the 1980s. The Law Reform Commission of Saskatchewan[59] and the Standing Senate Committee on Banking, Trade and Commerce[60] performed the most recent examinations of the matter in 1998. The Senate Committee recommended that joint and several liability be replaced by modified proportionate liability in the CBCA and other federal statutes. The Committee recommended that joint and several liability be retained in cases involving unsophisticated plaintiffs, the definition of which would be determined by the plaintiff’s net wealth. The Saskatchewan Law Reform Commission, on the other hand, recommended that joint and several liability be retained, though with amendments to Saskatchewan’s negligence statute to bring it into uniformity with other provincial liability statutes.

 

As noted by The Law Reform Commission of Saskatchewan in 1998:

 

The Commission has tentatively concluded that the basic principle of the existing contribution rules is sound.   We begin with the premise that the law of negligence must ultimately be judged as a social and economic institution.  In our view, the economic and social costs of shifting the burden of an insolvent co-defendant onto injured parties is less acceptable than shifting it onto co-defendants who are able to assume full responsibility for the harm they contributed to.  Neither approach can be regarded as entirely fair in the abstract.  But, as a matter of policy, a choice must be made.  We believe that the choice we tentatively recommend minimizes social and economic costs.  We have also tried to gauge the impact of the present law in practice.  Our conclusion that costs are more efficiently apportioned by protecting plaintiffs against short-falls in collection of damages could not stand if there was persuasive evidence that the present law leads to unacceptably high insurance costs.  Our review of studies of the impact of the contribution rules on insurance costs does not suggest that the rules result in significantly higher liability insurance premiums.[61]

 

 

C.    Other Jurisdictions

 

This part reviews the developments in other jurisdictions which are moving towards a system of proportionate liability, or otherwise away from joint and several liability. 

 

1.                 United States

 

A modified form of proportionate liability (proportionate capped liability) was adopted at the federal level in the U.S. with the passage of the Private Securities Litigation Reform Act of 1995.[62] The Act retains joint and several liability for defendants who knowingly violate securities laws and in relation to claims made by small investors.[63] A small investor is defined as a plaintiff whose net worth is $200,000 or less and whose share of the damage award is equal to at least 10% of his or her net worth.[64] For all other claims, proportionate liability replaces joint and several liability.

 

Where a defendant is insolvent or otherwise unavailable and a plaintiff is unable to collect the defendant’s share, each of the remaining defendants is further liable for the uncollected shares provided that the additional liability is not more than 50% of the remaining defendant’s proportionate share.[65] The Act also contains a contribution right which allows any person required to contribute more than his or her proportionate share to proceed against other persons who bear responsibility.[66]

 

Much of the impetus for reforming the joint and several liability regime came from a perceived insurance crisis. Municipal governments, in particular, were targeted as “deep pocket” defendants with relatively minor degrees of fault, and argued that joint and several liability was the root cause of higher taxes and service reductions.[67] The majority of states in the United States have modified the rule of joint and several liability in favour of some form of proportionate liability. Some states have adopted full proportionate liability in all circumstances. Others apply full proportionate liability but exclude cases involving intentional torts or strict liability. Some jurisdictions have instituted proportionate liability where the defendant’s fault falls below a specified percentage, while others apply proportionate liability if the plaintiff is contributorily negligent or where the plaintiff’s fault exceeds a specified degree.[68]

 

2.                 United Kingdom

 

The issue of professional liability has been given extensive consideration in the United Kingdom, stimulated by an increase in the number of negligence claims against auditors and the increasing costs of indemnity insurance. A number of major reports and documents have been produced in recent years.

 

  • The Likierman Report,[69] published in 1989, examined the liability problems associated with three professions, namely, auditors, the construction profession and other surveyors.
  • The second report was issued following an investigation by the Common Law Team of the Law Commission entitled “Feasibility Investigation of Joint and Several Liability”, published in 1996. The objective of this investigation was to determine whether a full Law Commission project on the issue of joint and several liability should be undertaken.
  • The third report was a consultative document issued by the Department of Trade and Industry in December 2003 entitled “Director and Auditor Liability: a consultative document”. This document, which was part of the process in reforming corporate law in the U.K., sought the opinions of interested parties on auditor and director liability.

 

The topic of professional liability was also considered by the Company Law Review Steering Group (the “Steering Group”), which was established by the government and charged with investigating how company law should be reformed. The Steering Group produced a final report in 2001, “Modern Company Law For a Competitive Economy”, wherein it considered and specifically rejected proportionate liability as a matter of principle because it was seen to leave innocent parties bearing some of the loss they incurred.

The UK Companies Act 2006 allows auditors to limit their liability by contract with their company clients, subject to shareholder approval (to address the tort liability) and subject to “such amount as is fair and reasonable in all the circumstances”.[70] These reforms, however, were counterbalanced by the following provisions: (1) a new criminal offence introduced for an auditor who “knowingly or recklessly” includes any matter which is misleading, false or deceptive in the audit report or who omits information which results in the audit report being misleading, false or deceptive;[71] (2) auditors may be required to disclose their terms of appointment – e.g. engagement letter;[72] (3) the audit report must be signed by a named partner – the senior statutory auditor;[73] (4) in the case where the auditor ceases to act for a named company, he or she must file a statement on the circumstances connected with his or her departure with the appropriate audit authority.[74]

 

3.                 Australia

 

In the wake of the corporate scandals in 2002, Australia introduced the Corporate Law Economic Reform Project (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9), which expanded the duties imposed on auditors and thereby increased auditors’ potential exposure to greater claims of negligence by third parties. CLERP 9 became effective in July 2004, amidst a professional indemnity insurance crisis and ongoing debate about the introduction of a statutory cap to auditor liability. A solution was sought to balance the claims for greater auditor accountability against the threat of auditors leaving the profession because of an increasing risk of litigation and exposure to liability.

 

In response, the Australian government introduced two measures in CLERP 9 to mitigate auditor liability: (1) proportionate liability for pure economic loss arising from misleading or deceptive conduct; and (2) a framework allowing for auditors to incorporate and thereby limit their liability through the corporate structure. The Government also legislated to allow for a national approach to a statutory cap for auditor liability through the Treasury Legislation Amendment (Professional Standards) Act 2004. The legislation limits losses between $1 million and $20 million AUD based on the fee for the service. The absolute maximum cap on liability is $75 million AUD.

 

4.                 European Union

 

On January 18, 2007, the European Commission launched a public consultation on the issue of auditor liability and invited stakeholders from across Europe to provide their views on four possible options for reforming auditor liability: (1) fixed monetary cap at the European level; (2) a cap based on the size of the audited company; (3) a cap based on a multiple of the audit fees; (4) a principle of proportionate liability implemented either by (a) having Member States change their laws to allow courts to award damages only for the portion of loss corresponding to auditor’s degree of fault (proportionate liability by statute); or (b) having Member States allow proportionate solutions between the company and its auditors to be negotiated and enshrined in contractual arrangements (proportionate liability by contract).

 

In identifying the overarching preferred trends in limiting liability, the European Commission found that the preferred approach for the audit profession was to limit auditors’ liability by capping, whereas the respondents from other professions favoured the implementation of proportionate liability. Those respondents who preferred a hybrid approach considered that proportionate liability was an appropriate mechanism for avoiding plaintiffs using the audit firms as a way to compensate any financial deficiencies of the audited company, but, at the same time, believe that it is not enough to prevent an audit firm disappearing due to a possible catastrophic claim. It was thought that a cap would provide additional protection for audit firms in the case of such claims.

 

While the European Commission’s public consultations focused primarily on auditor liability, the concerns and potential solutions are transferable to other professions. As the report noted, professional bodies and associations welcomed the consultations and recognized a general consensus that the unlimited liability that could result from a joint and several liability approach produces undesirable distorting effects in the capital market, generating an expectation gap due to the “deep pocket syndrome”.

 

Previous Next
First Page  Last Page
Table of Contents