There are several policy factors that must be balanced in assessing the current liability regime and options for reform. As noted in the introduction to this Report, this is fundamentally a determination of who should bear the risk of loss and what the role of the legal system should be in this debate.
A. Who can best bear or most efficiently distribute the risk of loss
An insolvent, unavailable or otherwise non-paying co-defendant introduces potential loss for parties to the litigation. The risk of loss shifts from the defendant to the plaintiff as a liability regime abandons joint and several liability for proportionate and/or statutorily capped liability. In a joint and several liability regime, the plaintiff will always be fully compensated if at least one liable co-defendant is capable of paying. If one co-defendant is incapable of paying, the remaining co-defendants must pay more than was found by the court to be their share of fault. Thus because the plaintiff will be compensated (assuming at least the solvent and available defendant), the risk of loss lies purely with the co-defendants. Strict proportionate liability regimes introduce the possibility that the plaintiff will not be compensated due to the non-payment by a co-defendant. In this case, the risk of loss shifts entirely to the plaintiff. Modified proportionate liability systems can include provisions for loss sharing between the plaintiff and co-defendants.
This issue is whether the risk of insolvent co-defendants should be borne fully by other co-defendants, such as the corporations, directors, officers, auditors, lawyers, engineers and other professional advisors, as it is with joint and several liability. Or, whether potential plaintiffs such as retail investors, institutional investors and other stakeholders should bear all or some of the risk of an insolvent co-defendant, as occurs with proportionate liability and caps on liability.
Therefore a critical policy issue between joint and several liability and proportionate liability schemes is the distribution of the risk of loss. This issue must recognize the presence and potential uses of insurance by parties to offset the risk of loss.
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 and put him/her back in the position he/she would have been in had the tort not occurred. 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 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.
Deterrence is traditionally seen as the primary policy goal of public enforcement and the criminal law, while the private law focuses on compensation (returning an injured party to his or her previous position) as well as deterrence. Deterrence involves 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).
Deterring individuals/organizations from misconduct, 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, to fulfill 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.
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.
E. Access to Justice and Cost of Litigation
Cost is another factor for consideration. One aspect of cost is the cost of the justice system and cost of litigation. Some liability regimes may increase the overall costs of litigation if there is a need for multiple or protracted proceedings. Different types of liability regimes may result in increased litigation costs at different stages of the proceedings and to different parties.
F. Cost of Professional Services
Rising costs may have an impact on the pricing of professional services. Consistent with traditional business principles, the presence of increased costs at some stage of the firm’s finances (such as insurance premiums) may, in turn, be passed on to the consumer.
All parties desire certainty, but for differing reasons. Investors and other stakeholders who have been harmed by the corporation, directors and officers and professional advisors desire the certainty of knowing that they will be fully compensated for their loss. Conversely, professional firms and insurance companies have an economic incentive to be certain as to the extent of their liability exposure, allowing them to more effectively plan their affairs. A statutory cap on liability provides for the greatest certainty with respect to the quantum of damages that a potential defendant may be responsible for, while neither joint and several liability nor proportionate liability provides for much certainty of the quantum of potential liability.
H. Competition for Capital
Another policy consideration concerns the potential transfer of capital to other jurisdictions that allow for less onerous systems of liability or conversely more protective systems of liability. Professionals, firms, corporations and investors may be keenly aware of the liability system used by a particular jurisdiction, and may move business to another jurisdiction based on their own economic incentives.