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National Competition Policy Review of the Professional Standards Act 1994
3. The Objectives Of The Act
3.1 Introduction
3.1.1 An examination of the objectives of the Professional Standards Act, and their continuing relevance, is an integral part of a Competition Policy review. Similarly, section 55 of the Act requires the review to determine whether the policy objectives of the Act remain valid and whether the terms of the Act remain appropriate for securing those objectives. Chapter 3 of the Issues Paper examines the Act’s stated and implied objectives, and the background to the introduction of the Act in order to clarify the objectives.
3.2 Legislative statement of objectives
3.2.1 According to section 3 of the Act, the objectives of the Act are:
a) to enable the creation of schemes to limit the civil liability of professionals and others;
b) to facilitate the improvement of occupational standards and others;
c) to protect the consumers of the services provided by professionals and others; and
d) to constitute the Professional Standards Council to supervise the preparation and application of schemes and to assist in the improvement of occupational standards and protection of consumers.
Issues
3(a) Are the policy objectives of the Act still valid?
3(b) Are the terms of the Act appropriate for securing those objectives?
3(c) Should the objectives be prioritised and if so, what should the ordering be?
3(d) Is there a need for legislative clarification or modification of the objectives?
3.3 Background to the legislation
3.3.1 It is useful to consider the objectives of the Act in the context of the background to the introduction of the Act and in particular, the difficulties the Act was designed to address.
3.3.2 In numerous common law jurisdictions, developments in the law saw an expansion of the areas in which professionals could be held liable for activities related to the practice of their profession. The most significant developments were in tort law, particularly in the tort of negligence. One example is the development of liability for pure economic loss.
3.3.3 Originally, common law prohibited any recovery for economic loss in the absence of reasonably foreseeable harm causing damage to the plaintiff personally. See, for example, Cattle v Stockton Waterworks (1875) LR 10 QB 453 It was considered undesirable to expose defendants to potential liability “in an indeterminate amount for an indeterminate time to an indeterminate class.” Cardozo CJ in Ultramares Corporation v Touche (1931) 174 NE 441 at 444
3.3.4 In 1963, the House of Lords decided in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 that a duty of care to avoid pure economic loss could arise out of negligent advice upon which it was foreseeable that the plaintiff might rely. In Australia, the High Court held in Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529 that owners of a dredge were liable for the economic loss incurred by Caltex, even though Caltex’s property was not directly damaged. See, for example, Hill v Van Erp (1997) 188 CLR 159 and Perre v Apand Pty Ltd (1999) 73 ALJR 1190
3.3.5 These developments had significant implications for members of occupational groups, where economic loss rather than physical damage is a more likely result of professional negligence. According to the case law, professionals could be liable to third parties in tort, and not just to their clients under contract.
3.3.6 Expanding fields of liability were accompanied by increasingly large awards of damages. Claims were being brought against professionals partly because they were seen as people of financial substance and likely to be carrying insurance. An increase in the number of claims against professions, resulted in a rise in insurance premiums. In some cases, professionals found they could not obtain insurance at any price.
3.3.7 The existence of joint and several liability for torts was also seen as having unfair results for some members of occupational groups. Under joint and several liability, all tortfeasors are jointly liable for losses caused to a plaintiff. If one or more of them cannot pay their contribution, the difference must be made up by the other tortfeasors. This meant an insured member could have to pay an amount exceeding losses caused by his/her own negligence.
3.3.8 Occupational groups such as solicitors and accountants are required by professional or legislative rules to work in a partnership business structure under which their liability is unlimited. The Legal Profession Amendment (Incorporated Legal Practices) Act 2000 was recently passed by the NSW Parliament. When the Act commences, solicitors will be able to provide legal services through a corporate structure. Historically, these rules were introduced to ensure professionals took personal responsibility for their work and maintained practice standards. However, these rules meant professionals could not use the shield of a limited liability available to corporations to avoid claims for negligence. Consequently, developments in tort law significantly impacted on these occupational groups.
3.4 The pressure for reform
3.4.1 Members of occupational groups called for legislative intervention on a number of grounds.
3.4.2 First, they were concerned that a single act of negligence could expose their personal assets to claims. This was seen as unfair because the amount a member could be liable for could be out of proportion to the negligence involved, particularly given the existence of joint and several liability.
3.4.3 Second, it was said that the situation was unfair to consumers. If a defendant had no insurance, a successful suit by a plaintiff would not necessarily result in the recovery of damages. There was also concern that the rising cost of insurance had resulted in an increase in the number of professionals who were not taking out insurance and who were ensuring all their assets were not in their own name.
3.4.4 Third, it was claimed unlimited liability adversely affected professional standards. It was argued that the legal risks discouraged competent people from entering the professions, and that this would eventually lead to a decline in standards. It was also argued that such risks encouraged a defensive form of practice, with professionals not prepared to take innovative steps for fear of being sued, and that this was not in the public interest. Further, it was feared professionals might simply not offer some services, leading to a reduction in services available to the public.
3.4.5 Fourth, it was claimed that large verdicts against members of occupational groups adversely affected the economy generally. There would be a loss of business confidence if, for example, professional firms were forced to cease practice because of claims against them. This in turn would affect the insurance market by making insurance even more difficult to obtain, exacerbating the problem. It was said that other economic effects included a trend towards large firms as only firms with considerable resources could afford insurance premiums, and an increase in the cost of professional services due to the need to cover insurance costs.
3.4.6 Fifth, it was claimed that growing delays in the court system were partly attributable to claims against professionals, driven by the possibility of receiving significant damages funded by insurance.
3.4.7 Finally, there was a perceived need to do something to reduce the number of consumer complaints and to deal more effectively with complaints. Accordingly, it was considered necessary to ensure professionals took proper steps to implement risk minimisation practices, and to ensure avenues existed to resolve consumer complaints.
3.4.8 It is noted that market failures in markets for professional and other occupational services are further explored in Chapter 4.
3.5 Proposals for reform
3.5.1 A number of suggestions for reform were put forward. These were:
- to allow incorporation, with limited liability, for all professionals;
- to reform tort law by introducing proportionate liability, so a tortfeasor would only be liable for his/her contribution to a loss;
- to limit (cap) liability for professionals;
- to make it compulsory for professionals to take out adequate insurance; and
- composite schemes involving a combination of one or more of the above.
3.5.2 Any legislative scheme had to ensure on the one hand that plaintiffs with valid claims had the opportunity to obtain compensation for loss suffered as a result of wrongdoing by a professional, and on the other that professionals had the opportunity to ensure any such liability could be met.
3.5.3 The Professional Standards Act attempted to address the concerns raised by introducing a combination of a cap on liability and more widespread insurance cover. The Act was also intended to reduce the need for claims to be made by encouraging service providers to undertake risk management training, and to establish complaints handling and disciplinary processes. Schemes under the Act therefore have some features of statutory occupational licensing regimes.
3.5.4 Although the Act was not particularly controversial when introduced, it did have critics. For example, it was said that the Act would work against the public interest by enabling professionals to escape full liability for their mistakes or wrongdoing.
Issues
3(e) Are the problems outlined in section 3.4 significant or severe enough to warrant legislative intervention?
3(f) In practice, has the Act adequately addressed the various problems it was introduced to address?
3.6 The Professional Standards Council
3.6.1 One of the objectives of the Professional Standards Act is to establish the Professional Standards Council. The Council is an independent body of part-time members appointed by the Attorney General for a period of up to three years. Appointments to the Council are based on an individual’s skills, qualifications, experience and ability to contribute to the work o the Council. The Council currently has 11 members drawn from business, government, professional bodies and employee organisations.
3.6.2 The Terms of Reference requires the review to consider the functions of the Council, which are set out in Division 3 of the Act. The Council summarises its tasks in the following terms:
The Council is responsible for:
- determining applications by occupational associations for professional standards schemes;
- advising the Attorney General about occupational standards;
- monitoring compliance by occupational associations with their risk management strategies, and
- publishing information and conducting forums to assist occupational associations to improve the standards of their members.
Issues
3(g) Are the functions assigned to the Professional Standards Council under the Act appropriate? Are there other areas where the Council should be acting?
3(h) Is the Professional Standards Council working effectively?
3(i) Have there been any difficulties with the administration of the Act in practice?
Footnotes
- See, for example, Cattle v Stockton Waterworks (1875) LR 10 QB 453
- Cardozo CJ in Ultramares Corporation v Touche (1931) 174 NE 441 at 444
- [1964] AC 465
- (1976) 136 CLR 529
- See, for example, Hill v Van Erp (1997) 188 CLR 159 and Perre v Apand Pty Ltd (1999) 73 ALJR 1190
- The Legal Profession Amendment (Incorporated Legal Practices) Act 2000 was recently passed by the NSW Parliament. When the Act commences, solicitors will be able to provide legal services through a corporate structure.
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