National Competition Policy Review of the Professional Standards Act 1994
5.1.1 Chapter 5 of the Issues Paper examines more closely the main issues associated with the capping of liability.
5.2.1 The main criticism of capping is that it is unfair to consumers who use the services of members of occupational associations covered by the Professional Standards Act. Consumers badly damaged by a professional’s negligence will have no reasonable redress if their loss exceeds the statutory cap. It is noted that many consumers do not have the ability to protect themselves from loss through insurance or risk management. Capping is therefore a departure from the principle that a plaintiff should be fully compensated for his/her loss.
5.2.2 It is often seen as fundamental to justice that a blameworthy defendant should not escape liability for harm he/she has caused. The UK Department of Trade and Industry and the Canadian Bar Association have criticised capping on the basis that it offers unfair protection to defendants. In its report, Feasibility Investigation of Joint and Several Liability, 1996, the UK Department of Trade and Industry stated (pp.47-49) that there was “no principled argument for a capping scheme — it simply benefits defendants at the expense of plaintiffs, when legally those defendants are liable for the wrongs done to those plaintiffs.” It its submission to the Canadian Senate Inquiry into Joint and Several Liability, the Canadian Bar Association submitted that a capping scheme “lacks the perception of fairness which should be coherent in good law, as the cap is unlikely to properly reflect the damage or ability to pay.” In the same inquiry, the Canadian Institute of Chartered Accountants argued that a capping scheme was “arbitrary and unfair.” (See Joint and Several Liability and Professional Defendants: Report of the Senate Committee on Banking, Trade and Commerce, Canadian Senate, March 1998)
5.2.3 Capping may also be unfair to other defendants in cases of joint and several liability. Defendants who are not members of a scheme are exposed to full liability, but those against whom they may have a right to seek indemnity or contribution may be covered by a scheme and have limited liability. For example, company directors and auditors cannot rely on the Act because it specifically prevents them from covering liability under the Corporations Law, and will only have a limited right of recovery against an insurance broker if the broker is covered by a scheme, even if the broker was primarily responsible for the damage caused by wrong advice.
5.3 Deterrent effect
5.3.1 It may be argued that capping liability dilutes the deterrent effect on poor behaviour associated with exposure to full liability. Less principled members of professional groups may take shortcuts in their work in the knowledge that there is a cap on liability for any harm they cause.
5.3.2 While general tort law is not the primary tool for ensuring appropriate behaviour by members of occupational groups, the threat of large damages claims may modify behaviour to some extent.
5.3.3 It has also been argued that the existence of a cap on damages reduces the incentive to negotiate settlement of claims.
5.4 Lack of effectiveness
5.4.1 The Canadian Bar Association has argued that capping liability on the basis of a dollar amount is unlikely to be effective. Canadian Bar Association, Professional Liability, November 1997, at p. 12 For class actions, the cap would apply on a global basis and may not provide sufficient recovery for members of the class, depending on the number of members in the class and the size of the claims.
5.4.2 It has been argued that a capped scheme means plaintiffs will at least receive some compensation for loss from an insurance policy. However, the existence of an insurance policy does not mean a successful plaintiff will recover the amount awarded. The insurer may, for example, disclaim liability based on non-disclosure by other members of the firm to which the policy relates.
5.4.3 The fact that the Professional Standards Act does not apply to all types of liability is also relevant to the issue of effectiveness. Claims are not covered if they relate to matters such as personal injury, breach of trust, fraud, dishonesty or breaches of the Corporations Law. It is considered inappropriate to cap liability in these instances. For example, if a solicitor fraudulently misappropriates $700,000 from a client’s trust fund, the amount the client may recover should not be limited to $500,000. It is also considered inappropriate to cap a professional’s liability for breaches of the law as this would send the wrong message. Members of schemes must therefore also consider additional liability that arise elsewhere. The Act may give a false sense of security to members of schemes, and a misleading message to consumers about their rights to sue for damages.
5.5 Forum shopping
5.5.1 Another criticism of the Professional Standards Act is that it encourages “forum shopping” because similar arrangements do not exist in other jurisdictions. A consumer may decide to commence proceedings in a jurisdiction where there is no cap on liability in the hope that he/she will be awarded higher compensation. This is particularly true of claims that may be brought under Federal law. For example, tort claims for defective products may be framed as including a claim for misleading conduct under the Trade Practices Act. Many transactions between consumers and members of professional groups have a multi-jurisdictional character and differences between jurisdictions can also lead to distortions in the market.
5.6 Risk management and complaints handling
5.6.1 It might be argued that any detriment to the public caused by capping is outweighed by the benefits associated with the complaints handling processes and risk management programs that ares required under the Act. The Annual Report of the Professional Standards Council for 1999 details the risk management programs implemented by occupational associations covered by schemes. These risk management programs include codes of practice and ethics, quality management, claims monitoring and review, discipline of members, voluntary mediation services, and continuing education standards.
5.6.2 It is difficult to know whether these complaints handling processes and risk management programs would have been implemented regardless of the introduction of the Act, due to factors such as pressure from consumers and insurers. Some occupational associations may already have had such systems in place. In other cases, licensing schemes may have required licensees to carry insurance and to be part of occupational complaints handling mechanisms.
5(a) In practise, has the cap on liability affected the level of compensation awarded against professionals who are members of approved schemes under the Act?
5(b) In practise, have there been savings in insurance costs as a result of the cap? If so, have these savings been passed on to consumers?
5(c) What are the costs and benefits associated with capping? Do the benefits of outweigh the costs?
5(d) Are the arrangements for capping under the Act, together with the requirements for complaints handling processes and risk management training, in the public interest?
5(e) Would complaints handling processes and risk management programs have been implemented by the occupational associations covered by schemes in the absence of the Act?
5(f) Is there evidence of “forum shopping”?
5.7 Amount of the statutory cap
5.7.1 As mentioned before, the Professional Standards Act imposes a cap of $500,000. However, many of the schemes under the Act have higher caps than the statutory amount (see Appendix A for the amount of the caps under each approved scheme). For solicitors, the amount of the cap is linked to the number of principals in the law firm, while the schemes for surveyors, chartered accountants and some engineers is linked to the fee charged.
5.7.2 The statutory cap has not been increased since the Act was introduced. This raises the question of whether a $500,000 cap remains adequate.
5(g) Does the cap of $500,000 set by the Act provide adequate protection for consumers? Should the figure be reviewed?
5.8 Disclosure of the cap
5.8.1 The Act requires members of schemes to disclose that their liability is capped on all documents given to clients or prospective clients. The Regulation made pursuant to the Act sets out the prescribed form of the disclosure in terms of the wording and print size to be used. The Professional Standards Council has also developed an Interim Policy Statement on the Disclosure of Limited Liability to give guidance on how people subject to a professional standards scheme can meet their obligations to disclose that they have limited liability.
5(h) Are the requirements for a member of a scheme to disclose that his/her liability is capped adequate?
9. Canadian Bar Association, Professional Liability, November 1997, at p. 12