Law commission targets corporate liability legislation

Law commission targets corporate liability legislation

The Ontario Business Corporations Act may be headed for an overhaul after the Law Commission of Ontario last week announced a public consultation on joint-and-several liability.

The consultation aims to settle a contentious area of law. Legislation targeting corporate governance places liability on corporate directors and officers, along with certain auditors and lawyers. The act’s joint-and-several liability provision gives a successful plaintiff the ability to recover all damages from any such defendant, regardless of the significance of his or her role in the matter.

“This is an issue that seems to have been live for quite some time,” says LCO executive director Dr. Patricia Hughes. “There have been some strong feelings about it — one way and the other — so that the issue is a rather provocative one in some ways, but it’s one nobody seems to have really addressed in Ontario under the [Ontario] Business Corporations Act.”

The LCO, in background materials on the issue, notes that joint-and-several liability may be justified by the argument that a plaintiff should not have to suffer from fault caused by any single defendant. Conversely, the approach may unfairly place the burden of all damages on a single defendant who may have made a comparatively small contribution to the offence.

Some also believe the system puts Canada at a competitive disadvantage by creating higher insurance costs for businesses.

Ontario’s law also clashes with other legislation. For example, the Canada Business Corporations Act allows modified proportionate liability for companies that are incorporated federally.

Meanwhile, other jurisdictions have shunned joint-and-several liability. Federal securities law in the United States allows proportionate liability for “unknowing” misrepresentations,” while the United Kingdom provides for “liability limitation agreements.”

Stikeman Elliott LLP partner Alan D’Silva, who represents defendants in securities class actions, believes proportionate liability is a fairer principle to apply. He has seen cases where the joint-and-several liability system has led to situations where a defendant found two-per-cent responsible is forced to offer up a massive payout because co-defendants are insolvent.

“You run the risk of plaintiffs, especially in class actions, suing defendants who have deep pockets, even though they have little or no responsibility for the issue at hand,” says D’Silva.

McMillan LLP partner Wayne Gray doesn’t think the OBCA is the right legislation to target for a change in joint-and-several liability.

For example, he believes related concerns about catastrophic liability raised by accounting firms may be overstated. He says those fears have been around since the 1990s, yet there has not been a single catastrophic payout to this point.

The Supreme Court of Canada’s 1997 decision in Hercules Managements Ltd. v. Ernst & Young offers some protection for auditors of financial statements, notes Gray.

At the same time, the Ontario Business Corporations Act is only one of many corporate statutes, he points out. Ontario businesses need not incorporate under it, they can go through the federal statue, or use legislation from any of the other provinces or territories.

There is also separate legislation for credit unions, co-operatives, not-for-profits, and other financial institutions.

“Unless you’re going to replicate this regime to make it unified in every corporate statute, which would be into the hundreds, you’re going to have a patchwork of regimes, and people have trouble knowing whether the financial statements prepared for that corporation are subject to joint-and-several liability, or proportional liability,” says Gray.

The law commission has developed a consultation paper, available on its web site, to help inform the feedback it receives. Written submissions are due June 30.

Any recommendations flowing from the consultations are likely to be released late this year.

A spokesman for the Ministry of Consumer Services says it is not currently considering any changes to joint-and-several liability under the OBCA, but would consider any recommendations from the law commission.

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