Chapter 3
Alternatives to joint and several liability

Capping

3.21Some jurisdictions have adopted the approach of imposing caps on the maximum potential liability of certain categories of defendants, or for certain kinds of losses. This can be achieved by statute or through a regime supported by statute.33 Such a cap is frequently argued to be appropriate for situations where business advisers and other professionals (such as accountants, auditors, lawyers, engineers and architects) could potentially face a catastrophic liability as a result of a corporate collapse. The argument follows that placing some maximum on liability for corporate advisers in such cases is necessary to encourage suitably qualified people to enter or remain in the sector, and prevent liability insurance becoming unaffordable or unobtainable. The theory is that it will prevent damage to business confidence and protect a country’s economic infrastructure.

3.22An obvious question with any cap is, at what level? A cap could be set at a single high level for all participants in a sector, for instance, auditors. Or it could have several tiers, based on size of operation (for instance large, medium or small engagements) or other criteria. Alternatively the cap could be set as a multiple of fees charged for a particular engagement. Once again, there is no obvious approach to setting a cap, so any level must in the end be somewhat arbitrary. Nonetheless, a cap should take into account the interests of potential plaintiffs to be compensated for wrongdoing as well as the perceived risks to an industry or economy from professionals’ liability for potentially catastrophic risks.

3.23Any cap would need to remain at a sufficiently high level to encourage professionals to take adequate precautions to avoid negligence. Professional advisers would still be required to manage their own behaviour, including through professional indemnity insurance for negligence risks. And, realistically, if investors or other consumers are asked to accept some cap on liability, then professionals and professional firms should expect to be required to provide some transparency of their earnings, operations and risks, so that the justification and reasonableness of any cap can be evaluated.

3.24Statutory caps can never be a complete alternative to either the status quo joint or several liability rule or to a rule of proportionate liability put in its place. Statutory caps would necessarily sit on top of a primary liability rule, and most likely would operate in limited circumstances and in respect of particular causes of action, defendants or both.

3.25The most directly relevant example for New Zealand of statutory caps in action is the Australian professions. In response to a perceived crisis in professional indemnity insurance brought on in part by the collapse of the HIH Insurance Group the Australian Federal Government legislated in 2003 to confirm and expand capping arrangements that were already in place in several states. State and federal legislation permits professional bodies to have limitation of liability schemes approved, in return for compulsory professional indemnity cover by those wishing to have liability capped, promotion of sound professional standards by the professional body and increased reporting requirements on those covered.34
3.26The caps introduced by the scheme can come down to quite low levels. The scheme put in place by one of the two main accounting professional bodies and covering accountants carrying out audit engagements provides a cap of $1 million for engagements with fees up to $100,000 and a cap of 10 times the reasonable fee above $100,000, up to a maximum liability of $75 million.35

3.27The Australian framework is not limited to auditors or accountants. Other professions including solicitors, engineers and surveyors have approved schemes in at least some states.

33Caps can of course also be voluntarily agreed between contracting parties. Contractual limitations are discussed in the following section.
34Treasury Legislation Amendment (Professional Standards) Act 2004 (Cth); Professional Standards Act 1994 (New South Wales) Professional Standards Regulation 2009 (New South Wales); Professional Standards Act 2004 (Qld) Professional Standards Regulation 2007 (Qld); Australia Professional Standards Act 2004 (SA) Professional Standards Regulations 2006 (SA); Professional Standards Act 2003 (Vic) Professional Standards Regulations 2007 (Vic); Professional Standards Act 1997 (WA) Professional Standards Regulations 1998 (WA) Professional Standards Act 2005 (Tas); Professional Standards Act 2004 (NT)Professional Standards Regulations (NT).
35See New South Wales Attorney General and Justice Department “Institute of Chartered Accountants in Australia (NSW) Scheme Summary” <www.lawlink.nsw.gov.au>.