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Tuesday, 28 June 1994
Page: 2123


Senator WATSON (7.30 p.m.) —The Corporations Legislation Amendment Bill is the first part of a simplification program that needs immediate attention. I wish to take some time tonight to draw to the Senate's attention an omission from these amendments that many believe should have been included in this category. I refer to what is referred to as the doctrine of joint and several liability. This is an ongoing problem that is particularly important to professional people, including accountants and auditors, who have to live with the outdated doctrine of joint and several liability.

  I am aware that the Attorney-General has recently initiated an inquiry to assess whether there exists a prima facie case for reform of the law as it affects professionals. Depending on the outcome of stage one of that inquiry, stage two will go on to propose the nature and scope of changes to the present law. I have no doubt that changes to the law will be seen as necessary and in the public interest, and hopefully the reforms will not be long delayed.

  For those who are not familiar with the concept of joint and several liability, I would point out that it is the process whereby a plaintiff may recover the entire amount of a judgment from one or more defendants. A particular defendant can be called upon to pay the entire amount of a plaintiff's claim even if that defendant's share of fault is minor compared to that of other wrongdoers.

  Often, if one of the defendant's appears unable to meet his or her share, the plaintiffs will aim their action towards the so-called "deep-pocket defendants", in many cases the professionals who have taken the responsible course and taken out professional indemnity insurance cover.

  This means that professional indemnity insurance is being asked to cover the potential negligence not only of auditors but of other unrelated parties as well. Of course, this leads to dramatic increases in the cost of professional indemnity insurance, especially for the largest firms where professional indemnity insurance premiums now exceed $60,000 per annum per partner.

  Obviously this situation cannot be allowed to continue in this way. It is of particular concern to those professionals in law and accounting that this matter continues unresolved while bills such as that which is now before the Senate are introduced into parliament, further complicating the already complex corporations laws of our country.

  While the present doctrine of joint and several liability continues as it is, the ability of professionals to provide an appropriate level of professional indemnity cover is put further at risk with every day that passes. Although the exposure of the accounting profession to rising liability claims is partly a result of the corporate collapses of the late 1980s and early 1990s, the underlying trend towards rising liability claims is mirrored in other professions such as medicine, law, engineering and architecture.

  Indeed, it appears that without significant reform, there is no reason to believe that the professional indemnity insurance market will improve in the future. It already appears that the `Big Six' accountancy firms may in future find commercial insurance entirely unprocurable, and the rest of the accountancy profession will find the cover increasingly expensive.

  In most cases, of course, these costs are passed on to clients and include, at some time or other, most Australians. Even for a small client, any system of liability that effectively decreases the incentive of professionals to maintain professional indemnity insurance by making them targets for litigation is ultimately not in the public interest.

  Part of the problem with joint and several liability as it currently exists is the growing tendency to ignore the fact that investors and shareholders are, and must be, risk-takers. Profits are the reward for that risk. Too often there is an expectation that losses, where these occur, must somehow be recouped from others. It is when this view is pursued to its conclusion that auditors become the underwriters of failed businesses. This is not to diminish the right of plaintiffs to pursue genuine neglect or fraud cases, but an apportionment of the fault should be reflected in the degree of the burden meted out.

  It is clear that there is a growing body of authoritative thought and action worldwide directed at the principle that professionals should not pay for others' mistakes merely because they are the only ones left standing after a financial collapse. Simple fairness and commonsense demand such an approach. It is pleasing to see that several states in the United States have completely abolished the doctrine of joint and several liability and that the recent South Australian Development Act 1993 has moved towards replacing it with proportional liability. Similar legislation has been prepared in Victoria.

  The time has certainly arrived for a reform of the present rules on joint liability. As we add yet another set of laws to those presently surrounding the accounting and legal professions, I urge the Attorney-General to act without delay to reform the law on joint and several liability and return fairness and justice to this area of our country's laws.