Written by:
Curtis M Goodman
—
Introduction to the Issue
Canada has an internationally respected professional services sector which is responsible for a significant share of total gross domestic product. In today’s globalized society a majority of economic output can be attributed to the efforts of professionals in a wide-variety of fields; from accounting and architecture to engineering and legal services. In fact, according to the Department of Foreign Affairs and International Trade, the professional services sector accounted for over $4 billion dollars in export revenue in 2008 and employed almost three-hundred thousand people in Canada. Accounting firms alone represent the majority of professional’s – employing over 191,000 Canadians many of whom are involved in some way with the financial services sector.[1]
The events which led up to the financial crisis in 2008 were the results of poor-decisions and perhaps negligence of innumerable professional’s in the financial service sector from all over the world. The resulting fallout of these events still remains unknown as the global economy faces a severe recession going into the second quarter of 2009. If government economic assistance is any measure of the severity of the situation, it is safe to estimate the cost is well into the trillions of dollars. This begs the question – who is responsible? For this reason professional liability and negligence should be among the most significant matters concerning any professional today.
Nearly all business transactions performed on a day-to-day basis will have some risk of professional liability. Be it the real estate agent offering advice to clients; accountants preparing financial statements; or the financial advisor’s market speculations – all professionals have a special relationship with the clients they serve. They offer services based on their specialized knowledge or skill – which are relied upon by the client as being the best solutions to their problems. At times issues arise as a result of these services, where clients may be discontented over the quality of work performed; which may have resulted in economic hardship, or in some cases physical harm. As the business environment continues to globalize and increase in complexity, as does the need to understand the obligations and responsibilities of professionals.
This paper seeks to provide readers with an overview of professional liability in an international context. To begin with this paper will define what professional services are and will identify market access barriers for professionals hoping to do business abroad. Furthermore it will outline international cooperation directly pertaining to professional services; which in turn provides references for international law. A significant share of the paper will identify the fundamental areas of professional liability within the Canadian legal system, including: duty of care; standard of care; fiduciary duty; and reasonable reliance. In this part of the discussion case examples of private international law will provide useful insight into major areas of concern. In addition this paper will briefly identify: significant barriers for professionals abroad; the importance of errors and omissions insurance; and the role of risk management. This will provide the reader with a greater understanding of the legal framework of professional liability within society. Overall this paper is most relevant for young Canadian professionals seeking cross-border service opportunities.
What Defines a Professional Service?
The contributions of professionals add great value to our society, but these individuals also have the ability to pose great detriment to society. So how do we define a professional? Legal definition classifies such a person based on criteria of “advanced and specialized training and the continued use of intellect, discretion, and judgment; the majority of statutes merely present an open-ended list of job categories.”[2]
In more general terms common professions include: accountants, architects and designers, bankers, lawyers, travel agents, and real-estate agents. By no means does this represent an exhaustive list of professions – but it does provide a clear context to distinguish the varying scope and standards among professions.
In some cases the standards may be formalized by professional organizations or they may be defined by legal precedent. Examples of professional accounting organizations are the Canadian Institute of Chartered Accountants (CICA) or Certified General Accountants Association of Canada (CMA). Other examples are the Association of Canadian Engineering Companies (ACEC); and the Federation of Law Societies of Canada (FLSC) which represent fourteen regional law societies throughout the nation. Such associations set standards or best practices which professional’s must adhere to in order to maintain good standing in their respective field.
For professionals one of the most important things to remember when working abroad is to ensure your education or training are accredited and recognized in the country you are working in. For example, if a Chilean company employed a Canadian engineer for a cross-border project, then the individual or firm would want to double check to ensure they are legally qualified to sign off on all the necessary documentation. Before tendering or entering into any contract such a professional would want to have such international issues figured out – to avoid embarrassing regulatory incompetence.
International Barriers for Professional Services
As Canadian professionals go abroad, exporting their services to remote areas of the globe they must be aware of the barriers to doing business. Because professional services generate a substantial amount of economic output and are considered an important linkage to sovereignty some nations believe restrictions on foreign professional service providers are necessary.
The stakeholders implicated through professional liability can be far-reaching. For example, audited financial statements are a cornerstone of many investments and when the courts decide that a Charted Accountant has acted negligent there are many consequences. Resulting litigation and the financial burdens they impose may bring job loss for the business as they struggle to deal with such proceedings. For the professional who is held accountable the resulting damage to their credibility is irreversible. The accounting firm may also be less likely to accept new clients as a result of the potential liability. Alternatively investor confidence may be weakened, as they become hesitant to invest based solely on the audited financial statements. The result of professional negligence is evident among the clients affected. Although courts try to provide adequate compensation, there is no clear way to calculate the potential losses incurred. To prevent consequential hardships of professional negligence in cross-border service arrangements some nations have blocked foreign professionals’ access to their markets.
Barriers to professional services exist to protect a nation’s autonomy ensuring domestic control over important matters such as: architecture and design, finance, engineering and legal services. The Canadian financial services sector has traditionally been heavily regulated and some people believe such barriers have protected the national economy from the fallout of the sub-prime mortgage bubble.[3] It begs the question – when professionals do wrong how does liability work across borders?
There are numerous ways countries can limit market access for professional service providers. Barriers may be exhausting domestic regulation over licensing and qualification requirements or non-transparent procedures. Some countries may require some form of commercial presence in order to do business; this ensures the state’s ability to collect taxes and ensures some level of foreign direct investment in their country. Another barrier for professional service providers may be restrictions on the scope of practice rights. An excellent example would be the case of a medical doctor. This type of barrier ensures protection over domestic industry, allowing national-competency to be developed over time.[4]
Professionals must be aware that service expectations in specific countries vary based on traditional practices or geographic location. However, as services continue to grow in importance in our global economy many developed nations have already made concessions in order to move towards more liberalized trade in services and harmonized labour regulations.
International Cooperation on Professional Services
Where do existing agreements on professional services exist in international law already? There are a few sources of international law; most countries are a party of the World Trade Organization (WTO) and the International Labour Organization (ILO). These multilateral institutions promote greater liberalization of goods and services and harmonization of regulatory presence. There are also other sources of law which represent specific economic regions including the North American Free Trade Agreement (NAFTA) and The European Union (EU).
Most nations are part of the World Trade Organization – which has a mandate to liberalize trade. The WTO sets rules governing trade in goods and services, investment, and has dispute settlement mechanisms. These provide legal ground rules for international commerce. One element of the WTO is The General Agreement on Trade in Service (GATS) which was one of the first ever agreements to govern trade in services. It outlines basic obligations that apply to member nations and sets national schedules for commitments to further liberalization. [5]
Under the GATS professional services fall under five major categories: accounting, auditing and bookkeeping; architectural; engineering; legal; and integrated engineering services. Each of these categories can be further divided into sub-categories[6]. In addition to defining the types of service GATS also outlines four modes of service delivery. These are: cross-border supply, consumption abroad, supply by a commercial presence, and supply through the presence of natural persons.
One of the key areas identified by the WTO is the provision of services for developing nations. It is generally accepted services are a key element in an industrialized nation – where professionals provide the necessary tools to facilitate economic growth.[7] Since professional standards can vary from region to region it is the responsibility of WTO member states to provide and make clear the necessary procedures to prove competency of professionals. [8] The greater the transparency of such procedures allows for easier trade in services and greater movement of professionals.
The International Labour Organization (ILO) is a United Nations agency which has worked for almost a century to ensure the decent treatment of working people. The ILO is unique in that it brings together “representatives of governments, employers and workers to jointly shape policies and programmes.[9]” It is arguable that the ILO is not directly relevant to professional services but instead to other service sectors. Regardless one of the ILO’s key areas of work is in unification of labour laws among member-states. The ILO mandate is promoting rights, equal employment opportunities, social protection and a forum for work-related issues.
The North American Free Trade Agreement (NAFTA) was an important step forward for greater North American economic integration. One of the major developments of NAFTA was a side accord on labour – the North American Agreement on Labour Cooperation (NAALC). The purpose was to deal with issues arising from labour law enforcement, labour rights, certification, registration, recognition and unionization. In Canada labour is considered provincial jurisdiction therefore professionals may face up to ten different jurisdictions with differing regulations or standards. The NAALC has provided a conduit to overcome such jurisdiction-issues by offering greater market access for professionals performing cross-border service. One way this has occurred is through unification of labour laws which protects migrant or foreign worker rights under their home legal system. Greater market access is also provided through the end of employment discrimination based on qualifications or bona fide occupational requirements.[10] This form of integration ensures compliance of domestic courts with international standards of professional liability.
The European Union (EU) is comprised of twenty-seven members and represents one of the largest trading blocs in the world. Since inception the EU has consistently worked towards harmonization of trade in services and labour. The principle of free movement of workers is evidence of this – which ensures each EU national has the right to live and work in any EU country and “that people who move between countries are not disadvantaged in relation to social security including healthcare.”[11] Such freedom offers great advantage to those in the professional services sector because the EU represents the world’s largest service-market with a world-class reputation in engineering and architecture. Since the EU has a distinct legislative and judicial authority professional’s can expect a high degree of harmonization of professional negligence and liability standards.
Liability The Legal Framework
If a professional is: under-trained; abusing their rights; being deceitful; or committing unfair practices – our society must have a channel to deal with such issues. Canada follows the doctrine of incorporation wherein customary international laws are automatically incorporated into Canadian law. There are three ways in which a professional can be held liable for their actions based on Canadian customary international law: under contract law; tort liability – negligence; fiduciary obligations and breach of trust. The following will provide a short discussion on each with specific case examples.
Contract Law
Under contract law a professional is required to provide a reasonable level of performance. If sub-standard service were to result in economic losses, a professional may be liable under a breach of contract.[12] The level of service expected of a professional is usually set by professional organizations, in the form of acceptable conduct guidelines, fundamental principles, and standards. Although in the case of Kripps v. Touche Ross (1997) the courts narrowed the scope of the applicability of such standards.[13] Regardless, this aspect of contract law gives a basis to deal with economic losses arising from expectation shortcomings, making it “much better suited than tort law to deal with economic losses.”[14] In most cases contract liability is limited to the client in which the contract exists. Therefore third parties would have no claims as a result of sub-standard service.
Professionals can use contractual agreements to their advantage, in-so-much as they can set limits, terms, and conditions. Under such contracts the professional has a foundation for a legal defense, which may defer potential litigation. It is important to be aware that such conditions of the contract will not protect the professional in their negligible actions under tort law however.
Tort Law
In the business world negligence is the most important area for tort liability. If the actions of the professional were to fall below a minimum acceptable standard, then the right to sue for remedies arises. Negligence involves the unintentional careless conduct causing injury to another person or his property.
Professional negligence under tort law must be distinguished between ordinary negligence. The major difference lies in the “reasonable reliance” the plaintiff has on the advice given. The four-part test to establish professional negligence is based on:
- a duty of care existed;
- the professional breached that duty of care;
- causation exists; and
- due to negligence, calculable damages were incurred by the claimant.
For professionals a primary question is – whom is a duty of cared owed to? In the past liability of professionals would only be owed to their clients based on the contracts they forged together and to their colleagues and clients based on fiduciary duty. When poor service was provided the liability would be held to the losses the immediate party had suffered due to the breach in contract.
Professionals should be aware that in courts have been willing to expand liability to include third parties.[15] The courts establish if a duty of cared is owed with the reasonable foreseeability test. In the case of Donoghue versus v. Stevenson Lord Atkin, the presiding judge, made the following classic statement;
You must take reasonable care to avoid acts or omissions which you can reasonable foresee would be likely to injure your neighbor. Who, then in law is my neighbor? This seems to be – persons are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my minds to the acts or omissions which are called into question.[16]
The reasonable foreseeable test is used exclusively to determine whether a duty of cared is owed or not. This test would allow for disgruntled investors to recuperate business losses by targeting professional accountants. Auditors would then be liable to all users of financial statements; which could cause serious problems as accountants may be reluctant to audit financial statements due to their potential for liability.
The Ann’s case allowed courts to limit this indeterminate liability with a two-stage test to determine if a duty of care is owed.[17] The first stage is in determining that the two parties are in close enough proximity that the defendant would realize the potential for damages as a result of his actions. The second part looks deeper and provides exceptions to the reasonable foreseeability test. It asks if there is anyone reason that the duty should not be imposed, or whether it should be limited or damages reduced. This provides a certain amount of flex within the system, where judges are able to interpret the law based on the social context and allows for reduction in indeterminate liability. Jim Leitzel cautions the circular nature of this; “courts will protect the amount of reliance in which a reasonable person would engage, but a reasonable person would rely up to the extent the courts protect.”[18] Due to this the courts have devised a five part test in determining if a duty of care exists, if the majority of the conditions are met – then sufficient grounds for negligence exist.
- The defendant had a direct or indirect financial interest in the transaction in respect of which the representation was made.
- The defendant was a professional who possessed a special skill, judgment, or knowledge.
- The advice was given in the normal operations of the defendants business.
- The information or advice was given deliberately and not on a social occasion.
- The information or advice was given in response to a specific inquiry or request.
This test also serves the court in determining if a reasonable level of reliance existed in the professional relationship. If the professional provides incorrect information, but has an understanding that the advice or information they offer will be used and relied upon in future actions, they can be held liable for those actions. However, the courts have made it clear that the person relying on the information must have certain levels of business acumen.[19] Meaning, the claimant must take the advice with a grain of salt – using their own business knowledge they should be able to evaluate the advice and it’s applicability to their case. If the defendant can demonstrate that the action or conduct of the plaintiff would have happened regardless of the defendants action then no liability exists. The second part in determining professional negligence is that a standard of care was violated.
The standard of care expected from a professional is different from what is expected from a non professional. Professionals are implied to have certain skills and abilities and their conduct must live up to set standards. If the professional falls below this standard of care, then negligence can be established. The courts use a reasonable person test to determine this breach. The question is whether the defendant actions, in a given situation, breached a standard of care. If the defendant’s actions have fallen below what a reasonable person would do, then he will be negligent for the injury or loss.
The reasonable person test is then what would have been what would have a reasonable accountant or doctor would have done in a given situation. If an individual claims to be a Chartered Accountant (CA) then he better have the training and competencies to be a CA. This is especially true as the courts do not recognize inexperience as a negating factor in liability. It is expected that a new professional is more susceptible to making mistakes, however, these people have demonstrated their ability to be a member of this profession and as a result must live up to the standard and competencies of a reasonable person in their profession.
The final two elements in determining professional liability are causation and damage, and are not differentiated from ordinary negligence. The tort of negligence requires that calculable losses have occurred, either economically or physically. The courts must recognize these damages as being compensable, in so much as to return the plaintiff to their original state, prior to the negligible act. The conduct of the defendant must be proved to have caused the damages in question. The two tests for causation are the but for test and the remoteness test. “Plaintiffs must prove in court that but for the conduct in question no damages would have resulted.”[20] The remoteness test looks at the damages caused by the defendant’s actions. In recent years the courts have “become much stricter in the manner in which it will assess the loss to the claimant.”[21] According to Anu Massey the courts will award damages on the basis of two considerations:
First, to compensate the claimant for the loss of the opportunity to achieve a certain result had the negligence not occurred [general damages]… secondly, and losses that have been suffered of a monetary nature such as costs that have been incurred as a result of remedial action which had to be taken to put the position right [special damages].[22]
If a reasonable person, in similar circumstances, could not have anticipated the nature of the damages or injuries caused as a result of their conduct, then the courts will not impose a liability. Once the majority of conditions of negligence are met, and providing reasonable reliance existed, the courts can establish professional negligence. Another important area of professional liability is that of their fiduciary duty to put client’s interests ahead of their own.
Fiduciary Duty
When a person comes to a professional seeking advice or services the professional has a fiduciary obligation to keep the act in the client’s best interest. This will include putting the clients interest before their own and avoiding situations where conflict of interest may arise. Business interests that may arise, as a result of the interactions with the client, should not be acted upon by the professional. This is true in circumstances which would pose no harm to the client, as a general rule the professional must remain independent of any business proceedings which may result. As well, any information that becomes privy to the professional in the course of their services must not be used by the fiduciary to benefit their position. An implicit obligation to maintain confidentiality exists in all professional relationships.
When a professional does not act in the best interest of the client it is a breach of trust and they may be held liable for any losses incurred. In the case of Hodgkinson v. Simms, a conflict of interest arose where the accountant promoted investment opportunities in which he was financially involved.[23] The courts found that in doing so the accountant breached his fiduciary duty and was therefore liable for the results. This exemplifies the court’s decision to extend fiduciary liability to include any situation where one person advises another and reliance is placed on that advice. Fiduciary liability is extremely important to professionals and poses as much risk as negligence if not taken seriously.
Recommendations
Liability insurance is now becoming a reality of doing business. Since professionals provide services which often their clients do not fully grasp, it is easy for errors in expectations to occur. According to the Duke Law Journal “professional liability insurance has become society’s chief agency for the distribution of the cost of malpractice by the medical profession.”[24] Professional liability insurance, also known as errors or omissions insurance usually protects from professional negligence or failure to perform duties. Essentially professional insurance can be broken down into two categories: primary coverage and extended coverage. “Primary layers are basic policies stating the risk and people covered, policy limits and period. Additional coverage or endorsements for special risks or events may be purchased at additional cost”[25] Most insurance policies will not cover fraud or breach of trust, which can become problematic in joint-ventures or partnership situations.[26]
Liability insurance does help protect professionals from losses incurred from lawsuits, but a more a proactive response is needed. Risk management is part of preemptive steps a professional or firm will take to avoid litigation proceedings. Three strategies of risk management according to James Thompson are: stressing quality control; submitting to regular peer review; and participating in continuing professional education courses.[27] Above all, professionals should always avoid promising more than can be delivered. In essence professionals must manage client expectations, ensuring open communication channels, and developing a contractual agreement.[28]
In larger corporations it has become commonplace to employ an insurance and risk management consultant. This person can be an invaluable addition to the organization, as they actively correct internal weaknesses. These liaisons cannot guarantee employee competence on all levels. It is therefore important for organizations to hire qualified and well-trained individuals.
As discussed earlier, most professionals are members of a self-governing association. Such associations impose strict standards and rules; they also act as enforcers ensuring members meet the requirements of the profession. These organizations act as a watch-dog, reprimanding individuals who fall below the standard. Professional bodies also defend against all unjustified lawsuits against their members.
Even when risk avoidance is used, negligent lawsuits may arise. It cannot be stressed enough that whenever entering into a professional relationship it is important to have written documentation of services to be provided, clearly outline the obligations and responsibilities. In the case of cross-border service arrangements ensure documentation is in the host country’s official language. These documents will be invaluable to the defense of the professional, and may reduce the scope of liability.
Overview
Overall, this paper has demonstrated the growing economic performance of professional services. A professional is someone with advanced specialized training which requires the continued use of intellect and discretion. Examples of professionals include: accountants, architects, engineers, lawyers, and real estate agents.
In our discussion of professional services it is crucial to understand the greater context. Holding professionals accountable for their actions by giving an appropriate course of remediation ensures confidence in the system. The importance of this cannot be underestimated, as the effects of professional mal-practice can be devastating to the profession as well as society in general. The relationship society has with professionals is based on trust and reliance – this must be maintained especially as our dependence on global professional services increases.
As professional services increase in importance to our globalized economy many nations have tried to formalize agreements to clearly define jurisdiction and sources of law for professionals. Already we have seen the inclusion of professional services in major multilateral agreements like the WTO’s General Agreement on Trade in Services (GATS) and through the UN’s International Labour Organization (ILO). Professional services are further defined in regional agreements like NAFTA’s North American Agreement on Labour Cooperation (NAALC) and the EU’s common labour policies. Such agreements have addressed the issues of certification and qualification requirements – but rely on domestic implementation of such concessions. Even still barriers exist for professional’s attempting to provide cross-border services.
In terms of legal grounding of recourse for professional negligence or malpractice this paper has outlined the three main areas of law: contract law; tort law; and breach of fiduciary duty. Canada subscribes to the indoctrination of incorporation – whereby all customary international laws automatically become domestic law. Regardless, professionals must be aware of host country legal anomalies; always perform due diligence remember to ensure qualifications and certifications are recognized. Professionals can take preemptive steps to limit the threat of potential litigation through risk management, errors and omission insurance, on-going education or training, and peer-review.
As professionals continue to shape our global economy greater transparency and accountability must be required. The negligence surrounding events of the financial crisis of 2008/09 must not pass unanswered for – otherwise it would set a dangerous precedent in professional liability standards.
Appendix 1:
WTO – GATS Classification of Professional Services
The classification system that is used in the GATS by most WTO members, divides Professional Services sectors into the following overall categories[29]:
| Accounting, auditing and bookkeeping services |
|
| Architectural services |
|
| Engineering services
and |
|
| Legal Services |
|
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Donoghue v. Stevenson. 562 (H.L., 1932).
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—. “Key Indicators of the Labour Market Programme.” International Labour Organization. Sept 14, 2007. http://www.ilo.org/public/english/employment/strat/kilm/download/kilm04.pdf (accessed March 29, 2009).
James H. Thompson, Laurie J. Henry. “Professional Liability Insurance: Go Bare or Not?” Journal of Accountancy 172, no. 1 (July 1991): 111-118.
Kripps v. Touche Ross. 421 (Supreme Court of Canada, 1997).
Lecture Material – Gatt Overview. 2 (February 2009).
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[1] (DFAIT 2008)
[2] (Professional Negligence Jan. 1973)
[3] (Financial Post 2009)
[4] (DFAIT 2008)
[5] (WTO)
[6] See appendix 1
[7] For example, according to the ILO developed nations have greater service-sector employment at almost 71% compared to less than 25% in sub-Saharan Africa (ILO 2007)
*Professional services account for only a portion of total employment
[8] (Senda 2009)
[9] (ILO 2009)
[10] (Government of Canada 1993)
[11] (European Commission 2009)
[12] (Yates 2008)
[13] Kripps v. Touche Ross, (1997)
A case in which accountants did not fully disclose information, as they were not required to by the GAAP at the time – the courts found their accounting statements misled investors, resulting in economic losses.
[14] Feinman, 2000
[15] Yates, 2008
[16] Donoghue v. Stevenson, (1932)
[17] Anns v. Merton, London Borough Council, (1977)
[18] Leitzel, 1989
[19] Yates, 2008
[20] Ibid.
[21] Massey, 2007
[22] Massey, 2007
[23] Hodgkinson v. Simms, (1994)
[24] Risk Control, 1960
[25] James H. Thompson, 1991
[26] Yates, 2008
[27] James H. Thompson, 1991
[28] Busch, 2004
[29] (DFAIT 2008)