Australia and Canada: The Role of Policy in Professional Liability

Publication Date01 Apr 2001
AuthorMohammed B. Hemraj
SubjectAccounting & finance
Journal of Financial Crime Vol. 9 No. 2
Australia and Canada: The Role of Policy in
Professional Liability
Mohammed B. Hemraj
The term 'policy' as used by the judges is mainly con-
cerned with whether third parties should be allowed
to recover economic loss suffered by them as a result
of professional negligence. The answers to the ques-
tion of recovery of economic loss in negligence are
not easy, as judges seem to be divided on this issue.
Some judges feel that in some cases beyond physical
damage and reliance, economic loss should be re-
coverable in negligence, while others fear
indiscriminately opening the floodgate of
A Canadian professor, Allen M. Linden,2 has iden-
tified four policy reasons for the reluctance of courts
in allowing recovery for pure economic loss. They
(1) economic loss was less worthy of protection than
bodily security and property;
(2) fear of indeterminate liability;
(3) it was more efficient to put the burden of
economic loss on the victim it is often seen
as an expected ordinary business risk and for
which business people can make contingency
(4) a restrictive approach would discourage a multi-
plicity of lawsuits, in favour of channelling
claims in one direction.
This paper will identify and analyse the policy
reasons articulated by the judges in decided cases on
economic loss, mainly in Australia and Canada, and
consider their implications for auditors' liability.
Prior to Hedley Byrne, judges made a distinction
between physical damage (personal and property)
cases and pure economic loss. Donoghue v Stevenson3
was based on the premise that human beings were
more important than property and lost expectations
of profit. The rule can be understood as based on
policy justification in insurance and in loss spreading.
Judge Cardozo in Ultramares Corporation v Touche,4 a
case concerning negligent misrepresentation, had to
address the fundamental policy consideration,
which centred on the notion that the defendant
must not be exposed to 'liability in an indeterminate
amount for an indeterminate time to an indeter-
minate class'. Several Canadian judges questioned
this fear of indeterminate liability as 'it is not a
justification for a blanket acceptance of a bar on the
recovery of [pure] economic
On the rule against recovery of pure economic loss
Stevenson J, a Canadian judge, observed that 'the
worst apocalyptic scenarios are feared. Everyone
will go bankrupt, business will be impossible to con-
duct, [and] the cost of insurance will be astronomical.
The floodgate will be opened and our legal system
will collapse'.6 Stevenson J did not share these fears.
He doubted whether indeterminate liability was the
real fear in pure economic loss situations and with
reference to personal injury cases concluded, 'Yet
no one suggests that such tortfeasors should not be
held liable'.
In Canada, although there is no general exclusion-
ary rule precluding recovery for economic loss in
negligence actions; this however did not mean that
all economic losses are recoverable in such an
action. There are policy reasons which preclude
recovery of certain types of economic
As a matter of policy, some limit on recovery of
pure economic loss (or rational loss, which is eco-
nomic loss as a result of injury to person or property)
must exist to prevent indeterminate liability.
In San Sebastian the High Court of Australia con-
sidered the fear first expressed by Judge Cardozo in
Ultramares. The court observed that 'the recovery
of economic loss has traditionally excited an
apprehension that it will give rise to indeterminate
liability'.8 Similarly, in England and Wales Taylor
LJ, in Caparo Industries plc v Dickman and others,
noted that 'casting too wide a duty on a potential
defendant may result in a liability which is intolerably
onerous. The court has therefore been reluctant to
extend the scope of liability for economic loss arising
from negligent misstatement'. Lord Oliver's view
was that to widen the scope of auditors' statutory
duty from shareholders, as a body, to individual
Journal of Financial Crime
© Henry Stewart Publications
ISSN 1359-0790
Page 109

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