Liability for the Engineering Profession

The Institution of Engineers, Australia

Submission to the Principles Based Review of the Law of Negligence

August 2002
Contact: Leanne Hardwicke Director, Public Policy Institution of Engineers, Australia, 11 National Circuit, Barton ACT 2601 tel. (02) 6270 6555, fax. (02) 6273 4200 email: policy @ieaust.org.au http://www.ieaust.org.au/

Principles based review of the law of negligence 1. INTRODUCTION

The Institution of Engineers, Australia (IEAust) is the peak body for engineering practitioners in Australia. IEAust embraces all members of the engineering team, all disciplines of engineering and has representatives in most universities, research institutes and industry sectors. It is Australia's largest and most diverse engineering association, with around 65,000 members. The submission by IEAust is made in response to the following terms of reference for the Review of the Law of Negligence. 2 3(d) Develop and evaluate principled options to limit liability and quantum of awards for damages. Develop and evaluate options for a requirement that the standard of care in professional negligence matters (including medical negligence) accords with the generally accepted practice of the relevant profession at the time of the negligent act or omission. Develop proposals to replace joint and several liability with proportionate liability in relation to personal injury and death, so that if a defendant is only partially responsible for damage, they do not have to bear the whole loss. Develop and evaluate options for a limitation period of 3 years for all persons, while ensuring appropriate protections are established for minors and disabled persons.

3(e)

The submission is divided into the following sections. 1. 2. 3. 4. Commencement and length of limitation period Contribution issues Limitation of quantum of liability Standard of care in professional negligence matters

The submission focuses primarily on the impacts of the current legal environment on the engineering profession. Throughout the submission, the term practitioner is used to describe a member of the engineering profession. However, many of the issues raised are also applicable to other professions. The response to the terms of reference has been drawn from members views, which have been expressed to IEAust for quite some time. In testing the currency of these views, IEAust undertook a major survey of members in late 2001 (the 2001 survey) to determine members most recent experiences and views on liability and insurance issues. The survey results provided a comprehensive picture of the views of the engineering profession with regard to the issues being considered by the review panel. IEAust notes that the review is primarily focused on examining a method for the reform of the common law, with the objective of limiting liability and quantum of damages arising from personal injury and death. IEAust takes the view that any reforms that apply to personal injury and death related actions, should also apply to other claims for economic loss, property damage and the like.

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Principles based review of the law of negligence A further point that must be made is Australia has a highly mobile population. It is important that members of the community are able to rely on having the same rights regardless of the jurisdiction in which they reside. It is important that suppliers of goods and services have the same liabilities regardless of the jurisdiction in which they trade. This is particularly true when the physical location of the supplier is not in the same jurisdiction as the recipient. The differing liability laws in each jurisdiction, and sometimes within each jurisdiction with regard to different products and services, creates difficulties for suppliers and manufacturers of goods and services in Australia. A consistent approach needs to be taken by the Commonwealth and all State and Territory Governments. Consistency in legislation across the nation brings with it more certainty for the majority of businesses that practice interstate and for consumers in those jurisdictions. IEAust strongly recommends that this issue be handled with a view to harmonising the limitation laws across Australia. It is suggested that a model Act be produced which covers all actions for negligence, and for issues under the Trade Practices and Fair Trading Acts for States and Territories and the Commonwealth to adopt. Summary of recommendations IEAust strongly believes that there are three areas of reform that must be introduced. These are: 1. The introduction of a limitation on the time a professional is liable. The limitation period should be consistent between all types of actions, based on the conduct act or omission of the defendant (rather than an accrual approach to the cause of action). 2. That the limitation period be the lesser of: 3 years after the date on which the plaintiff first knew, or ought to have known: that the injury had occurred; that the injury was attributable to the conduct of the defendant; and that the injury warranted bringing a proceeding; or 10 years after the date on which the conduct, act or omission giving rise to the claim occurred. 3. The replacement of joint and several liability with proportional liability, so that professionals are not asked to assume more than their share of responsibility. 4. The liability should be proportionate to each defendants degree of fault, and as such, rights to contribution among tortfeasors should be excluded. A proportionate liability system would allow the Court to make a finding as to the total damages suffered by the plaintiff and to make an apportioned award against those wrongdoers who are a party to the proceedings, with a notional allocation against absent wrongdoers. 5. The introduction of limitation of quantum of liability by means of a statutory cap, to ensure that the compensation given for all actions, including personal injury and death, contractual or tortious breaches, or actions under the Trade Practices Act does not exceed the professionals capacity for professional indemnity insurance. 6. That the statutory capping scheme for professional be based on a Professional Standards Act that focuses on the professional: being registered; Institution of Engineers, Australia August 2002 Page 2

Principles based review of the law of negligence being competent to practice, and undergoing competency based assessment before registration; maintaining high standards of practice; undertaking continuing professional development activities to ensure the practitioner remains up to date; having adequate risk management practices in place; and carrying adequate levels of professional indemnity insurance.

7. The standard of care required of an engineer should be based on the standards that were applicable at the time the service was delivered. The standard of care should be determined by the profession, and should accord with the generally accepted practice of the profession at the time of the negligent act or omission. 8. In determining the standard of care, the court must employ experts to determine what are the required standards, and must employ expert witnesses that are responsible to the court rather than to either party to the action. Each measure is worthwhile on its own, but the full benefit to the community will not be realised until all are in place. 2. COMMENCEMENT AND LENGTH OF LIMITATION PERIOD

Statutes of limitation set the time limits for bringing court proceedings. The time within which the plaintiff must commence an action is the limitation period. These limitation periods were enacted to discourage plaintiffs from taking an unreasonable length of time to commence proceedings to enforce a right. The limitation periods have been imposed for the following reasons: Fairness so that a potential defendant should not be subject to an indefinite threat of being sued; and that delay in bringing actions may unfairly prejudice the defendants ability to contest the claim. Certainty so that people can feel confident about arranging their affairs in the knowledge that a claim can no longer be brought against them. Limitation periods provide a means to assess the potential degree of exposure of a practitioner. Public policy where it is in the interests of the public to have disputes resolved as quickly as possible, and it is less difficult for a court to achieve a just result where the reliability of evidence has not been affected by time.

Unfortunately, the developments in the area of statutes of limitations have negated these reasons. The major problem for engineers relates to the period of time in which a practitioner will remain liable for faults that emerge in completed products or delivered services. A further problem is that different actions are subject to different limitation periods, which creates uncertainty with plaintiffs and defendants alike.

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Principles based review of the law of negligence Commencement of limitation period IEAust recognises that any limitation on when a plaintiff may take action will sometimes create harsh results, especially for latent damage, where a potential claimant may not have had the opportunity to become aware of the facts before the expiration of the limitation period. For instance, damage as a result of defective building materials used during construction may not become apparent for some time, and damage resulting from negligent design or inspection may also remain hidden. As well, loss caused by negligent advice may not become apparent until a significant period of time has elapsed. However, in jurisdictions where the limitation period begins at the time the damage becomes discoverable, severe problems occur. In these instances, the term during which litigation is possible begins at the time the fault became apparent or should have become apparent, as opposed to when the original product was created or the service delivered. Liability may therefore exist long after a practitioner has retired. This exposure puts pressure on practitioners to adopt an unduly conservative approach to the delivery of products and services. Industry sources have suggested that such undue aversion to risk, together with the increasing direct costs of insurance premiums, is having an adverse impact on both the initial and life cycle costs of the products and services. There is less innovation in product and service design in an environment where practitioners are placed in high and prolonged risk situations. Additionally, there is a detriment to the community where retired practitioners do not continue to carry insurance after retirement, thereby going bare. In this situation, the consumer is left with uncertainty if there is a claim, as this will depend entirely on the value of the assets of the retired practitioner. As many practitioners are setting up their affairs to divest themselves of assets due to risk, there may be no assets available to allow the payment of a claim. IEAust favours a modification of statutes of limitation in respect of professional services to reflect a definite commencement date for the period during which litigation may be initiated to recover actual loss or damages. Limitation laws must be balanced so as not to take away rights of potential plaintiffs, however, a potential defendant should not be subject to an indefinite threat of being sued. This is especially true in todays environment with increased awards for damages. Threats of open-ended liability do not allow the providers of goods and services to properly assess their potential liability. This generally means higher insurance costs, which are inevitably passed on to consumers through higher prices and increased costs of goods and services. Engineers a generally act as part of a team when delivering services, and may complete their work long before a project is complete. The majority of IEAust members surveyed in 2001 felt that the defined period should start from the point at which delivery of the professional services was effectively completed (76%), while a minority felt that the defined period should start when the end product has been completed (19%). All members believed that there should be a more definite limitation on the time a practitioner can be held liable for negligent actions.

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Principles based review of the law of negligence Length of limitation period In responding to the 2001 survey, members opinions diverged on how long the defined period should be. A quarter felt that no more than three years should be adequate (25%). A similar proportion nominated five years (28%). However most suggested a period between six and ten years (38%). The average preferred length was 5.7 years. IEAust believes that there should be a limitation period of general application for common law claims, which is to be the lesser of: 3 years after the date on which the plaintiff first knew, or ought to have known: that the injury had occurred; that the injury was attributable to the conduct of the defendant; and that the injury warranted bringing a proceeding; or 10 years after the date on which the conduct, act or omission giving rise to the claim occurred.

If implemented, this provides a final cut off date of 10 years for any action (except in special circumstances where the court should have power to extend the period), thereby providing certainty. IEAust is of the view that a 10 year period would be sufficient, given that this is the period of limitation in many other pieces of legislation in other jurisdictions for specific types of actions, particularly in the building and construction area. As well, it would enable most plaintiffs to commence proceedings, since by that time, there would be few remaining claims. The 2001 survey also measured support for the introduction of legislation that limited exposure to liability to a defined period if certain requirements were imposed on practitioners. Support for the legislation was strongest under the requirement that members be registered with a professional association (92% support). Eight out of ten members supported the legislation if there was a requirement for set levels of professional indemnity insurance (82%), and members had to undertake continuing professional development and this was audited (77%). Cause of action In many jurisdictions, limitation laws provide that the time specified as the limitation period for a claim will begin to run when the cause of action arises or accrues. The cause of action is a factual situation that gives rise to the right to sue, and includes every fact that is necessary for the plaintiff to prove to succeed in the action. Some of the advantages put forward for this approach are that: It provides certainty, in that when a cause of action accrues is generally settled by common law. It accrues when the cause of action is complete. It is a flexible approach, in that it can adapt to changing circumstances (ie when the damage becomes discoverable).

However, there are disadvantages to the accrual rule. Anecdotal evidence indicates that establishing the date of a cause of action in a court is an exercise in fantasy and opportunism and clearly highly productive of costs, both to the court system and the parties. Establishing the date of a cause of action is neither readily ascertainable nor certain. Institution of Engineers, Australia August 2002 Page 5

Principles based review of the law of negligence Another major disadvantage is that different causes of action may accrue at different times. Since the same factual situation may give rise to more than one cause of action, there may be different limitation periods. This results in inconsistency and confusion. For instance, liability in tort and contract can coexist. However, the cause of action in contract arises when the contract is breached, whereas in tort, it arises when the damage occurs. Different limitation periods create a complex and less efficient system. IEAust believes that the trigger event should be the conduct, act or omission of the defendant. This is on the basis that it is easily understood as compared to the notion of accrual, and there is more certainty, as the limitation period commences at a particular point in time. It also removes the problem of different limitation periods in alternative actions. IEAust has not addressed the issue of exemptions from the limitation period, but believes that some judicial discretion to extend the limitation period should be allowed, so that serious and extreme hardship is not caused to plaintiffs, and where it is in the interests of justice to do so. 3. CONTRIBUTION ISSUES - JOINT AND SEVERAL LIABILITY V PROPORTIONATE LIABILITY

The provision of engineering services often requires the engineer to be part of a team for the delivery of a project. This creates special circumstances with respect to the level of liability of the engineer. The system of joint and several liability allows that each person who has contributed to the plaintiffs loss may be liable to the plaintiff for the entire amount of the loss suffered, irrespective of the persons share of responsibility for the loss. Claims can be progressed even where a practitioner has contributed little or nothing to the critical decisions that led to the loss, and where there may be no question of professional negligence. Therefore, actions are taken against the member of the service team with the most assets and/or insurance cover, rather than the person or organisation mainly responsible for the problem (the deep pocket syndrome). A further effect of the joint and several liability system is the greenmail effect, where practitioners tend to settle out of court, even where they may have good claims and defences against major claims of negligence and/or did not cause the damages claimed. Any limitation scheme must ultimately be fair to all parties and must take into account that those with valid claims have an opportunity to obtain compensation for loss suffered as a result of a breach of duty by the practitioner. Australias engineers accept that they must bear the responsibility for negligence and acknowledge that members of the community are entitled to recover reasonable damages where the practitioner has been negligent. However, they should not be asked to bear unlimited or disproportionate liability. The majority of engineers surveyed in 2001 were dissatisfied with the current joint and several liability system. There was extremely high in-principal support for the need to change the current system and support for a proportionate liability system was almost universal (98%). Members of IEAust favour a model that replaces the doctrine of joint and several liability with a statutory mechanism, in which damages are distributed by the courts or by a specialised tribunal in proportion to the assessed contribution of each party to the problem. Institution of Engineers, Australia August 2002 Page 6

Principles based review of the law of negligence Some jurisdictions have legislation that allows defendants to claim contribution if the plaintiffs action is successful. There is usually a limitation period attached to the right to claim contribution. However, these types of contribution schemes can be particularly complex and confusing. IEAusts preferred model is the introduction of proportionate liability, particularly for actions for negligence causing property damage or purely economic loss. The liability should be proportionate to each defendants degree of fault, and as such, rights to contribution among tortfeasors should be excluded. A proportionate liability system would allow the Court to make a finding as to the total damages suffered by the plaintiff and to make an apportioned award against those wrongdoers who are a party to the proceedings, with a notional allocation against absent wrongdoers. The defendant must be allowed to join other concurrent wrongdoers to the proceedings. In this way, all possible parties can be brought into one set of proceedings. 4. LIMITATION OF QUANTUM OF LIABILITY

The problems of an unlimited liability environment In an unlimited liability environment, there are difficulties for the community and the professional alike. Some issues of major concern to engineers as professionals and members of the community are: uncertainty for clients; the consequences of undue exposure to financial risk for professionals; and the affordability of insurance cover. Where there is unlimited liability, there is uncertainty for the claimant as to whether the claim will be met. Most practitioners (as opposed to clients) will decide on the level of insurance cover that they will take (if any). If a major claim is made against the practitioner, or where there is a substantial gap between what is insured and the claim, this may have to be met through the realisation of the practitioners or his/her partners assets. This, even then, may not cover the amount of the claim. Therefore, there is no certainty for clients with respect to how much of the claim can be satisfied, as it depends entirely on the practitioners level of insurance and the value of their personal assets. In this situation, not only does the client lose, but this may also force the practitioner to become bankrupt. It is not in the public interest to force practitioners out of practice in such circumstances. In an unlimited environment, undue exposure to financial risk may well lead the practitioner to conduct the practice in an over cautious manner to the clients detriment. The practitioner may be reluctant to propose innovative solutions for the client, and this may, in turn, result in higher costs. Additionally, an increasing number of practitioners are arranging their affairs so assets are not held in their names. Under such arrangements, and where professional indemnity insurance is expensive, practitioners may choose to forgo any form of insurance, thereby providing no assets or insurance for the plaintiff to claim against.

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Principles based review of the law of negligence The reduced affordability of insurance cover is having a significant effect on the professional and consumer alike. There are difficulties in obtaining adequate and affordable professional indemnity insurance based on the increase in quantum and number of claims. Insurance companies are not able, or are unwilling, to underwrite such risks without substantial premiums. This is based on the problems of unpredictability and the difficulty of pricing unlimited liability. Insurers argue that there is a direct correlation between the price of premiums and claims history. However, because insurers price their premiums before the costs materialise, current activity in the tort system has a more subtle than direct impact on decision making. More important to insurers premium rates are their perceptions, and there is a perception that there will be an expansion of potential liability with professional services. Therefore, insurers have raised their premiums in order to cover the risk of a small minority of very high claims, which is then passed on to the consumer through higher professional fees. On the basis that insurance mechanisms are no longer functioning effectively, and are placing an undue burden on the professional and providing uncertainties for claimants in an unlimited liability situation, IEAust supports the introduction of a statutory limit on the quantum of liability, particularly for professional services. Limitation of professional liability schemes Limiting professional liability by monetary limit provides benefits to the community and professionals alike, taking into account social and public policy issues. Any limitation scheme must ultimately benefit the client and must take into account that those with valid claims have an opportunity to obtain compensation for loss suffered as a result of a breach of duty by the professional. The scheme must also provide the professional with a reasonable opportunity to ensure the liability can be met. The limitation must be reasonable, in that any likely claim from the substantial majority of claimants can be met within the limitation. A scheme can be for either exclusion of personal liability subject to satisfactory capital and insurance requirements or a monetary limit (statutory cap). Exclusion of personal liability would require the professional practitioner to have a minimum capital reserve and insurance up to a minimal level. In the event of a claim, the claim could firstly be satisfied by insurance and, if exhausted, from the prescribed capital and the assets of the firm. There would be no claim against the personal assets of the professional. The benefits of this type of scheme overcome many of the problems associated with an unlimited liability environment, but would cause the firm to become insolvent if the claim exceeded the insurance and capital reserve and assets of the firm. A statutory cap is, in some respects, the most controversial of all schemes, since in many cases, all losses above the cap will be borne by the client. This is arguably unjust. However, the question is moot if, under the current unlimited situation, there is no money to satisfy the debt and no insurance. If the cap is set high enough to properly compensate the majority of clients, and operates in tandem with mandatory professional indemnity insurance, the net result should be equitable from the point of view of the community as a whole.

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Principles based review of the law of negligence It has been argued that the overall effect of capping would be to reduce the pool of assets legally available to compensate plaintiffs. This is not necessarily the case, and is likely to become even less true with practitioners arranging their affairs so assets are not held in their names. In view of this, and as commercial insurance becomes more expensive and larger firms opt for self-insurance, the real pool of available assets decreases. It has also been argued that capping would reduce incentives to maintain high professional standards. This depends entirely on how the scheme is introduced. The applicability of a scheme can very easily be linked to membership of a professional organisation that requires high standards of membership and adequate disciplinary measures that may be taken against their members. For instance, the key elements of a limitation scheme should focus on the professional: being registered; being competent to practice, and undergoing competency based assessment before registration; maintaining high standards of practice; undertaking continuing professional development activities to ensure the practitioner remains up to date; having adequate risk management practices in place; and carrying adequate levels of professional indemnity insurance.

All of these matters would be capable of audit. In the 2001 survey, members attitudes to such schemes were tested. Considerable support was given for a Professional Standards Scheme, which would set an upper limit on the amount a practitioner was liable for in the event of an action being taken against them. In general, respondents indicated they would be prepared to meet certain requirements in order to limit the amount of liability. Most respondents were comfortable with the necessity to: register with an appropriate body such as a professional association (96% would be prepared to do this to limit the amount of liability in the event of a claim) or a government body (78%) or a professional register; have professional indemnity insurance (94%); undertake specific risk management training (80%).

The level of the limit was another issue tested in the survey. Most practitioners surveyed agreed that the limit should be set in proportion to the level of fees for a particular project (83%). Just over a third felt that the limit should be set at a figure in proportion to their turnover (37%). 28% of members supported both approaches to determining the limit. Western Australia and New South Wales have introduced Professional Standards legislation to overcome some of the difficulties inherent in an unlimited liability environment. IEAust believes that, to be fully effective, this type of legislation should be introduced in all Australian jurisdictions.

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Principles based review of the law of negligence However, there are still some limitations in the Professional Standards Acts, which were factors in the low take up rate by engineers in NSW. Some of the major inhibitors to practitioners taking advantage of such legislation include the following: The Acts deliberately exclude liability for death and personal injury from any limitation that applies. Therefore practitioners must still insure against this liability, which often curtails potential savings from the cost of insurance. There is a view that the limits on liability provided by the Act may be by-passed by actions brought under the Trade Practices Act. Progress in other jurisdictions is slow. Without national coverage (ie consistent across the Commonwealth), the benefits of the legislation are weakened considerably.

A right to unlimited damages is of no comfort to consumers when practitioners are underinsured, uninsured or divested of assets. This common situation imposes an arbitrary, inadequate cap. Professional standards legislation provides a limit that is properly found and is adequate for protecting consumers. A harsh liability environment is not in the public interest and does not provide an incentive for professionals to perform diligently. Professional standards schemes offer incentives to practitioners to increase their focus on reducing risk through risk management strategies and improving standards of practice. A scheme of limited liability provides some guarantee of payment for the vast majority of claimants, which outweighs any argument for unlimited liability with no certainty of payment in many instances. Professional standards schemes offer practitioners the incentive to increase their focus on reducing risk through risk management strategies and improving standards of practice. 5. STANDARD OF CARE IN PROFESSIONAL NEGLIGENCE MATTERS

IEAust fully supports the current proposal being considered by the NSW Government to introduce legislation to make more certain the standard of care required of professionals. IEAust members strongly believe that the standard of care required of an engineer should be based on the standards that were applicable at the time the service was delivered. The standard of care should be determined by the profession, and should accord with the generally accepted practice of the profession at the time of the negligent act or omission. An issue that is closely related to the standard of care required of a professional is the role of expert evidence in civil proceedings. In determining the standard of care, the court must employ experts to determine what are the required standards. IEAust believes that the role of the expert witness in litigation is to assist a court in the administration of justice by providing an opinion or factual information based on the experts competence in a subject that is outside the knowledge, skill or experience of most people. It follows that the opinion is only useful if it is based on the experts area of competence, includes all relevant matters and is impartial and dispassionate. Therefore, the primary duty of an expert is to the court. An expert is subject to the normal duty in respect of evidence of fact to be complete, accurate and truthful.

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Principles based review of the law of negligence The expert owes a second duty to the body of knowledge and understanding from which his or her expertise is drawn. This implies recognition of its limitations, since the outcome of litigation is likely to influence the practical application of such knowledge and understanding in the future. It also implies dealing with the opinions of other competent experts in a respectful manner. It is important to the overall process that the integrity of the processes by which knowledge is acquired and understanding developed should not be degraded. The expert witness owes a third duty to the party who has sought his or her advice. That duty is to provide the advice in the context of the first and second duties above, which implies that the expert should not be an advocate for a party. IEAust is strongly supportive of a common set of rules throughout Australia, in line with the practice direction issued by the Federal Court of Australia and the Law Council of Australia. Addressing this will assist courts in determining what the standard of care required of a professional should be.

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