Landes and Posner are wary of this formula because the lesser cost avoider could be judgment- proof and, therefore, have no incentive to exercise due care, or any care for that matter.(n278) In such a case, the second actor who could avoid the harm is assigned "backup liability in order to achieve a second-best solution in circumstances in which the best solution is not feasible."(n279) Such a result is less than optimal, but is "preferable to zero care for both A and B--the outcome that would result if A were judgment-proof and B were not jointly liable."(n280) This general proposition would appear to support the rule of reasonable foreseeability found in H. Rosenblum v. Adler which holds that the auditor should be assigned back-up tort liability to foreseeable third parties in the event the insolvent client cannot meet its contractual obligations to those parties nor meet any tort judgments rendered against it in favor of those parties.(n281)
Landes and Posner proceed to demonstrate that having joined the higher cost avoider as a joint tortfeasor, the common law rule prohibiting contribution (but permitting indemnity) among joint tortfeasors in alternative care cases is more efficient than a rule permitting contribution.(n282) This is so, they say, because contribution suits are expensive to administer.(n283) To the argument that such a rule will underdeter fraudulent and negligent behavior, they argue that contribution is unnecessary as a deterrent because if "ex ante, each defendant bears a cost (an expected cost) of liability, each defendant will be deterred, even if ex post all but one pay nothing."(n284) Landes and Posner also assume that an efficient rule requires that non-negligent victims can expect ex ante to be fully compensated by their negligent injurers.(n285)
The theoretical model developed by Landes and Posner assumes that the parties have "no contractual relationships with each other" and that "the costs of voluntarily negotiating levels of care or accident avoidance is prohibitive."(n286) In the auditor cases neither of these conditions are present. Between auditors and clients there are contracts of engagement and between clients and various third parties there are contracts of debt and investment. As a result, it is not prohibitive for care levels to be negotiated ex ante between auditors and clients, although the cost of such negotiations would generally be prohibitive between auditors and third parties. On the other hand, the risk of client insolvency coupled with auditor negligence can be negotiated ex ante between clients and third parties. That some risks of negligence can be allocated ex ante by contract in these relationships provides an opportunity for using both tort and contract law to optimize efficiency imperatives.
At first glance it might appear that, under a joint and several regime, auditors may be well positioned to bear initially the risk of client insolvency and then to spread it efficiently.(n287) If auditors can accurately estimate the additional exposure to loss they will suffer because of a joint and several rule, they can determine the necessary level of precaution expense they must incur and can then seek to pass through this additional cost of doing business by raising their audit fees by commensurate amounts. As a result of this roundabout process, clients would be bearing the risk to third parties of their own insolvency in those cases when their auditors could also be held liable for negligent misrepresentation.
There are three major problems with this scenario, however. First, it is difficult for auditors to assess the risk dimensions facing them. Second, there is no assurance that the extra precautionary expenses can be passed through to clients through greater audit fees. And third, the insistence of full ex post compensation to third party victims will increase litigation costs. These problems