Please note I am not a lawyer and am only imparting a little information (an opinion) that may help answer the question..
There are no flag regulations for shore diving here in Ontario. If diving from a boat there are flag regulations for it.
While it is becoming common practice to have some form of surface marker there are still large quantities of divers that do not use them.
Without a contract the instructor is just a more experienced diver entering the water with another diver qualified to do the dive. (I make the assumption the other diver was qualified) Also make note that either diver had the opportunity to abort the dive prior to entry for any reason. So if the buddy proceeded he must have acknowledged the lack of flag and agreed to enter the water regardless. That is a way of accepting any risk of not having a float/flag.
With regards to liability there would need to be an indecent that causes damages first. Then there would need to be an act of fault or neglect. Note that this could be by one or both the instructor and the buddy as they both entered without a float.
The court would determine the degree in which each of such persons is at fault or negligent, and, where two or more persons are found at fault or negligent, they are jointly and severally liable to the person suffering loss or damage for such fault or negligence, but as between themselves, in the absence of any contract express or implied, each is liable to make contribution and indemnify each other in the degree in which they are respectively found to be at fault or negligent
So I believe if the instructor was under contract the would have accepted a duty of care for a student.
Without a contract he has not accepted a duty of care other than that both he and the buddy would be buddy's, which would be a joint duty between divers.
While the instructor is more qualified than the buddy they both accepted the risk of diving without a float.
Without an incident causing damage there is no liability.
If there was an incident causing damage they could be found jointly liable.
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