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Demystifying the Civil Liability of Corporate Agents

Published online by Cambridge University Press:  11 August 2003

Neil Campbell  and
John Armour
Neil Campbell
Affiliation:
University of Auckland
John Armour
Affiliation:
Centre for Business Research, University of Cambridge
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Extract

Companies, being legal abstractions, can act only through human agents. A necessary consequence of a company's legal abstraction is the development of rules of attribution, such as those that govern the company's liability for the wrongful acts of its agents. Given that companies have been a significant feature of the economic, social, and legal landscape since the nineteenth century, it is not surprising that those rules are fairly well settled, if not always easy to apply.

Perhaps surprisingly, there is less agreement on the rules governing the attribution of liability to agents acting in the course of a company's business. In recent years, Commonwealth courts have seen repeated challenges to the boundaries of corporate agents’ liability, with claims against corporate agents being made in deceit, in negligent misstatement, for infringement of copyright, for negligent property damage, and even for breach of contract. The courts have yet to offer a coherent response.

Type
Shorter Articles
Information
The Cambridge Law Journal , Volume 62 , Issue 2 , 01 July 2003 , pp. 290 - 303
Copyright
Copyright © Cambridge Law Journal and Contributors 2003

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Footnotes

An earlier version of this paper was presented to the Company Law section at the SPTL annual conference, University of Glasgow, in September 2001, and to a staff seminar at the Faculty of Law, University of Otago, in April 2001. We are grateful for the feedback from both presentations, and to Peter Watts and Richard Nolan for their comments on earlier drafts. The usual disclaimers apply.

References

1 Meridian Global Funds Management Asia Ltd. v. Securities Commission [1995] 2 A.C. 500, 506 (P-C.).

2 See, e.g., Williams v. Natural Life Health Foods Ltd. [1998] 1 W.L.R. 830 (H.L.); King v. Milpurrurru (1996) 136 A.L.R. 327; Trevor Ivory Ltd. v. Anderson [1992] 2 N.Z.L.R. 517 (N.Z.C.A.); London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992) 97 D.L.R. (4th) 261 (S.C.C.); ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995) 129 D.L.R. (4th) 627 (Ont. C. A.). In most of these cases the claimants have, when suing a corporate defendant, added corporate agents as defendants. In Ontario this has become so prevalent that the Court of Appeal has expressed concern at the proliferation of claims against directors and employees of companies in circumstances that give the appearance of the desire for leverage in the claimant's claim against the company: ADGA Systems International Ltd. v. Valcom Ltd. (1999) 168 D. L.R. (4th) 351.

3 For an earlier expression of this view, see Campbell, “Directors’ Liabilities to Third Parties” [1998] Coy & Secs Law Bulletin 34. A similar view is put forward by Glick and Gledhill in their advice to the Company Law Review, “Company Law Review: Attribution of Liability” (October 2000), paras. 69-71, 84.

4 [2000] 1 Lloyd's Rep 218. The case is cogently criticised by Watts, “The Company's Alter Ego—a Parvenu and Impostor in Private Law” [2000] N.Z. Law Review 137, 143 and 116 L.Q.R. 525.

5 Ibid., at 230.

6 [2002] UKHL 43, [2002] 1 W.L.R. 1547.

7 A view expressed by Lord Hoffmann in Standard Chartered Bank v. Pakistan National Shipping Corp. [2002] UKHL 43 at [23], [2002] 1 W.L.R. 1547, 1561.

8 A point made by Watts, “The Company's Alter Ego—a Parvenu and Impostor in Priwile Law” [2000] N.Z. Law Review 137.

9 For earlier criticisms of this approach, see Watts [1992] NZ Recent Law Review 219, and Armour, “Corporate Personality and Assumption of Responsibility” [1999] L.M.C.L.Q. 246, 249.

10 See, e.g., Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] A.C. 705; Tesco Supermarkets Ltd. v. Nattrass [1972] A.C. 153.

11 Meridian Global Funds Management Asia Ltd. v. Securities Commission [1995] 2 A.C. 500, 507 (P.C.).

12 Trevor Ivory Ltd. v. Anderson [1992] 2 N.Z.L.R. 517, 520 per Cooke P.

13 [1992] 2 N.Z.L.R. 517.

14 Ibid., at 527.

15 ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995) 129 D.L.R. (4th) 711, 722. See also Normart Management Ltd. v. West Hill Redevelopment Co. (1998) 155 D.L.R. (4th) 627 (Ont C.A.). The Ontario Court of Appeal has since, in ADGA Systems International Ltd. v. Valcom Ltd. (1999) 168 D.L.R. (4th) 351, moved away from the disattribution heresy. For discussion, see Nicholls, “Liability of Corporate Officers and Directors to Third Parties” (2001) 35 Can. Bus. L.J. 1. For a disattribution view from the Federal Court of Australia, see King v. Milpurrurru (1996) 136 A.L.R. 327, 344.

16 “Directors’ ‘Tortious’ Liability: Contract, Tort, or Company Law?” (1999) 62 M.L.R. 133. For similar views, see Farrar, “The Personal Liability of Directors for Corporate Torts” (1997) 9 Bond L.R. 102.

17 [1998] 1 W.L.R. 830.

18 (1999) 62 M.L.R. 133, 138-139.

19 [2000] 1 Lloyd's Rep 218. The case is cogently criticised by Watts, “The Company's Alter Ego—a Parvenu and Impostor in Private Law” (2000) 116 L.Q.R. 525.

20 Ibid., at 230.

21 Ibid., at 233. The disattribution heresy also lies behind Nourse J.'s view, in White Horse Distillers Ltd. v. Gregson Associates Ltd. [1984] R.P.C. 61, 91, that “[b]efore a director can be held personally liable for a tort committed by his company he must not only commit or direct the tortious act or conduct but he must do so deliberately or recklessly and so as to make it his own, as distinct from the act or conduct of the company” (emphasis added). This view was discredited in C Evans & Sons Ltd. v. Spritebrand Ltd. [1985] 1 W.L.R. 317.

22 [2002] UKHL 43 at [20]. See also Lord Rodger at [40].

23 A further variant has been put forward by McKendrick and Edelman (2002) 118 L.Q.R. 4, 8-11. In the context of an employee's liability for statements, they correctly perceive the issue as a principal-agent problem, rather than as a problem peculiar to company law. However, they then argue that a statement made by an employee will be attributed to the employer (and disattributed from the employee) whenever the employee made the statement “solely in a representative capacity and within the scope of his actual or apparent authority”. However, agents do not enjoy a blanket immunity from liability for their statements or acts as agents, although for some civil wrongs their status as agents is relevant to their liability—a matter that we explore in Section III, infra.

24 These points were made long ago by Watts, commenting on Trevor Ivory Ltd. v. Anderson: [1992] N.Z. Recent Law Review 219-220. Cf. Grantham [1997] C.L.J. 259.

25 (1999) 62 M.L.R. 133, 139. This primacy was accepted by Evans L.J. in Standard Chartered Bank v. Pakistan National Shipping Corporation (No. 2) [2000] 1 Lloyd's Rep 218, 231, but subsequently doubted by Potter L.J. in SX Holdings Ltd. v. Synchronet Ltd. (10 October 2000, Potter, May and Tuckey L.JJ.) at [25].

26 For other expressions of the mistaken belief that questions of corporate agents’ liability involve a clash between tort law and company law, see Fridman, “Personal Tort Liability of Company Directors” (1992) 5 Cant. L.R. 41; Farrar (1997) 71 A.L.J. 20.

27 [1992] 2 N.Z.L.R. 517.

28 On the facts, however, this rationale was probably flawed, given that the plaintiffs’ claim was for damage to property. It is most likely necessary to prove an assumption of responsibility only when suing for carelessly-inflicted pure economic loss, but not when suing for carelessly- inflicted damage to property. See Shapira, “Liability of Corporate Agents: Williams v. Natural Life Ltd. in the House of Lords” (1999) 20 Co. Law. 130.

29 (1993) 4 N.Z.B.L.C. 103,375. Cf. Xerox Canada Finance Inc. v. Wilson's Industrial Auctioneers Ltd. (1997) 34 B.L.R. (2d) 135. See also Banfield v. Johnson (1994) 7 N.Z.C.L.C. 260, 496 (negligent building design; assumption of responsibility treated as an additional pre-requisite to liability); King v. Milpurrurru (1996) 136 A.L.R. 327, 351 (infringement of copyright).

30 [1992] 3 N.Z.L.R. 311 (N.Z.C.A.).

31 [1998] 1 W.L.R. 830.

32 At 233; criticised by Toulson J. in Noel v. Poland [2001] 2 B.C.L.C. 645, para. 46.

33 [2002] UKHL 43, at [22] per Lord Hoffmann, at [41] per Lord Rodger.

34 E.g., Farrar, “The Personal Liability of Directors for Corporate Torts” (1997) 9 Bond L.R. 102; Borrowdale [1998] J.B.L. 96; Griffin (1999) 115 L.Q.R. 36.

35 [1921] 2 A.C. 465.

36 Ibid., at 477. The directors were, nonetheless, held liable because they personally occupied the land on which the explosion had occurred.

37 The leading cases are Performing Right Society Ltd. v. Ciryl Theatrical Syndicate Ltd. [1924] 1 K.B. 1 (C.A.); Wah Tat Bank Ltd v. Chan Cheng Kum [1975] A.C. 507 (P.C.); C Evans & Sons Ltd. v. Spritebrand Ltd. [1985] 1 W.L.R. 317 (C.A.).

38 For a (rare) recognition of this point, see Root Quality Pty. Ltd. v. Root Control Technologies Pty. Ltd. (2000) 177 A.L.R. 231, 259.

39 See, e.g., CBS Songs Ltd. v. Amstrad Consumer Electronics pic [1988] A.C. 1013.

40 [2000] 1 Lloyd's Rep 218, 235-236.

41 [2002] UKHL 43, at [38]. Lord Rodger said that assessing the director's liability on the basis of direction or procurement was “a strangely complex way to formulate [the director’s] liability” (at [33]).

42 The common law has no well-developed conception of secondary liability, but instead isolated instances of secondary liability, such as dishonest assistance and inducing breach of contract: Markesinis and Deakin, Tort Law (1999) 790-792. For a coherent conception, see Cooper, D., Secondary Liability in Civil Wrongs (Ph.D. Thesis, University of Cambridge, 1995)Google Scholar. For a helpful survey of secondary liability rules, see Carty, “Joint tortfeasance and assistance liability” (1999) 19 L.S. 489.

43 CBS Songs Ltd. v. Amstrad Consumer Electronics plc [1988] A.C. 1013.

44 Royal Brunei Airlines Sdn v. Tan [1995] 2 A.C. 378 (PC.).

45 Lumley v. Gye (1854) 3 El. & Bl. 114; 118 E.R. 1083. We note that the rule in Said v. Butt [1920] 3 K.B. 497 generally precludes an action against an agent for inducing his or her principal to breach a contract.

46 [1998] 1 W.L.R. 830, 838-839.

47 With respect, Lord Steyn's dismissal of the plaintiffs’ argument was overstated, though only minimally. On Lord Steyn's view a defendant can never incur secondary liability for Hedley Byrne-type liability—the defendant can only ever incur primarily liability, through having assumed personal responsibility to the claimant. This is inconsistent with the recognition of secondary liability for inducing breach of contract—a liability that does not require the defendant to have assumed contractual obligations to the claimant. To be consistent, the law should recognise secondary liability for Hedley Byrne-type liability—but only where the defendant has “induced” the primary wrongdoer to provide the inaccurate advice. Inducement, in this sense, would require the defendant to have known that the advice was inaccurate, and to have nonetheless encouraged or directed the provision of the advice. In such a case the defendant might be primarily liable in deceit, so the recognition of a secondary Hedley Byrne-liability would make little practical difference.

48 For example, one of the leading cases concerns whether a manufacturer of cassette recorders was liable for directing or procuring purchasers of the recorders to infringe copyright: CBS Songs Ltd. v. Amstrad Consumer Electronics plc [1988] A.C. 1013.

49 [1998] 1 W.L.R. 830, 835.

50 [2002] UKHL 43 at 23.

51 This calls into question the Court of Appeal's decision in Merrell v. Babb [2001] 3 W.L.R. 1, leave to appeal refused [2001] 1 W.L.R. 1859. There the defendant, an employee of a firm of valuers, negligently prepared a valuation report on behalf of his employer. The claimant relied on the valuation report in purchasing a property. The Court held that, despite the defendant acting as agent for his firm, he had assumed a responsibility to the claimant and was

52 E.g., Mahon v. Crockett (1999) 8 N.Z.C.L.C. 262,043 (C.A.). For an early examination of this issue, see Reynolds, “Personal Liability of an Agent” (1969) 85 L.Q.R. 92.

53 A similar voluntary/imposed distinction is suggested by La Forest J (dissenting) in London Drugs Ltd. v. Kuehne & Nagel International Ltd. [1992] 3 S.C.R 299, and developed by Goddard, , “Corporate Personality—Limited Recourse and its Limits” in Rickett, C. and Grantham, R. (eds.) Corporate Personality in the 20th Century (Oxford 1998)Google Scholar.

54 Thus, in Watson v. Dolmark Industries Ltd. [1992] 3 N.Z.L.R. 311, 316 (N.Z.C.A.), Cooke P. said that Trevor Ivory had no relevance to a claim in dishonest assistance.

55 E.g., Watson v. Dolmark Industries Ltd. [1992] 3 N.Z.L.R. 311 (N.Z.C.A.); Standard Chartered Bank v. Pakistan National Shipping Corp. [2002] UKHL 43.

56 E.g., Lakeland Steel Products Ltd. v. Stevens [1996] 2 N.Z.L.R. 749.

57 Actions in unjust enrichment based on receipt of the claimant's property are an exception to this general principle. To be liable, the defendant must have received the property beneficially. receipt merely as an agent for another will not therefore attract liability. See, e.g., Agip (Africa) v. Jackson [1990] Ch. 265, 292 (aff’d [1991] Ch. 547) (“knowing receipt”); Hollicourt (Contracts) Ltd. v. Bank of Ireland [2001] Ch. 555, 563-564 (receipt of company's property pursuant to void disposition in winding-up).

58 [1920] 3 K.B. 497, 506.

59 The Ontario Court of Appeal recently recognised this limitation in NBD Bank, Canada v. Dofasco Inc. (1999) 181 D.L.R. (4th) 37, 74 (where the claim against the agent was in negligent misrepresentation). We do not explore the rationale for this limitation here. However, lacobucci has suggested that the rule in Said v. Butt reflects a concern about overdeterrence: that to impose liability on the agent would create an incentive for the agent to perform the contract on behalf of the principal even in circumstances where breach would be in the principal's interests: “Unfinished Business: An Analysis of Stones Unturned in ADGA Systems International v. Valcom Ltd” (2001) 35 Can. Bus. L.J. 39. We suggest that where the primary obligation of the principal, for breach of which the claimant seeks to make the agent secondarily liable, is a non-consensual obligation, the overdeterrence argument has less force.

60 Thus, the rule does not apply where the director of company A induces company B to breach its contract with a third person: ADGA Systems International v. Valcom Ltd. (1999) 168 D.L.R. (4th) 351 (Ont. C.A.).