Examining a director’s civil liability

Examining a director’s civil liability

46414989 - legal law concept imageIs a director personally liable in damages to an employee injured while working for a company that did not have adequate insurance cover? Andrew Smith QC of Crown Office Chambers examines this question in light of the Supreme Court’s decision in Campbell v Gordon.

In Campbell v Gordon [2016] UKSC 38, the Supreme Court held that the criminal liability of a company and director imposed by section 5 of the Employers’ Liability (Compulsory Insurance) Act 1969 (EL(CI)A 1969) for failure to properly insure their employees did not render the director civilly liable to pay damages to an employee whose injury at work was not covered by the employer’s insurance.

What was the background to the case?

While employed by the first respondent, the appellant had been injured when using a woodworking machine. Although the first respondent had employers’ liability insurance policy, it excluded the type of injury suffered by the appellant. The appellant issued proceedings but the first respondent was insolvent and therefore he claimed that the second respondent, as sole director, was liable in damages for the first respondent’s failure to provide adequate insurance cover.

What issue was before the Supreme Court?

Under EL(CI)A 1969, s 1(1) every employer is obliged, on pain of prosecution in the criminal courts, to take out insurance for the benefit of his employees. Under EL(CI)A 1969, s 5, if the offence is committed by a limited company and:

‘…has been committed with the consent or connivance of, or facilitated by any neglect on the part of, any director, manager, secretary or other officer of the corporation, he, as well as the corporation shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly’.

The issue for determination was whether the imposition under EL(CI)A 1969 of criminal liability on a company and its director could render the second respondent civilly liable for their failure to provide adequate insurance.

On one view, the question before the Supreme Court was settled by the Court of Appeal’s decision in Richardson v Pitt-Stanley [1995] 1 All ER 460 that EL(CI)A 1969 was intended to have effect solely within the confines of criminal law. However, in that case, Sir John Megaw handed down a powerful dissenting judgment. In the instant case, the decision under appeal from the Inner House also contained a strong dissent from Lord Drummond-Young. In both cases, the judges at first instance had found in favour of the plaintiff and pursuer respectively. It was felt that to the extent that the decisions were unsatisfactory, the case was correctly brought before the Supreme Court.

How did the Supreme Court decide the issue?

At the commencement of the appeal, Lady Hale somewhat pithily put it that the score so far was ‘four all’—the reference being to the first-instance decisions and the dissents versus the majority opinions in the appellate courts. Unfortunately, the decision in Campbell only formally resolves the matter as the decision was by a simple majority—Lord Carnwath issuing the lead judgment, which was agreed to by Lords Mance and Lord Reed. Both Lady Hale and Lord Toulson dissent—each of them issuing strong dissenting opinions with overlapping, but differing reasons.

In the course of the hearing, Lord Mance suggested other routes by which the appellant might meet with success—for example:

  • if he could argue that he relied upon the representations of the insurance company (whose certificate is required to be displayed) he may have a right of action directly against the company, or
  • if the appellant obtained control of the liquidation, as a major creditor, he might take proceedings against the brokers directly for failure to provide the correct product to the company

However, no judgment was issued by Lord Mance, and it may or not be the case that the appellant will seek to press these alternative remedies which were suggested.

The reasoning of the majority

All of the justices agreed that the purpose of EL(CI)A 1969 was to benefit the employee. Where they disagreed was on whether that was sufficient by itself to create civil liability for breach of a statutory obligation. Lord Carnwath took the view, in effect, that the transposition of liability to the company officers was a step too far—he took comfort in the fact that the wording in EL(CI)A 1969 differed from that in road traffic cases, which had resulted in the opposite conclusion about civil liability for breach of an obligation with criminal sanction. Finally, he was clearly concerned about the floodgates, and relied to some extent upon a Westlaw search showing a number of hits in respect of statutes that would be affected by the judgment in the Campbell case if the appellant were to be successful.

The reasoning of the minority

Lord Toulson was concerned that the majority view placed form over substance—as it was acknowledged that the object of EL(CI)A 1969 was protection of the employee, the form of language (always strained in deeming provisions) should be subservient to the purpose of the legislation. Lady Hale concluded that it was ‘absolutely plain’ that Parliament had intended there to be civil liability. She further explained that subsequent cases had not changed the position in Lonrho Ltd v Shell Petroleum Co Ltd (No 2) [1981] 2 All ER 456 and X (minors) v Bedfordshire County Council [1995] 3 All ER 353 that where a statutory obligation or prohibition was imposed for the benefit or protection of a particular class of individuals there could be an exception the general rule that if a statute imposed an obligation and a criminal penalty for failure to comply, there was no civil liability. It is clear that not even the majority in Campbell disagreed with Lady Hale’s view.

Does the judgment clarify the law in this area?

It is most unsatisfactory that this case only provides formal clarification—and without expressly saying so, it is surely a call (at least by the minority) upon Parliament to amend the legislation to place it beyond doubt that civil liability arises upon those who fail to obtain the necessary insurance. The case is a reaffirmation by all justices as to the applicable rules and dispels any belief that the cases relied upon by the respondents somehow compromise the well-settled rules laid down on Lonrho and X v Bedfordshire.

It is another example of how dissenting judgments in the Supreme Court can lead to an unsatisfactory and oxymoronic clarification of the law. The judgment may be of importance in assessing other cases where it is suggested that civil liability may arise from breach of statutory provision—and the assist those who act for defendants or defenders in avoiding liability should attempts be made to extend the principles.

Andrew Smith QC appeared for the appellant in this case. He is a member of both the Bar in England and Wales and the Faculty of Advocates in Scotland, and he practises as a QC in the two jurisdictions.

Interviewed by Robert Matthews. The views expressed by our legal analysis interviewees are not necessarily those of the proprietor.

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