Corporate directing mind and will in civil cases

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Speed read: Attributing liability to a company continues to be fraught with difficulty, in both civil and criminal cases. Historically, the courts adopted a more flexible approach in civil cases, and there is room for further development. This article discusses the position, noting that on one recent occasion a court had to consider the principles of attribution to be applied to conspiracy torts. The court hinted at a broader approach, but challenges remain.

Introduction

A groundswell of opinion holds that English law contains an anachronistic and unprincipled limitation to the attribution of liability to corporates. The ‘identification principle’ is a restrictive method of attribution. It is, of course, distinct from vicarious liability, or agency principles. Its bemoaned effect is that a corporate is only liable for an offence with a mens rea if its directing mind and will possessed the necessary intention.

Quite what this means in practice is not well-understood. Cases can flounder on the basis that it is an insurmountable hurdle, especially when larger companies with diffuse structures are involved. The new Director of the Serious Fraud Office, Lisa Osofsky, therefore, describes the SFO as ‘hamstrung’ by the identification principle. [1] The President of the Queen’s Bench Division, Sir Brian Leveson, suggests that extending the Bribery Act’s failure to prevent model to other economic crimes, such as fraud, would be in the public interest. [2] Criticisms of the identification principle are persistent and well-worn. The UK government is consulting on whether a ‘failure to prevent’ model of economic crime might offer a tonic.

An area which receives less attention, however, is the application of the identification principle in civil cases, partly because vicarious liability is more readily applied. The broader relevance of the identification principle is highlighted by High Court’s recent judgment in Kalma v African Minerals [2018] EWHC 3506 (QB), dismissing claims alleging corporate complicity in repeated police violence at an iron-ore mine in Sierra Leone. Before turning to this recent civil case, however, it is convenient to recall the development of the identification principle which, after all, originated in a civil claim.

The origins of the identification principle

In Lennard’s Carrying Co Ltd v Asiatic Petroleum Ltd [1915] AC 705 (HL), the issue was a maritime trading dispute under the Merchant Shipping Act 1894. The legislation provided a defence to a claim for loss of cargo if the shipowner could show that the event(s) in question happened “without his fault or privity”. The point therefore became who within Lennard’s Carrying Co Ltd was responsible for monitoring the condition of the ship, authorising repairs and so on.

Viscount Haldane reasoned that

“if Mr Lennard was the directing mind and will of the company, then his action must, unless a corporation is not liable at all, have been an action which was the action itself within the meaning of the [statute].”

On the facts, Mr Lennard was at fault and therefore the company could not rely upon the statutory defence.

In later cases, both criminal and civil, judges expanded upon the metaphor of the company’s ‘directing mind and will’.

The identification principle in criminal law

The leading criminal case is Tesco Supermarkets Ltd v Nattrass [1972] AC 152. The defendant company was charged with an offence under the Trade Descriptions Act 1968. Its defence was that the commission of the underlying offence was due to the conduct of a store manager whose conduct could not be attributed to the company – which owned more than 800 stores at the time.

The House of Lords allowed the company’s appeal, holding that the company had a proper system of control in place and the defaults of a (mere) store manager, on a proper reading of the legislation, should not be attributed to the company.

Lord Hoffmann in Meridian

A turning point, too often overlooked or misunderstood, is Lord Hoffmann’s careful reasoning in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 PC. This was an appeal from New Zealand to the Judicial Committee of the Privy Council (JCPC). The issue was whether the company had breached a requirement under local securities laws to disclose substantial shareholdings in another company. The share purchases at issue were made by investment managers who were not members of the board, but who acted on the company’s behalf. The question was whether their knowledge should be attributed to the company.

The JCPC held that the investment managers’ knowledge should indeed be attributed to the company for the specific purpose of its statutory disclosure obligations. Lord Hoffmann reasoned that the statutory purpose was the prompt disclosure of shareholdings. It was therefore entirely appropriate to treat the knowledge of those in charge of the company’s market dealings as sufficient to attribute liability to the company. Lord Hoffmann emphasised the need to interpret the relevant statute in its full context, considering the factual reality. [3]

This approach implies a fair degree of flexibility in the identification principle. Indeed, Lord Hoffmann regretted the “anthropomorphism” which had seeped into the caselaw because it “distracted attention” from the more fundamental question: “Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company?” [4]

The key point was that, even though the investment managers in Meridian were not all that senior – they were not on the board – the company was still liable.

Confusion since Meridian

A strong argument exists that English cases since Meridian have defaulted to a position which gives undue prominence to the notion of a company’s ‘directing mind and will’, without examining the principles of corporate attribution described by Lord Hoffmann.

In R v St Regis Paper Co Ltd, for example, the Court of Appeal declined to attribute the dishonest intentions of a ‘technical manager’ to the company in circumstances where he made false entries in records which environmental legislation required the company to keep. [5] At trial, the judge ruled that since the technical manager was entrusted with managing waste disposals, his dishonesty should be identified with that of the company, following which the company was convicted by a jury. This conviction was overturned by a unanimous Court of Appeal, which applied Tesco Supermarkets and held that the trial judge had erred by allowing the technical manager’s intentions to be attributed to the company. Although the Court of Appeal’s judgment examined the statutory provision and the factual context, it concluded that there was no basis to depart from the ‘directing mind and will’ test. It is difficult to reconcile the result in St Regis Paper with Meridian. The technical manager in St Regis Paper was the individual with the relevant responsibility within the company, just as the investment managers had the relevant responsibility in Meridian.

Another example of English law’s regression to a more restrictive approach to corporate criminal liability is found in the context of the common law offence of gross negligence manslaughter: AG’s Reference (No 2 of 1999) – which involved the criminal prosecution of a rail company following a fatal collision. [6] The Court of Appeal considered Lord Hoffmann’s reasoning in Meridian but held that statutory offences did not govern the common law and

“unless an identified individual’s conduct, characterisable as gross criminal negligence, could be attributed to the company the company is not, in the present state of the common law, liable for manslaughter.”

Another significant aspect of the court’s decision was to reject a submission that corporate liability could result from the aggregation of fault by different individuals.

Confusion seeping back into civil cases?

In the recent case of African Minerals, Turner J had to consider various civil claims including an allegation of corporate accessory liability for repeated police violence at a mine in Sierra Leone. The judge reasoned that the question of attribution turned on the approach of Lord Hoffmann in Meridian, and that this was the approach to be applied to the torts of conspiracy.

The judge quoted Lord Hoffmann’s test (“Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company?”), but proceeded to conclude, without explanation, that the requisite intent had to be “that of a member (or members) of its senior management.” (para 38.) The judge further concluded that, even if he could look further down the pecking order — for example to the mining company’s community liaison officers who were more closely mixed up with the police officers who committed the violence – the company representatives did not possess the necessary intention on the facts. (para. 333). This makes the judgment more difficult to appeal on this point.

For present purposes, the striking aspect of the judge’s approach in African Minerals is the way in which his discussion of Lord Hoffmann’s abstract test segued straight into a factual category of ‘senior management’ – a class of persons which the judge failed to define. The point which emerges is that, notwithstanding the absence of any express reference to directing mind and will in the African Minerals judgment, there is a risk that the judge’s approach misapplied Lord Hoffmann’s test from Meridian, and suggested too restrictive a test for corporate attribution in the context of conspiracy torts.

Conclusion

The genius of Lord Hoffmann’s approach in Meridian is that there are special rules of attribution over and above say, the provisions in a company’s constitutional documents, or the usual rules of agency and vicarious liability which might otherwise apply. Context is key. Admittedly, the rules of attribution are easier to discern in the context of statutory provisions, compared to say common law causes of action in tort. Nonetheless, the common law’s approach to corporate attribution is more flexible than commonly presented.

In Moulin Global Eyecare Trading Ltd (in Liquidation) v The Commissioner of Inland Revenue [2014] HCCFA 22, Lord Walker suggested that, instead of referring to a company’s directing mind and will, it would be better

“to refer instead to ‘the relevant responsible director or employee’, or some such expression, would be less arresting and a good deal more accurate.”

There is much to be said for Lord Walker’s approach. [7] Were it to be followed and developed in civil cases, some of the confusion in the line of authorities might dissipate. And criminal prosecutors might feel less hamstrung as well.

 

[1] In December 2018, City AM reported that Lisa Osofsky described the SFO as ‘hamstrung’ by the identification principle. See http://www.cityam.com/270724/sfo-director-lisa-osofsky-wants-agency-crack-down-corporate.

[2]https://www.lawgazette.co.uk/law/parliament-urged-to-create-all-encompassing-failure-to-prevent-law/5068369.article#.W_P6UkTVOpQ.twitter

[3] See the discussion of Meridian by: J. Payne, “Corporate Attribution and the Lessons of Meridan” in P. Davies & J. Pila (eds), The Jurisprudence of Lord Hoffmann (Oxford and Portland, 2015). Kindle version; and E. Ferran, “Corporate Attribution and the Directing Mind and Will”, 127 LQR (2011) 239-259.

[4] Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 PC, at p. 507 referring also to Denning LJ’s well-known passage in H. L. Bolton (Engineering) Co. Ltd. v. T. J. Graham & Sons Ltd. [1957] 1 Q.B. 159, at p. 172 likening a company to a human body: “It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre.”

[5] R v Regis Paper Co Ltd [2011] EWCA Crim 2527, [2012] 1 Cr App Rep 177; see also [2012] EWCA Crim 1847 (refusing leave to appeal to the Supreme Court).

[6] Attorney-General’s Reference (No 2 of 1999) [2000] QB 796; [2000] 3 All ER 182, per Rose LJ.

[7] The issue in Moulin was whether the fraudulent directors ‘ knowledge of inflated profits should be attributed to the company, in circumstances where the liquidators sought to rely on the fraud exception to reclaim repayment of excess tax paid on those inflated profits. The liquidators won at first instance, but both the Hong Kong Court of Appeal and Final Court of Appeal held that the directors’ knowledge should be attributed to the company.