In this article, Dipti Khatri pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Tortious liabilities of Companies.
Tortious liabilities of Companies
Law of tort forms a part of English common law. An act which injures someone in some way, and for which the injured person gets the opportunity to sue the wrongdoer for damages is called as law of tort. Some acts do not arise out of a contract or statute such as negligence and intentional civil wrong. Intentional civil wrong includes battery or defamation, and tort of negligence. In other words, when there is a duty of care but when that is breached it causes damage and that makes tort of negligence.
The definition of tortious liability is as follows,
“Tortious liability is when it arises from the breach of a duty which is primarily fixed by law. This duty is required to be towards persons generally and its breach should be redressable by an action for unliquidated damages.” As per W.V. H. Rogers in contract there is an agreement required between two or more parties, however, in case of tort there is no agreement required between the parties. Thus, the main difference between which lies between tortious liability and contractual liability is the nature of duty. The duties in the torts are more fixed by the law where as the duties in case of contracts are fixed by the contractual parties.
A company in most of the cases can both commit torts and have torts committed against it. As company is an artificial person, therefore in order for the companies to be held personally liable there is both need of humanitarian assistance and that of an individual. Liability will arise from either an individual committing an act or its wrongful omission. But in certain cases directors can also be simultaneously liable as he authorized the wrongful act or omission.
Director’s tortious liability
A director will be liable for tortious liability if he actively participates in the act or authorises or instructs anyone to commit such an act. The exact extent of liability, however, does not happen to be clear. It is generally held that the company will be held liable whereby company imposes the third party to damage/loss by reason of breach of his general duty with ordinary skill and care.
Identification and Agency approaches
Generally, the question arises for the act whether the company or director should be held liable. To appropriately answer this question generally two main approaches are applied: These include agency approach and Identification approach.
The Identification Approach suggests that based on the separate legal entity principle and separate legal entities, the director should be treated as the company whether he or she is acting in the course of business.
However, the Agency Approach alleges that the director is only acting as an agent of the company, which is a separate entity and therefore should be made personally liable only for his or her own wrongful acts. These two conflicting approaches clearly reflect the fundamental conflicts that exist between the company law and tort law in deciding director’s tortious liability. On one hand, tort law has long accepted that an individual is only responsible for his or her own tortious acts. Making directors liable in these circumstances would arguably damage the doctrine of separate entity and limited liability which are considered to be the foundation of company law.
There is yet another approach i.e. when directors act as the trustees as they are generally allotted the Companies assets over which they have control. Therefore, they are expected to exercise the powers honestly and not for their own personal advantage. And, if they misuse they will be rendered liable as trustees and in case of his death even his legal representatives can be made liable.
The two main approaches in Director’s Tortious Liability are as follows:-
- The Agency Approach- The Agency Approach recognizes a director as an agent of the company and their liability would be assessed accordingly. Under the Agency Approach, as the director is viewed as an agent of the company, therefore normally liable for all tortious act committed by him or her. In addition, the company will be taken as principal and would also be vicariously liable for the tort which has been committed by their director. This approach is generally taken as a creature of the tort law principle. In essence, the Agency Approach requires director’s direct liability in tort, without any alteration made by company law principles. Nowadays, agency approach seems to be more preferable then identification approach. It was held in the case of Williams v. Natural Life Ltd. That generally we should aim at adopting agency approach. In order to further explain, the facts of the case stated plaintiffs were earning profit. But successfully running after 2 years, they found that Company was running into losses. Thereby, it was found that the director was not acting for the interest of Company. Therefore, in the eyes of his Lordship, the company should be treated as the principal of the director.
- The Identification Approach- In case of identification approach, the act of director is considered as the act of company itself. Therefore, the director’s act is generally considered as the company’s act. This would generally exempt company from the personal liability. The identification approach was adopted in the most important case of Trevor Ivory Ltd v Anderson decided by the Court of Appeal of New Zealand. By adopting Lord Reid’s idea in Tesco Supermarkets Ltd. to the present case, Hardie Boys J. stated that “…in appropriate circumstances the directors are to be identified as the company itself so that their acts are taken in truth the company’s acts. Indeed it is considered that the nature of corporate personality requires that identification should be the basic premise…” Although the Hon’ble Judge agreed that the personal liability can still be imposed on a director based on the “assumption of personal liability test”. However, it can rightfully be said that in most circumstances the directors can most of the time escape their liability under this test.
Liability in tort
As a general principle of law, it is generally possible for the directors to have joint tortious liability along with their company. The circumstances in which this may occur are difficult to define precisely. Therefore, the courts have tried to strike a balance between the legal principles as
- An incorporated company is to be considered as a separate and distinct from its shareholders, directors and officers, and
- Everyone is to be made liable for their tortious acts.
The case of Williams and another v Natural Life Health Foods Ltd ([1998] 2 All ER 577) considered whether a company director should be personally made liable for a negligent misrepresentation. The House of Lords held that, in accordance with the norms of normal tortious principles, a director would only be held liable if the assumed personal liability for a representation and the other party reasonably relies on that assumption of responsibility. Equally however, the courts have tried to make clear in the plethora of cases such as Contex Drouzhba v Wiseman ([2007] EWCA Civ 1201) that where a fraud is involved, a director who has tried to make fraudulent misrepresentations will not be able to raise limited liability and separate legal personality of the company as a defence. Although, as noted above, in the context of tortious liability it involves a smaller degree of misfeasance then others.
In the High Court decision in Contex Irwin J commented: “In my view, there is no necessary contradiction between a foolish optimism that something will turn up and dishonesty. Specifically, it is possible for a businessman to practice deceit in order to keep the business alive, in the unreasonable hope that things will come right in the end”. The key representation which was noticed in the Context case was agreeing to a contractual provision within 30 days after shipment when the defendant always knew that company would not be able to pay for those goods at all. The Court of Appeal has also given judgment clarifying that the potential right of a liquidator to make a claim under s.213 (Fraudulent Trading) or s.214 (Wrongful Trading) of the Insolvency Act, 1986 against a director on the similar facts does not prohibit a creditor from bringing a claim directly against a director in the tort of deceit.
As far as torts are to be concerned, generally, a company has some degree of liability which is to be fulfilled for the torts committed by its directors and/or employees during the course of their employment, depending upon the nature and effect of the tort.
Conclusion
At last, the liability has to be determined on the basis of agency theory or identification theory. The intentional tort if foreseeable by the corporate directors or by the corporations then as per the theories they will be accordingly held liable. However, Corporations will generally not be held liable for the punitive damages based on a tort committed by the employees. The corporations will generally be held be liable for a tort committed by a corporation. However, if the intentional tort was foreseeable to the corporate directors or if the corporation accepted the benefits of the commission of the tort, the corporation will generally be held guilty even for a tort committed intentionally by an employee.
