company liability for a breach of the Trade Descriptions Act 1968

 

Assignment:

Decisions can be made at all levels of a company, and any or all of those decisions can result in allegations of a tortious or criminal act. Determining who is responsible for the resulting act or omission-the company, the individual, or both-is a problem which continues to have to be decided in a range of practical situations.
In Tesco, Lord Diplock (at 199-200) used the question ?what natural persons are to be treated in law as being the company for the purpose of acts done in the course of its business ? ?? as a guide to determining who is responsible, while Lord Reid referred to Lord Denning?s concept of the ?directing mind and will of the company?.

Compare the approaches used by Lord Reid and Lord Diplock in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 (House of Lords) in relation to company liability for a breach of the Trade Descriptions Act 1968. As part of your analysis, explore the issue of agency and authority in the context of the Tesco decision.

our Textbook is:B. Hannigan Company Law, 3rd edn., Oxford University Press, 2012.
Law of Business Organisations

Week 2: Corporate activity and legal liability

Rules of attribution and contractual liability
Textbook reading (Hannigan, Chapters 3 and 8)
You have already explored the idea that a company can be a ‘person’ at law. But to interact with other ‘persons’ a company must act through the medium of a human (or ‘natural’) person, so it can be difficult to tell when that human is to be considered to be acting on their own behalf, and therefore capable of incurring liability themselves and when they are said only to be acting as an agent of the company, who will therefore bear any liability incurred.
The fact that a company, rather than a ‘natural person’, enters into a contract makes no difference to the normal rules of contract (or tort, or, in general, crime). The difference is that the company itself does not know, intend, do, etc. To determine this, one must know ‘who acts for the company?’ The rules by which one determines this are known as ‘the rules of attribution’ and they are particularly relevant to criminal acts. An early approach to ‘who acts for the company?’, known as the ‘identification doctrine’, was to discover who is the ‘directing mind and will’i of the company (see Hannigan from 3-91).
A broader approach was set out in Meridiani, where Hoffman LJ describes the source of these rules as:

Primary rules of attribution:
Stated in the company constitution: e.g., “the decisions of the board in managing the company’s business shall be the decisions of the company”.
Implied in company law: e.g. “the unanimous decision of all the shareholders in a solvent company about anything which the company…has the power to do shall be the decision of the company”. (Multinational Gas caseiii)
Secondary rules of attribution:
Built using the principle of agency: “It will appoint servants and agents….”
Fashioned by the court, when a particular rule has been stated in a form designed for a natural person, but must be applied to a corporate person, using the usual canons of interpretation (i.e., taking into account the language of the rule, if it is a statute, and its content and policy…).
Although the Meridian approach is now a good guide to “who acts for the company?”, the “directing mind and will” approach is still relevant (see Hannigan from 3-103).
In contract law, the issue of who is the party to the contract—the company or the person making the contract (ostensibly on behalf of the company)—is fundamental, as a contract is normally only valid and binding if the parties have capacity to enter into it. Where a ‘natural’ person is a party to a contract, issues such as age and mental state, e.g., drunkenness impact on their capacity to make a particular decision (such as to enter into a contract) at a given time. For a company, no such limitations apply; a company is ‘adult’ from the time of incorporation, cannot be inebriated or suffer from mental illness, or be the patient, student, or parishioner of another person and therefore subject to ‘undue influence’ from that other person.
This leaves two special issues in relation to the contractual liability of a company (introduced at Hannigan 3-62):

Did the company have capacity to enter the contract? Such capacity would normally only be limited by an ‘objects clause’ which reduced capacity in regard to the subject matter of the contract. Even when such a limitation exists, statutory provisions have largely removed this limitation on enforceability of a contract in relation to a third party who did not know of the limitation (see Hannigan from 4-12).
Was the agent of the company (director, employee) who ostensibly entered into the contract on behalf of the company authorised to do so? Again, by and large, third parties have been protected from the invalidation of their contracts with apparently authorised (but actually unauthorised) company agents, in this case by common law mechanisms—the legal rules on ‘ostensible or apparent authority’ (see below and Hannigan 8-12 – 8-21) and the ‘indoor management rule’ (Hannigan 8-49, discussed later), and through statutory protection (Hannigan from 8-25).
Agency and authority in corporate contracting
Textbook reading (Hannigan, Chapter 8)
Aside from the question of whether a company has legal capacity to commit itself to a particular course of action (discussed above), there is the question of when, in relation to what, and in what circumstances a person (an agent) acting for the company has successfully bound the company in contract to a third party. That agent could be a member/shareholder, a director, or an employee.
Hannigan (8-12–8-21) discusses key cases explaining aspects of the principles of agency, and discusses statutory protection for third parties from 8-25.
Key points here are the difference between:

Actual authority of an agent—i.e., authority given to the agent by the company; and
Ostensible authority—i.e., authority to bind the company that a third party has been told (by the company) that the agent has been given.
In both cases the authority can be express or implied.

Liability in tort and criminal liability
Textbook reading (Hannigan, Chapter 3)
Case law:
Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577 [1998] 1 WLR 830 (House of Lords)
Note: See Hannigan from 3.73 and available online at:
http://www.publications.parliament.uk/pa/ld199798/ldjudgmt/jd980430/williams.htm

Tesco Supermarkets Ltd v Nattrass [1972] AC 153 (House of Lords)
Note:SeeHannigan from 3.100 and available online at:
http://www.bailii.org/uk/cases/UKHL/1971/1.html.

The liability of a company in tort or at criminal law is not a major focus of this module. A focus on both issues has intensified in a world where daily life increasingly takes place within a commercialised environment and public concerns in relation to the responsibility of companies for large issues, such as environmental damage, or public and employee health and safety are increasingly discussed. You might like to read further on these wider issues.iv

What your textbook focuses on, in relation to both liability in tort and under criminal law, is issues related to the capacity of the company to commit the act for which it is allegedly liable.
In tort (see Hannigan from 3-58) a company can be liable in two ways:

The company may be primarily liable—just as any natural person might be liable. Clearly no objects clause specifically empowers a company to commit a tort, but it may (or may not) empower the company to do the act from which the tortious liability flows (e.g., empowering mining, from which polluted spills onto a neighbouring property gives rise to liability in tort). The rule in Campbell v Paddingtonv makes it clear that even if the act was beyond a company’s capacity under the ultra vires doctrine, or illegal, the company can still be held liable.
The company may be vicariously liable—where it is vicariously liable for the acts and omissions of a person (e.g., an employee or agent acting in the course of their employment or agency) who is primarily liable. Liability attaches to the company, not because it did the act (which it did not), but because it created the risk that the tort would be committed. In this case, capacity to commit the tort is not relevant. Where vicarious liability is established, the individual and the company are jointly liable to the victim for the tort.
The difficult issue here is to distinguish between persons acting as the company (usually a director) where primary liability of the company might result, and persons acting for the company, such as an employee, where primary responsibility of the individual might result. This can be a confusing area, particularly in a small, ‘one person’ company. Natural Life Health Foodsvi makes it clear that when a person is acting as the company, they will not themselves be personally liable in tort unless personal liability is established under the principle of Hedley Byrnevii: “There must have been an assumption of liability such as to create a special relationship with the director or employee himself…”. While a company might become vicariously responsible for the acts of its employees, the individual does not become vicariously responsible for the acts of the company in the same way.
This is an important practical point, because companies can quite easily go out of existence, while the natural persons who were their shareholders, directors or employees may still be around. It is natural that the plaintiff will seek to find someone with funds to be found liable for the damage done to them. Natural Life Health Foods makes it clear that the corporate veil has substance in this situation. However, where the deed was actually done by a director the corporate veil will not shelter him or her from liability (see Hannigan from 3-59, and particularly 3-66 for the contrasting of these two approaches).
In the case of criminal liability (see Hannigan from 3-82), other factors related to capacity can come into play, since a person, including a company, cannot be vicariously liable for a crime—although it could be separately responsible for the same, or related, crime. Acts from which criminal liability might arise take two legal forms:

Those for which there is strict liability (such as some indicated in the Companies Act itself); and
Those for which there must be an element of mensrea (guilty mind). A company, not having a mind in and of itself, must be found to have a person acting as its “directing mind and will”, in whom the mensrea can be found.
Although it would appear from Tesco (see Hannigan 3-93 and 3-98) that it might be clear who is acting as the mind of the company, e.g., a director versus one who is merely acting for the company, e.g., a branch manager, it would appear on the basis of Meridian (discussed earlier) that there is no single test of identification, but rather a range of ‘rules of attribution’ which vary from case to case. (Hannigan provides a useful summary at 3-91.)
As noted earlier, there has been considerable public discussion about the difficulties in establishing corporate mensrea in cases of corporate killing, such that a company could be found guilty of manslaughter. In July 2007 the Corporate Manslaughter and Corporate Homicide Act became law in the UK.

The imputation of knowledge to the company
Textbook reading (Hannigan, Chapter 3)
If a company does not have a mind, in and of itself, then what can it be said to ‘know’? This is highly relevant to criminal acts in which “knowledge” is relevant, such as receiving money with the knowledge that it is the proceeds of a fraud (as was the case in El Ajou v Dollar Land Holdings Ltdviii), or not knowing something such that it could be the victim of deception (as in R v Roziekix, where the accused was charged with obtaining property from certain finance companies by deception, and what was at issue was whether the finance companies ‘knew’ of the deception, and therefore were parties to it).
Two key matters have been treated as separate in the relevant cases:

The ‘directing mind and will’ approach, whereby the knowledge of a person acting in this capacity has been attributed to the company; and
The ‘agency’ question, where as agent, the same person might not have a duty to communicate certain information to their principal (the company).
In El Ajou the knowledge of the Chairman of Directors, Ferdman, was attributed to the company on the first of these grounds, but not on the second (for the reason cited above). However, in Meridian, “the position was the reverse: the knowledge was that of the company on agency principles without regard to the question whether the particular individual was the company’s directing mind and will.”x
In general, as stated by Viscount Sumner in Houghtonxi:
What a director knows or ought in the course of his duty to know may be the knowledge of the company, for it may be deemed to have been duly used as to lead to action which a fully informed corporation would proceed to take on the strength of it.
Two exceptions have been recognised to this general rule relating to the knowledge of an agent:

Where knowledge is received by the director in his or her private capacity. In such cases the knowledge will not be ascribed to the company (although should the director have a duty to keep this knowledge private, they may also have a duty to declare that a conflict of interests exists).
Where the ‘agent’ is also the ‘wrong-doer’. Thus, as an example, a company cannot ‘agree’ to being defrauded by its agent by virtue of the fraudster also acting as the mind of the company.
Moore Stephens v Stone Rolls Limited (in liquidation), a very recent case canvassing these issues, was decided in the House of Lords 11 July 2009. You might like to read it in full on-line.xii

What is a company legally entitled to do?
Textbook reading (Hannigan, Chapter 4)
Companies are legal persons and are subject to most of the same legal restrictions as ‘natural’ persons, especially as related to the performance of criminal acts or acts which invoke tortious liability. What you are asked to consider here are the special limitations imposed only on companies in relation to what they are legally entitled to do. These limitations can come from two main sources:

Limitations imposed on a company by its original members in its constitution (or ‘objects clause’) —see Hannigan Chapter 4; and
Limitations impose by statute on companies (but not on ‘natural persons’) or limitations practically imposed by the artificial nature of corporate personality (e.g., a company cannot vote, marry, rape, or be sentenced to imprisonment).
Since the Companies Act 2006 (CA 2006) in the UK (and earlier in some other jurisdictions) companies have been able to dispense with an objects clause. Even before then these clauses became so wide ranging that virtually no limitations were placed on the capacity of a company to act by the writers of its constitution, previously memorandum and articles of association.
There are still many commercial companies that do have objects clauses, and companies formed for charitable objectives will always have them. Therefore, you need to read and study the law related to the interpretation of objects clauses. Where they exist they have two main purposes:

To restrict the company from acting in certain ways in relation to others – in this way certain types of borrowing, lending, manufacturing, selling or other activity might be ultra vires the objects of the company. This might be simply because the writers of the objects clause intended the company to undertake commercial activity in a certain area (e.g., mining, as opposed to farming). Alternatively, the writers might have wished to prevent the company from entering into certain activity for ‘moral’ reasons (e.g., a ban on purchasing the products of slave labour, or of investing in countries with poor human rights records).
To restrict future directors from making decisions about what is in the ‘best interests’ of the company, by circumscribing those decisions to within the ‘objects’ of the company (as described above).
The first of these is now difficult to enforce ‘after the event’, in that a contract will not be rendered void as against a third party acting in good faith simply because it is ultra vires the objects clause of a company (although a member can seek an injunction to prevent the company entering into such a contract). The second is still a powerful limitation, in that the company can take action against its directors for acting beyond the powers impliedly conferred on them by the objects clause.
Read carefully ss 39 and 40 of the Companies Act 2006 as regards (s 39) a company’s capacity, and (s 40) power of directors to bind the company.

In summary

This week’s work has been designed to help you consider what companies are legally entitled to do and the liabilities they incur. Issues of agency and authority in corporate contracting were explored in their legal context.
To interact with other ‘persons’, a company must act through the medium of a human (or ‘natural’) person. Thus it can be difficult to tell when that human is to be considered to be acting on his or her own behalf, and therefore capable of incurring liability themselves, and when they are said only to acting as an agent of the company, who will therefore bear any liability incurred. A large body of law and precedent surrounds this issue, and you examined some of it this week, especially as it relates to the law of contract, but also touching on corporate liability in tort or criminal law.
Next week you will go on to consider the organs of the company. The week will focus particularly on the division of power in a company between shareholders and the board of directors (as separate organs of the company), decision-making and company meetings, board structure and shareholder engagement, and board composition—especially qualification and disqualification.

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iLennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 at 713, HI

ii Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2BCLC 116, PC

iii Multinational Gas and Petrochemical Co trd v Multinational Gas and Petrochemical Services Ltd [1983]Ch 285; [1983] 2 All ER 565 (CA)

iv Books you can browse in Google Books include Celia Wells (2001) Corporations and Criminal Responsibility, or Clinard and Yeager (2006) Corporate Crime (focused on corporate behaviours in the US). You might also like to read relevant journal articles, such as GuangweiOuyang and Roger Shiner, “Organizations and Agency”, (1995) Legal Theory 283, and/or V.S. Khanna, “Corporate Criminal Liability: What purpose does it serve?”, (1996) 109 Harvard Law Review 1478.

v Campbell v Paddington Corpn [1911] 1 KB 869

vi Williams v Natural Life Health Foods Ltd [1988] 2 All ER 577, [1998] 1 WLR 830 (HL)

vii Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL)

vii [1994] 1 BCLC 464; [1994] 2 All ER 685

ix [1996] 1 BCLC 380

x Sealy and Worthington, supra, at p. 164.

xi JC Houghton & Co v Nothard, Lowe & Wills [1927] 1 KB, CA

xii Available at http://www.publications.parliament.uk/pa/ld200809/ldjudgmt/jd090730/moore-1.htm

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