Groundbreaking Victory for Ronald Fletcher Baker in the Supreme Court: Directors Liability

‘Knowledge is the antidote to fear’.

– Ralph Waldo Emerson

Introduction

Our victory for the Ahmeds in the Supreme Court involved navigating decades of complex legal concepts traversing the law of accessory liability, company law and evolution of the common law in the context directors being found personally liable for accessory liability.  The problem is a particularly difficult one in cases of strict liability and where the weight of authority has leaned in favour of finding that knowledge and a director’s state of mind is not relevant when considering liability for a strict liability tort. In such cases if primary liability is strict then it often followed that liabilities of accessories, even innocent accessories was also strict. The scope for injustice was evident.

The Supreme Court has defined the issue before them as:   

“When are directors of a company liable as accessories for causing the company to commit a tort of strict liability – in this case, trademark infringement? In particular, is such liability also strict or does it depend on knowledge (or some other mental element)? And if directors are strictly liable, should they be ordered to account for profits made by either (i) the company or (ii) the directors themselves?” 

Our clients – the Ahmeds 

For us it concerned two individuals, Kashif and Bushra Ahmed.  They ran a small family business trading as the “Juice Corporation” under two limited companies. They were brother and sister and held roles as employees and directors of companies who had infringed the intellectual property rights of Lifestyle. Trademark infringement is a strict liability tort, meaning that it does not matter the intention behind the infringement, or the steps taken to prevent the infringement; the fact that it occurred rendered the respective companies liable. But as directors and employees of the company, was it right that the Ahmeds should also find themselves personally liable? Did it not matter that they were unaware of the trademarks of Lifestyle? Was it irrelevant that they had sought professional advice before proceeding with what they believed to be a legitimate commercial endeavour? Did it not matter that all times they acted in good faith without knowledge that the acts which the company was undertaking would bring about a legal wrong?

The Ahmeds did not know or appreciate that there was a likelihood of confusion over the designs.  To compound the injustice on this family, Lifestyle sought to recover an account of profits, not of the sums which they were said to have made, but sums which the relevant corporate entities had made.  Lifestyle sought to recover sums which had been loaned and further their salaries which had been earned in the relevant period all under the heading of an “account of profits”.

At those early stages, looking at the law in the area it seemed far too draconian. A director would be liable simply for procuring or acting in common design with a company which unwittingly infringed a third party’s copyright. Given that a company can only act through its corporate agents, it was difficult to see a situation where a company would not be liable for procuring or acting in common design for a strict liability tort. 

We could see innocent charity trustees, directors of small property management companies unwittingly finding themselves shouldering quite large liabilities should the company innocently infringe a strict liability tort. 

The Supreme Court grappled with this problem, firstly by exploring whether the conduct of the Ahmeds gave rise to primary liability, exploring whether directors should be exempt as a matter of principle from joint tortious liability and in doing so examined the law on attribution, the law concerning inducing a breach of contract and its applicability in tort,  relevant cases on liability of directors for companies tort including the case of MCA Records Inc v Charly Records Ltd before deciding the case on first principles having examined the genesis of accessory liability in the context of joint liability. 

Primary infringement 

The Supreme Court, having examined section 10(2) and 10(3) of the Trade Marks Act 1994, found that the Ahmeds were not primarily liable for the infringement of Lifestyle’s mark, they had not used “the offending signs” in the course of trade. Whilst Mr Ahmed was the “ultimate decision maker”, there was no finding that he personally did any acts which were uses of any of the offending signs. For his sister Ms Ahmed, whilst she was head of sales at the “House of Brands” and displayed goods and sold them to customers, it was not done in the course of her trade. For the purpose of section 10(2) and 10(3) course of trade is “naturally understood as referring to persons who are trading on their own account and for their own economic advantage rather than to persons who are simply performing duties for their employer …”. The Supreme Court was therefore very much dealing with a case of accessory rather than primary liability. The Supreme Court emphasised that accessory liability exists alongside statute and operates in the same way as other common law torts.  There need not be a separate treatment of directors as had been the tension faced by the Courts when considering alleviating a potential injustice on a director who had in good faith and without knowledge committed a civil wrong. 

Liability of directors as a matter of principle 

The Supreme Court rejected the wider argument that a directors act is that of the companies, and in doing so the Court examined the rules of attribution. The rules of attribution determine which acts of an individual are attributed to a company.  The fundamental issue being that the rules of attribution do not support the principled point that a director is immune from liability because the acts are that of the company. Employees can be primarily liable despite its employer also being vicariously liable. Agents can be personally liable notwithstanding the liability of the principal. The Court found that there was nothing in the Companies Act which suggested that a director ought not be liable in tort for its own wrongful act. 

Examining the law concerning negligent misstatement and the assumption of liability it was necessary for the Court to identify that the reason for directors escaping personal liability (for instance in Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 & Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830) was not their status as directors but rather because the directors assumed no personal responsibility in the context of that tort. In both cases the directors had made statements which were representations on behalf of their respective companies. It was understood that it would be the principle rather than agent who would be liable. The law concerning negligent misstatement was analogous to that of a contract.  

In Standard Chartered Bank v Pakistan National Shipping Corpn (Nos 2 and 4) [2002] UKHL 43; [2003] 1 AC 959 a director who had committed a tort of deceit was not exempt from primary liability simply because of his directorship. The Supreme Court found that there should be no difference in principle which called for a blanket exemption for an accessory rather than a primary tortfeasor. 

One of the cornerstones to any practitioner concerning directors and the scope of their liability is the rule of Said v Butt [1920] 3 KB 497 which limited scope for a director to be liable for procuring a breach of contract.  The Supreme Court considered McCardie J judgment Said v Butt [1920] 3 KB 497: 

“if a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the [third person].”

Applied to the current case, the argument would be that if the Ahmeds are acting bona fide within the scope of their authority then liability is that of the Company. 

The Supreme Court disagreed with McCardie J reasoning in Said v Butt but found the rule to be sound for different reasons. The Supreme Court found that for breach of contract the “normal understanding” is that an agent assumes no liability towards the other party, only the company does. This is described by the Supreme Court as “a general norm or social understanding which the law should and does reflect”. To find otherwise would run contrary to “torts cooperation principle” that being, where parties have voluntarily come together on the basis of a particular allocation of risk between them, the law will not impose obligations which would circumvent that allocation.  

Significantly, the Supreme Court developed this line of reasoning finding that the rule in Said v Butt is not limited to contracts and can “also be engaged where liability in tort arises out of a relationship “equivalent to contract” involving an assumption of responsibility”.  The Supreme Court refused to extend the rule of Said v Butt to civil wrongs which do not depend on a contract or where liability arises where there is no special relationship, therefore it was not applicable to the situation the Ahmeds found themselves in. 

No Safe Harbour for Directors 

In its detailed judgment, the Court determined that no specific exemption for directors was necessary regarding accessory liability. The Court’s examination of relevant UK & Commonwealth cases yielded unexpected results.

The Canadian case Mentmore Manufacturing Co Ltd v National Merchandising Manufacturing Co Inc (1978) has long been influential in shaping the Courts’ approach to director liability in accessory liability cases. In that case, Le Dain J highlighted the complex policy considerations involved, emphasizing the need for a certain degree of personal involvement on the part of the director.

The Courts assessment of MCA Records Inc v Charly Records Ltd [2001] EWCA Civ 1441 was particularly surprising. That case concerned an individual who had been found to be a shadow director and personally liable for copyright infringement joint tortfeasor.  The Court of Appeal in MCA faced with accessory liability of a shadow director provided guidance that a director would not be liable if they do no more than to carry out their constitutional role such as voting at board meetings and act within their constitution. The judgment would lead to unfortunate results. A large company which has the formalities of regular board meetings and delegates execution of its decision to its employees was in a much more favourable position than a small family run company. There was no logical reason for the “voting at board” meetings exemption. 

The Supreme Court disagreed with both Mentmore and MCA. For the Supreme Court there was no difficult question of policy, there was no requirement to examine the degree of a director’s personal involvement, nor was there need to carve out a safe harbour for directors who only voted at board meeting. The Courts below had approached the matter the wrong way round assuming that directors were immune from tortious liability when they are liable under the ordinary principles of tort law.  

Undoing the Injustice 

The injustice which the Supreme Court identified extended far beyond that of directors. The Supreme Court recognised that: 

“It seems unjust that anyone whose act causes another person to commit a tort should be held jointly liable for the tort as an accessory if the individual was acting in good faith and without knowledge of facts which made the act of the other person tortious.”

How could that injustice be avoided when the mental element of the tortfeasor was irrelevant in strict liability torts? 

The Courts resolved this by drawing a distinction between someone who primarily brings about the tort and someone who is liable as an accessory. There was no reason why the mental element for liability as an accessory ought to mirror that of the primary infringer.  

The Court drew from jurisprudence arising out of accessory liability in equity, including accessory liability for dishonest assistance and development of the law concerning inducing a breach of contract as in Lumley v Gye (1853) 2 E & B 216; 118 ER 749. Analysing Lumley v Gye (1853) and the principles which developed therefrom including that developed in Allen v Flood [1898] AC 1, 96,  Quinn v Leathem [1901] AC 495, 509 which summarised the principle in Lumley and Gye as:

“a person who procures the act of another … will incur liability if he knowingly and for his own ends induces that other person to commit an actionable wrong”

The Supreme Court recognised that the law as stated in Lumley v Gye (1853) 2 E & B 216 which, although concerned with accessory liability for procuring breach of contract, shared the same underlying principles as that of procuring a tort. Lumley v Gye was “wide enough to include even civil rights existing independently of contract”.  Accordingly the line of authority which was expressed in the House of Lords decision of OBG Ltd v Allan applied equally to procurement of a breach of contract or tort. 

The Supreme Court clarified that in order for liability for accessory liability for procuring a breach of tort or contract it was required that:

“the defendant acted in a way that was intended to cause another party (the primary wrongdoer) to do an act which the defendant knew was a wrongful act (turning a blind eye being sufficient for this purpose).”

Further clarification which the Supreme Court provided as to the applicable test is that ignorance of the law could not serve as an excuse to such liability and that it would be necessary that the defendant knew all the essential facts which made the act unlawful.  

As to whether there ought to be any different treatment for common design the Supreme Court considered its judgment in Fish & Fish Ltd v Sea Shepherd UK [2015] UKHL 10; [2015] AC 1229, which was at that point treated as the leading authority on common design, noting that it turned on a very narrow issue. The Supreme Court found that the Court of Appeal were wrong to rely on  Fish & Fish Ltd v Sea Shepherd UK as authority that there is no requirement for a liability for tort of strict liability that the defendant should know or have reason to believe that his activities may cause a civil wrong. 

Procuring an infringement and participating in a common design are two separate principles of accessory liability. The Court considered that the law relating to assisting or even knowingly assisting another to commit a tort would not be sufficient to give rise to accessory liability. It would therefore be irrational “if innocently procuring or inducing the commission of a tort were to give rise to liability when knowing assistance does not suffice.”.  Put another way it would be irrational if “knowing assistance does not give rise to accessory liability that unwitting assistance should do so if it is given pursuant to a common design.”

The Supreme Court considered that the need for consistency called for the same test to be applied across both torts requiring that for both procuring a tort and acting in common design, it must be done knowingly. 

Conclusion on Liability 

Pulling the strands together in respect of accessory liability for a strict liability tort of procuring a breach or acting in common design of a civil wrong, the Court concluded that knowledge is an essential component. 

The test is that to be liable a person’s act must be more than trivial, that person must know (or deliberately turn a blind eye to) the essential facts which make the act unlawful.  Only if all the features of the act done which make it unlawful are known to a defendant, will the defendant be jointly liable with the actual infringer. Ignorance of the law will not absolve someone from liability.  

What this meant for the Ahmeds

The Ahmeds were found to not be liable as accessories for procuring a breach of tort or for acting in common design. This was not due to their status as directors but rather due to their lack of knowledge of the essential facts which would make the act unlawful.

The signs which the Ahmed’s companies used were different in various ways and there was “room for argument and honest difference of opinion about the extent of similarity and whether it gave rise to a likelihood of confusion”. 

This raises an interesting question as to where the bar will be set in other cases where defendants will inevitably argue that there was room for an honest opinion. Would that mean that any case which is defended and passes the summary judgment / strike out test the defendants can safely argue that there was room for argument? Surely if there is no room for argument we would be in summary judgment territory?

For the Ahmeds, the findings of the lower courts was such that it fell well short of showing that they had the relevant knowledge for accessory liability. The Judge below had not found that the Ahmeds knew or turned a blind eye to the likelihood of confusion.  The Ahmeds were innocent accessories and therefore the Courts below ought not to have ordered the account against the Ahmeds.  

In any event it would be wrong, as Lifestyle contended throughout, for the Ahmeds to account for the profits which they did not make and that which was made by the company. The Supreme Court affirmed that “the very nature of the remedy of account of profits” requires that person to only account for profits which they made. To order an account of profits made by another would amount to “paying a penalty or fine”.  As to the nature of any profits which the Ahmeds were said to have made, it would be wrong to hold a loan as a profit. It was not (and could not be) alleged that Mr Ahmed’s loan was a disguised dividend or at a preferential interest rate. There was accordingly no profit. The fact that it was caught up in the dissolution of a company did not “alter its character as a loan”.  The Supreme Court found that it was wrong to hold that the Ahmeds salary could be treated as profits. It was not (and could not be alleged) that the salary was a way of extracting profits from the company or any other than “ordinary remuneration for their services”.  It was found that “an employee who received in return for their services a sum no greater than the fair market value of those services does not make a profit”. 

As to the profits which the corporate entity made, the Supreme Court identified the question which should have been asked in the Court below was whether it was likely that any and if so what proportion of the sales of goods bearing the offending signs would have been made if the offending signs had not been used. 

The Team 

The Ahmeds have been fighting this case against Lifestyle since 2016.  The combined efforts of Ronald Fletcher Baker LLP’s dedicated team—Rudi Ramdarshan, Victoria Huxley, Ben Frost and Benjamin Rimell—alongside the exceptional counsel of Peter Knox KC, Laurent Sykes KC, Dr. Timothy Sampson, and Adam Riley, have culminated in a landmark victory at the Supreme Court. The case was one the most challenging as the injustice was clear but pathway to a solution was complex. Company, tort and intellectual property law all had a potential solution to the injustice. Against the background of all of the complexity, as a result of the judgment, Kashif and Bushra Ahmed are free of litigation and liability. We are pleased that others who find themselves as innocent accessories to a strict liability tort will not have to go through such a lengthy litigation process. 

The judgment is available here.

Should you wish to speak about the legal issues in this article please contact either Rudi Ramdarshan r.ramdarshan@rfblegal.co.uk (0207 465 7565), Victoria Huxley v.huxley@rfblegal.co.uk (0207 467 5756) or Ben Frost b.frost@rfblegal.co.uk (01392 715 310).

By Rudi Ramdarshan, Victoria Huxley and Benjamin Frost