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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Safeway Stores Ltd & Ors v Twigger & Ors [2010] EWHC 11 (Comm) (15 January 2010)
URL: http://www.bailii.org/ew/cases/EWHC/Comm/2010/11.html
Cite as: [2010] 3 All ER 577, [2010] UKCLR 434, [2010] EWHC 11 (Comm), [2010] Bus LR 974, [2010] 2 BCLC 106, [2010] 2 Lloyd's Rep 39
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
||
B e f o r e :
____________________
| SAFEWAY STORES LIMITED SAFEWAY LIMITED STORES GROUP LIMITED |
Claimants |
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| - and - |
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| SIMON JOHN TWIGGER AND OTHERS |
Defendants |
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Mr Andrew Mitchell and Mr David Murray (instructed by CMS Cameron McKenna LLP) for the First to Seventh and Ninth to Eleventh Defendants
Mr Thomas Sharpe QC (instructed by Clifford Chance LLP) for the Eighth Defendant
Hearing dates: 14-16 December 2009
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Crown Copyright ©
- By Application Notices dated 17 July 2009, in the case of all the defendants except the eighth defendant, and 20 July 2009 in the case of the eighth defendant, the defendants seek summary judgment against the claimants pursuant to Part 24 of the CPR, alternatively an Order pursuant to Part 3.4(2) of the CPR striking out the claim. For the purposes of their applications, the defendants accept that the court should proceed on the assumption that the allegations made against them in the particulars of claim are true.
- In these proceedings the claimants bring a claim for damages and/or equitable compensation against the defendants in the following circumstances. The defendants are former employees and in some cases directors of the claimant companies, companies in the Safeway Group which was sold to Morrisons in May 2004. The first claimant carried on business as a supermarket retailer prior to the sale. The first claimant was a wholly owned subsidiary of the third claimant which in turn was a wholly owned subsidiary of the second claimant.
- The eighth defendant was at the times material to the claim the chairman of the second claimant. All the other defendants had contracts of employment with the first claimant. The third and fifth defendants were directors of the first claimant. The second and seventh defendants were directors of the second claimant.
- From 2000 onwards concerted direct action was taken by British dairy farmers to put pressure on dairy processors and supermarkets to increase farm gate prices for dairy products. In 2002 and 2003, the claimants (acting by the defendants) engaged in the repeated direct and indirect exchange of commercially sensitive retail pricing intentions with other large supermarkets and dairy processors. This resulted in four initiatives which increased the price of milk and other dairy products for consumers. The price increases were passed back to the farmers.
- In January 2005, the Office of Fair Trading ("OFT") launched an inquiry into the various initiatives by the claimants and other supermarkets and the dairy processors. As a result of the inquiry the OFT alleged that the claimants and other supermarkets had breached the prohibition in section 2(1) in Chapter 1 of the Competition Act 1998.
- Section 2 provides:
- On 20 September 2007, the OFT gave the claimants written notice, a so-called statement of objections, informing the claimants that as a result of the investigation, the OFT intended to make a decision that the Chapter I prohibition had been infringed. A copy of the statement of objections was not before the court on the present applications, because of confidentiality obligations owed by the claimants to the OFT. Even the lawyers representing the claimants in the present proceedings have not seen the statement of objections.
- Upon the service of the statement of objections, under section 31 of the Act, the claimants would have had the opportunity to make representations to the OFT, which could include a formal oral hearing. However, they chose not to do so. Instead, on 6 December 2007, the claimants and the OFT entered into an "early resolution" or "fast track" agreement as to the terms on which the OFT investigation into the claimants' practices would be resolved. Similar agreements were reached with other supermarkets, but the investigation into some supermarkets continues. As part of the terms agreed with the OFT, the claimants admitted that they had breached the Chapter 1 prohibition in the Competition Act through the repeated exchange and disclosure of commercially sensitive retail pricing intentions by participating in the initiatives. The precise terms of the fast track agreement are also subject to obligations of confidentiality and are not before the court.
- The claimants' pleaded case is that by participating in and facilitating the initiatives, each of the defendants was in breach of his or her contract of employment and/or in breach of fiduciary duties owed to the claimants and/or negligent. It is also alleged that in breach of contract and/or of fiduciary duty the defendants failed to report the initiatives to his or her superiors or the Board of Directors of any of the claimants. Details of what each of the defendants is alleged to have done or failed to do are set out in paragraphs 34 to 39 of the Particulars of Claim, but it is not necessary to repeat those details here.
- It is said by the claimants that, as a consequence of the defendants' breach of contract and/or fiduciary duty and/or negligence, the claimants have suffered loss and damage. The principal element of this loss is the penalty from the OFT to which the claimants are exposed. The levying of penalties is dealt with by section 36 of the Competition Act which provides:
- Despite having served the statement of objections in September 2007, the OFT has yet to make a "decision" under this section, but it has indicated to the claimants that when it does so the penalty that will be imposed will be £16,449,893. This may be discounted by up to 35% in recognition of the co-operation of the claimants in the OFT investigation. If the full discount is achieved, the penalty will be £10,692,431. I deal later in this judgment with how the OFT calculates its penalties. For the present it is only necessary to record that the maximum penalty which can be imposed is a sum equivalent to 10% of the worldwide turnover of the relevant undertaking. The proposed penalty has apparently been calculated by reference to the worldwide turnover of the Morrisons group. However, it represents a tiny fraction of that turnover, possibly as little as 0.1%.
- Apart from claiming an indemnity against the liability for a penalty, the claimants also claim as damages their costs, including legal costs, of the OFT investigation, some £200,000.
- In addition to the claim for breach of contract, breach of fiduciary duty and negligence, the claimants allege that the defendants conspired to procure the claimants' participation in the initiatives and, in furtherance of the conspiracy carried out the anti-competitive measures which were unlawful acts. It is alleged that since those unlawful acts were intended to increase the claimants' retail prices, they were aimed at the claimants.
- The claimants also pleaded a claim against the defendants for contribution under the Civil Liability (Contribution) Act 1978. During the hearing, Mr Robert Anderson QC for the claimants accepted that this claim was not sustainable.
- Although it is irrelevant to the issues I have to determine, it is apparent that the real target of the present claim is not the assets of the individual defendants, many of whom are of modest means, but the directors' and officers' liability insurance available to the defendants, which would, presumably, respond in the event that the defendants were held liable to the claimants.
- The defendants contend that the claimants' claim is barred as a matter of public policy for two related reasons:
- All the defendants served a joint skeleton, but in oral submissions, Mr Thomas Sharpe QC, who represented the eighth defendant addressed the general scope of what I will call for convenience the ex turpi causa rule and the second reason above. Mr Andrew Mitchell, who represented all the other defendants, made submissions in relation to the so-called narrower version of the rule, that a person who commits an illegal or unlawful act cannot maintain an action for an indemnity against the liability which results from the act.
- It was accepted by the defendants that before the ex turpi causa rule could apply in the present case, two conditions would have to be satisfied:
- A great deal of the argument at the hearing focused on whether these conditions were satisfied in this case, so that the court should strike out the claim as infringing the ex turpi causa rule. After a brief discussion of the defence of ex turpi causa in general, I propose to consider both those conditions in turn, but in reverse order, dealing first with the question of what illegal or unlawful acts will engage the rule, then with the question whether, on the basis the acts here were sufficiently illegal or unlawful to engage the rule in principle, those wrongful acts are the acts of the claimants so that the claimants' claim is barred by reason of the rule.
- The public policy encapsulated in the Latin maxim ex turpi causa non oritur actio was formulated by Lord Mansfield in Holman v Johnson (1775) 1 Cowp 341 at 343:
- The nature and scope of the defence of illegality and the application of the maxim ex turpi causa have been considered twice recently by the House of Lords in Gray v Thames Trains Ltd [2009] UKHL 33; [2009] 3 WLR 167 and Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39; [2009] 3 WLR 455. It is important to note at the outset that the maxim is not an inflexible or immutable one. As Lord Hoffmann pointed out in Gray at paragraph 30, it: "expresses not so much a principle as a policy…not based upon a single justification but on a group of reasons, which vary in different situations". Thus, although, as I have said, for convenience I will refer to it as "the ex turpi causa rule", the policy which lies behind the maxim is a flexible one and its application is not rigid, but depends upon particular circumstances.
- In his opinion in Stone & Rolls, at paragraph 26, Lord Phillips of Worth Matravers noted that in the context of contractual obligations, the policy can be subdivided into two principles: (i) the court will not enforce a contract which is expressly or impliedly forbidden by statute or that is entered into with the intention of committing an illegal act and (ii) the court will not assist a claimant to recover a benefit from his own wrongdoing. As in that case, it is the second of these principles which is under consideration in the present case.
- Clearly the paradigm case where the ex turpi causa rule will be applicable is one in which, in bringing the claim, the claimant is relying on his own criminal conduct. Gray was such a case. The claimant had been involved in the Ladbroke Grove rail crash and suffered post-traumatic stress disorder. He subsequently killed someone and was convicted of manslaughter and sentenced to detention in a secure hospital. He brought proceedings in which he claimed inter alia damages for his loss of earnings whilst detained and for feelings of guilt and remorse consequent on the killing. The House of Lords upheld my decision at first instance that these claims were all excluded by the ex turpi causa rule, both in what Lord Hoffmann described as its narrower form (which is essentially the form on which the defendants rely in the present case), that you cannot recover for damage which is the consequence of a sentence imposed upon you for a criminal act and in its wider form, that you cannot recover for damage which is the consequence of your own unlawful act.
- Whilst the public policy which lies behind the rule will be engaged where the relevant wrongful act of the claimant on which the claimant relies in bringing the claim is a crime, the rule is not limited to criminal acts. This principle was clearly stated by Kennedy J in Burrows v Rhodes [1899] 1 QB 816 at 828 (in a passage approved by Lord Wrenbury in Weld-Blundell v Stephens [1920] AC 956 at 997):
- The difficulty is in deciding what acts which are not criminal are unlawful in that sense so as to engage the rule. Obviously, in the context of civil wrongs and the law of tort generally, the mere fact that the claimant has been found to be negligent cannot preclude a claim over against a third party said to be liable for the same damage. Were it otherwise, the whole scheme of contribution or indemnity now contained in the Civil Liability (Contribution) Act 1978 would be subverted. Something more serious is required.
- The claimants submitted that before the rule is engaged in the non-criminal context, the conduct of the claimant must be considered "morally reprehensible" or involve what might be called moral turpitude. The phrase "morally reprehensible" derives from the decision of the Singapore Court of Appeal in United Project Consultants Pte Ltd v Leong Kwok Onn [2005] 4 SLR 214, upon which the claimants relied in support of their submissions. To the extent that that case proceeds on the basis that there are only two strands of case in English law where the illegality defence has been invoked in a non-criminal context (claims by dependents of those who committed suicide in police custody and claims where the conduct is immoral) that is almost certainly too narrow an approach. However, I accept the underlying principle enunciated in United Project Consultants, that before the ex turpi causa rule can apply, there must be an element of moral turpitude or moral reprehensibility involved in the relevant conduct.
- It does not seem to me that there is anything in the decision of the majority of the House of Lords in Weld-Blundell v Stephens [1920] AC 956 which is inconsistent with that principle. That was a case where the claimant had committed a deliberate libel with actual malice. The defendant accountant had repeated the libel in correspondence and as a consequence the claimant was sued successfully by those he had libelled. The claimant then sued the defendant for breach of duty in, effectively, failing to keep the libel to himself. The majority of the House of Lords held that he could not recover substantial damages for several reasons. Two of the majority (Lords Dunedin and Wrenbury) concluded that he could not claim damages for the consequences of his own wrongdoing. Lord Sumner, who was also in the majority, concluded that the defendant was not liable for a different reason, namely that there had been a novus actus interveniens. Given that there is no clear ratio in the case (and two strong dissents by Viscount Finlay and Lord Parmoor), its value as an authority in the present context must be limited. In any event, both Lord Wrenbury (expressly) and Lord Dunedin (by implication at 976-7) approve the principle set out by Kennedy J in Burrows v Rhodes. Furthermore, Weld-Blundell was a case which, on its facts, clearly involved what is properly categorised as moral reprehensibility or turpitude on the part of the claimant.
- In my judgment, anti-competitive acts in breach of the prohibition in Chapter 1 of the Competition Act do involve the necessary element of moral reprehensibility or turpitude and are sufficiently serious to engage the ex turpi causa rule in principle. I have reached this conclusion for a number of reasons.
- First, it has been held by the Court of Appeal in the context of what is now Article 81 of the EC Treaty, which is in almost identical terms to section 2 of the Competition Act, that an agreement which is in breach of the prohibition in that Article is an illegal agreement and that a party to such an agreement cannot claim damages for loss caused by being a party to the illegal agreement: see Gibbs Mew plc v Gemmell [1999] 1 EGLR 43. At 49-50 Peter Gibson LJ said:
- The same conclusion as in Gibbs Mew was reached by the European Court of Justice in Courage Ltd v Crehan [2002] QB 507, another case concerned with infringement of what is now Article 81. The Court held that, in exceptional circumstances, a party to an agreement which infringes the Article may be able to sue the other party to the agreement, where there was an inequality of bargaining power between the parties or the defendant bore "significant responsibility" for the infringement. However, the Court stated that Community law did not preclude national law from denying someone who did bear significant responsibility for the infringement any right to claim damages under the agreement. At paragraph 31 of the Judgment the Court stated:
- It should be noted that both these cases were examples of the application of the first principle identified by Lord Phillips in paragraph 26 of his opinion in Stone & Rolls. In other words, they were cases in which one party to an agreement which was expressly prohibited not by domestic statute but by Article 81 of the EC Treaty was seeking to enforce that agreement against the other party. By parity of reasoning, if the claimants were trying to enforce the anti-competitive agreements against, say, the dairy processors, they would be met by the defence that under section 2(4) of the Competition Act 1998, the agreements were illegal and void. However, that is not what the claimants are seeking to do in this case. In so far as they are seeking to enforce any contracts, the relevant contracts are the contracts of employment of the defendants, which are not illegal. That is why, as I have said, it is Lord Phillips' second principle which is under consideration in the present case.
- The second reason why the acts of the defendants for which the claimants are responsible under the Competition Act are sufficiently serious to engage the ex turpi causa rule in principle is that, whilst proceedings brought by the OFT which result in the imposition of a penalty are not criminal, this is essentially so that domestic law under the statute is in line with European law under the Treaty or Directives, as expressly provided for by section 60 of the Act. The penalties which the European Commission can impose for anti-competitive acts are regarded as of an "administrative" nature, so as to avoid legal and political arguments relating to sovereignty which might arise if the Commission had power to impose criminal sanctions: see Kerse & Khan: EC Antitrust Procedure 5th edition para. 7-008.
- Because infringements of the prohibition in Chapter 1 of the Competition Act are not criminal offences, the standard of proof to be applied is not the criminal standard but the civil standard, albeit the heightened civil standard for serious cases: see the decision of the Competition Appeal Tribunal in Napp Pharmaceutical Holdings Ltd v Director-General of Fair Trading [2002] CAT 1 at paragraphs 99 to 109, following Lord Nicholls in Re H [1996] AC 563 at 586-7, where he held that, within the civil standard, the more serious the allegation, the more cogent should be the evidence before the court concludes that the allegation is established on the preponderance of probability.
- The Competition Appeal Tribunal concluded at paragraph 108 that in practice there would be little to choose between the criminal standard and that heightened civil standard:
- Furthermore, although the proceedings are not criminal, for the purposes of Article 6 of the European Convention on Human Rights, they are regarded as involving a "criminal charge": see Napp at paragraphs 93-4. In the recent case of Crest Nicholson Plc v Office of Fair Trading [2009] EWHC 1875 (Admin) Cranston J, citing Napp, referred to infringement proceedings as being of a quasi-criminal nature.
- The third reason is that, although the penalty which the OFT may impose is a civil or administrative penalty, it has many of the characteristics of a fine imposed for commission of a criminal offence. As already noted, a penalty can only be imposed under section 36 of the Competition Act where the OFT is satisfied that the infringement has been committed intentionally or negligently by the undertaking: see section 36(3).
- The meaning of "intentionally" and "negligently" in this context was considered by the Competition Appeal Tribunal in Napp at paragraphs 456 to 458:
- It was submitted on behalf of the defendants that their acts and conduct for which the claimants are responsible in the present case were committed intentionally within the meaning of that definition. Although I could see the force of the submission, it does not seem to me either necessary or appropriate to reach a final conclusion about that, without having seen the statement of objections or the fast track agreement, let alone any of the materials on which the OFT relied or any calculation from the OFT of the proposed penalty.
- The purpose of the penalty, as with a fine, is twofold: punishment and deterrence, but not compensation. As with fines, any penalty is paid into the Consolidated Fund. That the purpose is punishment and deterrence is clear from the OFT's Guidance as to the appropriate amount of a penalty, published in December 2004. This states at paragraph 1.4 that the twin objectives of the policy of the OFT on penalties are to impose penalties on infringing undertakings which reflect the seriousness of the infringement and to ensure that the threat of penalties will deter undertakings from anti-competitive practices. It is also stated that the OFT regards price-fixing agreements and other cartel activities in breach of the Chapter 1 prohibition or of Article 81 as amongst the most serious infringements of competition law.
- The Guidance sets out steps for determining the level of penalty. The first step is the starting point, which is calculated by reference to the seriousness of the infringement and the relevant worldwide turnover of the undertaking, but the starting point may not in any event exceed 10 per cent of that turnover. The second step is that the starting point may be increased to reflect the number of years during which the infringement has been taking place.
- Step 3 is the adjustment as appropriate to achieve the policy objectives set out in paragraph 1.4, in particular deterrence, not just of the infringing undertaking but of other undertakings which may be contemplating infringement. Step 4 is adjustment for aggravating and mitigating factors. A number of such factors are set out. Aggravating factors include the role of the undertaking as a leader in, or an instigator of, the infringement and the involvement of directors or senior management (notwithstanding that only undertakings and not individuals can be guilty of infringement). Mitigating factors include termination of the infringement as soon as the OFT intervenes and co-operation which enables the enforcement process to be completed more effectively or speedily. Step 5 is a final adjustment to avoid the maximum penalty of 10% of turnover being exceeded and to avoid double jeopardy.
- As I pointed out during the course of argument, although the infringement is not a crime, there is a similarity between these steps in the Guidance and the approach to sentencing in criminal cases advocated in many of the Definitive Guidelines issued by the Sentencing Guidelines Council, particularly as regards aggravating and mitigating factors and what might be described as totality of offending.
- In all the circumstances, I accept the defendants' submissions that (i) an infringement of the Chapter 1 prohibition is a sufficiently serious wrongful act to engage the ex turpi causa rule in principle and (ii) a penalty imposed by the OFT under section 36 of the Competition Act is akin to a fine. It follows that the authorities dealing with the recoverability or otherwise of fines in civil proceedings are relevant and applicable by analogy. I will consider these cases in more detail later in this judgment in the context of whether the relevant wrongdoing is that of the claimant companies, so that the ex turpi causa rule does preclude the claim in these proceedings, the issue to which I now turn.
- The question is whether the unlawful conduct is that of the claimant companies so that they cannot seek to recover from the defendants an indemnity or damages in respect of the penalty they face from the OFT because, were they permitted to do so, they would be profiting from their own unlawful conduct.
- Mr Sharpe submitted that in the present case, the liability of the claimants for infringement of section 2 of the Competition Act 1998 was a primary or direct liability. He points to the fact that under the legislation, it is only "the undertaking" (i.e. here one or other of the claimant companies) which is liable for the infringement, not the employees. Accordingly, he submits that the OFT is penalising the claimants for their own infringement, their own wrongdoing. However, in my judgment this begs the question as to the true basis for that liability. Since a company can only act through human agents, the acts or conduct of a company are inevitably performed by those human agents and not all the acts or conduct of those agents will be attributed to the company for the purpose of the application of the ex turpi causa rule.
- There are essentially three different bases of liability of a company: (i) primary liability, through the application of the primary rules of attribution; (ii) liability through the application of the normal principles of agency or of vicarious liability (the general rules of attribution) and (iii) liability imposed for the purposes of a particular legislative intent (a special rule of attribution).
- The distinction between these three different rules of attribution was explained by Lord Hoffmann in the judgment of the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] AC 500 at 506-7:
- Clearly where the company is under a primary or direct liability, because of the application of the primary rules of attribution in the sense in which Lord Hoffmann used that concept in Meridian, for example, where the relevant unlawful acts have been approved at a meeting of the board of directors or at a shareholders' meeting, the unlawful acts are those of the company "personally" and the ex turpi causa rule will be engaged.
- However, in the present case, there is no question of the company being under a primary liability in that sense. It is not suggested by either side in this case that the actions or conduct of the defendants in entering and pursuing the various anti-competitive initiatives, albeit some of them were directors of one or other of the claimant companies, were approved by the boards of directors of the claimant companies or by the majority vote of shareholders, so as to constitute the acts and conduct those of the company, by virtue of the articles of association or of primary rules of attribution implied by company law. Indeed, it seems to me that Mr Sharpe must be right that the occasions when a company is primarily or directly liable for unlawful acts because of the application of those primary rules of attribution must be comparatively rare.
- Two questions then arise: (i) short of the application of those primary rules of attribution, in what circumstances will the wrongful acts of a company's agent be attributed to the company for the purposes of the ex turpi causa rule; and (ii) do the circumstances of this case fall into that category?
- It is clearly not sufficient to bring the rule into play that the company is vicariously liable for the acts of its employees. This is clear from two passages in the opinion of Lord Phillips of Worth Matravers in Stone & Rolls v Moore Stephens [2009] 3 WLR 455. First at 462 (paragraph 8) he said:
- Then at 467-8 (paragraphs 27 and 28) he said:
- These are references to the submissions made orally by Mr Jonathan Sumption QC, counsel for the defendant auditors, who were applying to strike out the claim on the basis that it was precluded by ex turpi causa. Mr Sumption accepted in his oral submissions that not all the acts of an agent for which a company is responsible will be imputed or attributed to the company so as to bring the ex turpi causa rule into play. I was provided by Mr Mitchell with a transcript of the hearing in the House of Lords, where Mr Sumption submitted as follows:
- Contrary to Mr Sharpe's submissions, it seems to me that, as is clear from paragraph 8 of Lord Phillips' opinion, which I quoted above, the qualification to the application of the ex turpi causa rule accepted by Mr Sumption in that case is that, before the rule can apply, the company must be under a "personal" liability for the relevant wrongdoing. In other words, the rule does not apply where the company is only liable for the acts of its employees or agents either by virtue of the application of the doctrine of vicarious liability or where the act or conduct of an employee or agent is attributed to the company under the general principles of the law of agency. In neither of those cases is the liability of the company "personal" or primary or direct, nor can it be said that the company is guilty of turpitude.
- In Stone & Rolls, the majority of the House of Lords considered that the claimant company was under a primary or direct liability because it was wholly owned, controlled and managed by the fraudster Stojevic. It was created by him as a vehicle to defraud various banks. The defendant firm of accountants were appointed auditors by Stojevic to lend the company a veneer of respectability. The defendants did not detect the frauds during their audits. One of the banks defrauded obtained a judgment for substantial damages in a claim in deceit against the company, which went into liquidation. The liquidators of the company sought to claim damages against the defendant auditors for negligence in having failed to detect the frauds during their various audits.
- The majority of the House of Lords concluded that ex turpi causa provided a complete defence to the claim by the company. Lord Phillips said at paragraph 86 that all those:
- Lord Walker of Gestingthorpe pointed out at paragraph 135 of his opinion that it was common ground that Mr Stojevic really was the embodiment of the company for all purposes. He adopted what Rimer LJ had said in the Court of Appeal ([2008] 3 WLR 1146 at paragraph 9):
- Lord Walker concluded that Stone & Rolls was primarily liable for the frauds. He then went on to consider whether the so-called Hampshire Land principle or adverse interest rule applied. After a detailed discussion of the authorities, he drew a distinction at paragraph 173 between cases where a director or directors of a company have acted fraudulently to the detriment of innocent participators in the company and cases where there is what the US jurisprudence calls a "sole actor", in other words where there is by definition no innocent participant in the company because it is a one-man company and the one man has acted fraudulently.
- Although of course there is no suggestion that any of the defendants in the present case acted dishonestly, the distinction Lord Walker makes is an important one, which seems to me to be of some relevance to the issues raised by this application:
- Lord Brown of Eaton-under-Heywood considered that the ex turpi causa rule applied because Stone & Rolls was a one-man company. At paragraphs 197 and 199 of his opinion he stated:
- In his oral submissions Mr Sharpe ultimately submitted that the liability which section 36 imposed on the claimants, which he sought to categorise as a primary or direct liability, arose by virtue of a special or statutory rule of attribution. Both he and Mr Mitchell submitted that in effect questions of attribution did not arise because the effect of the Competition Act was that the acts of the defendants were attributed to the claimants for all purposes. In other words, they submitted that, once the OFT had decided that the claimants had committed an infringement intentionally or negligently, the relevant wrongdoing was that of the claimants for the purposes of the application of the ex turpi causa rule.
- Attractively though these submissions on behalf of the defendants were put, I cannot accept them. It is true that, as between the claimants and the OFT, the issue of attribution did not arise since the relevant wrongdoing was inevitably that of the claimants as the "undertakings". It would have been of no avail for the claimants in their dealings with the OFT to say that it was the defendants who had carried out the anti-competitive acts and practices, since the defendants were directors and employees acting in the course of their employment. However, contrary to the defendants' submissions, the question whether, in consequence, the ex turpi causa rule applies to preclude a claim over against the defendants is simply not addressed by the Competition Act, which is not concerned with relations between the undertaking and its employees. It seems to me that the answer to that question depends upon the correct analysis of the liability which the claimants are under.
- One can quite see that in a case such as Stone & Rolls, where Mr Stojevic was the company in the sense that it was entirely his creature, the liability of the company for the fraud was a primary liability. Equally, as Mr Sumption submitted to the House of Lords, the concept of direct or primary liability would seem to extend beyond the case of a one man company or "sole actor" to cases where the relevant actor is the "directing mind and will" of the company.
- Although, as I have said, Mr Mitchell referred me to the transcript of the hearing in the House of Lords to identify the precise submission made by Mr Sumption QC as to the scope of the ex turpi causa rule in its application to companies, detailed submissions were not really addressed on behalf of the defendants as to the basis upon which the defendants could be said to be the "directing mind and will" of the claimant companies, for the purpose of establishing that any liability in the present case was a primary liability.
- Indeed, somewhat ironically, Mr Sharpe, who actually represented the eighth defendant, drew my attention to a letter before action from the claimants' solicitors where reference was made to the defendants being the "mind and will" of the claimant companies, not to support a submission that the defendants had been the directing mind and will, but rather to pour scorn on any such suggestion, given the relatively junior position or limited involvement of many of the defendants.
- Mr Mitchell submitted in general terms that because various of the defendants were directors of the claimants and the eighth defendant (whom of course he did not represent) was the chairman of the second claimant, they must have been the directing mind and will, but that submission was not developed by reference to the actual involvement of the defendants. Mr Mitchell accepted that the question whether the defendants were the "directing mind and will" could not be determined on the present summary applications.
- In any event, the claim is not pleaded on the basis that the defendants were the "directing mind and will" of the claimant companies and, in both his written and his oral submissions, Mr Anderson eschewed any suggestion that the defendants were the directing mind and will of the claimants. Rather, as I have stated, the claimants' case is that they are liable for the defendants' acts upon the application of the normal principles of the law of agency.
- On the material before the court, it seems to me that (as Mr Mitchell accepted) it is not possible to reach the conclusion that any of these defendants was the "directing mind or will" of the claimant companies. That is a question which might well be dependent upon the facts and evidence as they emerged at trial and Mr Mitchell, at least, reserved his clients' position in relation to that question. I do not consider that it would be appropriate to say anything further on the issue as to whether the defendants were the directing mind or will of the claimant companies.
- The defendants also placed considerable reliance upon the decision of the Court of Appeal in Ashmore Benson & Pease v AV Dawson Ltd [1973] 1 WLR 828. In that case the principals of the defendant haulage company agreed orally with the transport manager of the claimant company and his assistant to carry two 25 ton tube banks to a load port for shipment. The contract was made after the haulier had inspected the load. Later the same day, the haulier's drivers arrived to load the tube banks on two articulated lorries weighing 10 tons laden. This meant that when laden they would exceed the limitation on laden weight for vehicles of that kind of 30 tons set out under the Motor Vehicles (Construction and Use) Regulations 1966. Under the Road Traffic Act 1960 it was not lawful to use a vehicle on the road which did not comply with the Regulations. On the road, one of the lorries toppled over and the load was damaged.
- The claimant company brought a claim for damages for breach of contract or negligence. The defendant alleged that the contract of carriage was void for illegality. The Court of Appeal held by a majority that, although the contract was lawful in its inception, its performance was illegal to the knowledge of and with the participation of the claimant's employees in a sufficient degree to affect the claimant company: see per Lord Denning MR at 833C and Scarman LJ at 835E-836C. Phillimore LJ considered that the contract was illegal from inception.
- The defendants relied upon Ashmore as demonstrating how the knowledge of a relatively junior employee will be attributed to the company in an appropriate case, so that the company cannot rely upon an illegal act. However, on proper analysis it seems to me that Ashmore is a case within Lord Phillips' first principle, that the court will not enforce a contract which is expressly or impliedly forbidden by statute or that is entered into with the intention of committing an illegal act. Ashmore was not a case of a contract illegal in its formation, but rather illegal in its performance. However, in my judgment, it falls within the same principle.
- As Lord Phillips went on to say at paragraph 27 of his opinion, the qualifications recognised by Mr Sumption (i.e. so far as relevant here, that ex turpi causa only applies where the company is relying on wrongdoing for which it is personally liable) only apply to the second principle not the first principle. The reason for that is not hard to discern. Questions of attribution will not arise by definition where the claimant company is seeking to enforce a contract. If the company seeks to enforce the contract, it inevitably adopts the acts and conduct of the employee or agent who made or performed the contract, whose knowledge and conduct is thus imputed to the company. The question whether the employee or agent was acting outside the scope of his employment or agency simply cannot arise in the context of a claim to enforce the contract, whatever separate complaint the company might have against the employee or agent for exceeding his actual authority. However, the position is very different where Lord Phillips' second principle applies, as in the present case.
- The logical consequence of the defendants' reliance on Ashmore in support of a submission that the liability of the company in that case was a primary liability, is that any claim over by the company against the transport manager for breach of his contract of employment in agreeing to perform the contract in the illegal way in which he did, would have been precluded by the ex turpi causa rule. In my judgment, the absurdity of the suggestion that the company could not pursue such a claim demonstrates the flaw in the argument that the basis of liability of the company in such cases is a primary liability, as opposed to liability pursuant to the general principles of the law of agency, in which case the company should be at liberty to pursue a claim over against its employee or agent, without the ex turpi causa rule being engaged.
- Much was sought to be made by Mr Sharpe of the fact that the present case cannot be one where the claimants' liability is vicarious, since under the Competition Act, it is the undertaking alone and not the individual employees or agents of the undertaking, which commits the infringement of the Chapter I prohibition. This is undoubtedly correct, but as I have already said, the qualification to the ex turpi causa rule recognised in Stone & Rolls is not limited to cases of vicarious liability. On the pleaded case of the claimants, it seems to me the basis upon which the claimants are liable here is that the relevant wrongful acts were committed in the name of the claimants by the defendants, who as directors and employees were acting in the course of their employment. Accordingly, those acts are to be attributed to the claimants by virtue of the general law of agency.
- Contrary to Mr Sharpe's submissions, it does not seem to me that, had the claimants challenged the OFT's statement of objections, it would have been necessary for the OFT to resort to any special or statutory rule of attribution such as in In re Supply of Ready Mixed Concrete (No. 2) [1995] 1 AC 456 (where Lord Nolan at least seems to have thought some special rule of attribution was necessary), in order to establish liability under sections 2 and 36 of the Competition Act. Unlike that case, this is not a case where there was an express prohibition of the relevant conduct, precluding the application of the general law of agency. On detailed analysis, the claimants are not alleging that the defendants' actions were in breach of an express prohibition issued before any of those actions took place. Accordingly, the relevant anti-competitive acts and practices were carried out by employees of the claimants in the course of their employment and the claimants are liable for those acts and practices pursuant to the general principles of the law of agency.
- Even if it were necessary to resort to some special or statutory rule of attribution, I am far from convinced that the liability which arises as a consequence is properly characterised as primary or direct liability. It seems to me that even then, the relevant wrongdoing is still not the personal wrongdoing of the claimants themselves so as to make the ex turpi causa rule applicable, but rather is wrongdoing for which the claimants have to take responsibility as a matter of law under the Competition Act.
- For the purposes of the present applications, I consider that the claimants have a real prospect of successfully defeating any defence based upon ex turpi causa at trial on the basis that their liability is not primary or direct so as to attract the necessary degree of turpitude. I agree with Mr Anderson that this should be sufficient to dispose of the applications, whether founded on the wider formulation of ex turpi causa or on the narrower formulation advanced by Mr Mitchell. However, since Mr Mitchell put forward detailed argument based upon the fines cases, it is necessary to consider those in more detail.
- Mr Mitchell cited a number of cases where a claimant had not been able to recover a fine imposed in criminal proceedings in subsequent civil proceedings against the person who was alleged to have caused the fine to be incurred. Obviously, where the ingredients of the relevant criminal offence include a mental element which imports criminal culpability i.e. mens rea, the offender cannot recover by way of damages from a third party losses suffered in consequence of the sentence imposed upon him. That is the narrower version of the ex turpi causa rule recognised and applied in Gray. The position is no different if the sentence imposed is not imprisonment, but a fine.
- However, not all criminal offences where fines are imposed fall into that category. The authorities which have considered the question of recoverability of fines also deal with two types of "strict liability" offence: cases which are "pure" strict liability offences where mens rea is irrelevant for the commission of the offence, which only requires the actus reus and cases where although strict liability is imposed, a defence is available if the offender can demonstrate that he has taken reasonable precautions.
- An example of a case which on analysis is in the latter category is the decision of Rowlatt J in R Leslie Ltd v Reliable Advertising [1915] 1 KB 652. The claimant moneylenders had employed the defendants to address and send out circulars on their behalf. The defendants had negligently sent a circular to a minor and the claimant company and its sole director were convicted of an offence under section 2 of the Betting and Loans (Infants) Act 1892 as amended by section 5 of the Moneylenders Act 1900 and fined. The offence as originally enacted required proof of knowledge of the moneylender that the person to whom a document was sent was an infant. However, by virtue of the amending section, a moneylender was deemed to know that the person to whom a document was sent was an infant unless he proved that he had reasonable ground for believing that the infant was of full age.
- Rowlatt J indicated that his first reaction to the case had been that the claim was misconceived:
- If these statements did represent the law, then on the basis that the penalty in the present case is, as I have held, analogous to a fine, there would be a formidable obstacle in the way of the claim. However, as Rowlatt J recognised, there are authorities which go the other way, specifically the decision of Kennedy J in Burrows v Rhodes [1899] 1 QB 816. In that case, which I have already referred to above, Cecil Rhodes was sued by one of the men who had been enlisted for the Jameson raid. It was held that although the claimant was guilty of a criminal offence under the Foreign Enlistment Act 1870, he could sue for fraud in inducing him to go on the raid. In reaching that conclusion Kennedy J gave examples of cases where a person might be convicted of an offence without a guilty mind and could recover the penalty imposed as damages.
- It is apparent from his judgment that Rowlatt J did not agree with Kennedy J and would have preferred to decide the case before him on the basis of the wider principle he had enunciated. However, in deference to the views of Kennedy J, he decided the case on the narrower basis that the claimants had been convicted of an offence of "knowingly" circularising an infant and had no reasonable grounds for believing that the infant was of full age. Accordingly, recovery was precluded because the claimants were personally at fault.
- Another case in the category where a defence to the offence of having exercised due diligence had not been open to the offender and recovery of the fine was precluded by public policy, is the decision of Denning J in Askey v Golden Wine Ltd [1948] 2 All ER 35. In that case, the claimant purchased large quantities of alcohol from the defendants for the manufacture of cocktails. The defendants were convicted of selling for human consumption liquid contaminated with methylated spirit, but assured the claimant that this was nothing to do with the alcohol they manufactured for him and he continued purchasing from them. The claimant was then convicted under the Food and Drugs Act 1938 of selling cocktails unfit for human consumption and fined. Also he had to refund his retailers. He sought to recover the fine and the amount of the refund from the defendants.
- Under the Food and Drugs Act, it was a defence to the charge if the offender could prove that he had used all due diligence and had no reason to believe that the liquid was contaminated. Denning J held that the claimant could not have availed himself of that defence because he had taken no steps to see that the liquid was fit for sale. He had gone on buying from the defendants and had not had the liquid analysed. As the judge held, although the claimant had not been party to a conspiracy with the defendants he was guilty of what the judge described as "gross negligence".
- The judge held that the claimant could recover neither the fine nor the refund. In relation to the fine he stated the principle as being:
- That passage was cited, with apparent approval, by Lord Hoffmann in paragraph 33 of his opinion in Gray, as defining the narrower version of the ex turpi causa rule. However, it is not an unqualified principle and as the judgment of Rowlatt J in R Leslie demonstrates, the courts have stopped short of saying that a fine should never be recoverable (albeit in his case with some reluctance). The mere fact that the damages which the claimant seeks to recover consist of a fine does not preclude recovery, provided that the court is satisfied that the claimant was not negligent or otherwise personally at fault in relation to the incurring of the fine. This is demonstrated by two decisions of the Court of Appeal after Askey.
- Strongman v Sincock [1955] 2 QB 525 was a case where the claimant builders had contracted with the architect owner and he had promised orally that he would obtain the licences then necessary under the Defence (General) Regulations 1939. Work considerably in excess of the licences was carried out. The builders claimed under the contract for the price over the licensed amount. The Court of Appeal held that they could not recover on that basis, as the contract was illegal as absolutely prohibited by the regulations. However, they allowed the builders to recover on their alternative claim for damages for breach of a warranty by the architect to obtain the licences or a collateral contract to that effect.
- Denning LJ addressed the question whether the claim for breach of warranty was precluded by public policy at 535:
- He then cited the judgment of Kennedy J in Burrows v Rhodes with approval and turned to consider the effect of negligence on the part of a claimant at 536-7
- He went on to find that the claimants had not been at fault in that case, but entirely innocent, having been led into the illegality by the representation of the architect, amounting to a collateral contract, that he would get the licences. Accordingly, the claimants could recover damages for breach of that collateral contract. Thus, although Strongman is not a fine case, Denning LJ's judgment provides a useful exposition of the limitations in the scope of the principle he had applied in Askey.
- The case upon which the claimants placed considerable reliance in this context is the subsequent decision of the Court of Appeal in Osman v J Ralph Moss Ltd [1970] 1 Lloyd's Rep 313. The claimant was Turkish, with a limited ability to read and understand English. He had been insured with a reputable insurer but considered the premiums high and asked the defendant insurance brokers to find him another insurer. The defendants negligently recommended Belvedere Motor Policies Limited underwritten by London & Midland Insurance Company Limited, whose shaky foundation was under attack in the financial press. The trial judge found that this must have been known to the defendants but was not known to the claimant.
- The claimant completed a proposal form and paid the defendants the annual premium. They gave him a 60 day cover note with a certificate of insurance attached. When the 60 days expired the defendants negligently failed to tell him whether or not his proposal had been accepted. The claimant assumed all was in order. On 15 February 1967, Belvedere wrote to the defendants saying that insurance had been effected, but on 20 February a compulsory winding up order was made against London & Midland. Rather than informing the claimant that his policy was now valueless as they should have done, the defendants, with what Sachs LJ described as "crass negligence", wrote a letter to the claimant informing him that he was insured with Belvedere.
- The claimant was subsequently involved in an accident. He informed the defendants with a view to claiming on his policy and it was only then that the defendants informed him that he was uninsured. He subsequently pleaded guilty before the magistrates to an offence of driving without insurance and was fined £25. He sought to recover that sum from the defendants, who resisted liability on the grounds that Askey precluded such recovery.
- The Court of Appeal held that the fine was recoverable in the circumstances. Although the offence under consideration was a strict liability offence, what clearly influenced the Court was the absence of any negligence or other fault on the part of the claimant. Sachs LJ stated the principle shortly at 316:
- Edmund Davies LJ at 318 cited the passage from Strongman where Denning LJ had commented on his judgment in Askey and continued:
- Phillimore LJ also considered that the fine should be recoverable on the facts of that case. At 319-320 he said:
- The decision of Lord Coleridge J in Cointat v Myham [1913] 2 KB 220 (to which Edmund Davies LJ referred) was that a claimant who had been convicted of selling unsound meat could recover the fines imposed from his vendor. However, as Rowlatt J had pointed out in R Leslie, Cointat did not consider the question of illegality at all. It turned on the question of remoteness of damage. Furthermore, the case has a somewhat chequered history as Denning J pointed out in Askey at 39.
- I agree with Mr Mitchell that Cointat is a somewhat unsafe foundation for the principle which the Court of Appeal was enunciating but, nonetheless, Osman is clear authority for the principle that a fine or penalty will be recoverable where the claimant was not negligent or otherwise personally at fault, nor do I consider that the application of the principle is limited to strict liability offences properly so called. I should add in parenthesis that the cases refer to gross or culpable or crass negligence. I accept Mr Mitchell's submission that these are no more than epithets and that on analysis, none of the cases is suggesting that something more than negligence would have to be shown before recovery of a fine was precluded on the grounds of public policy.
- Returning to the present case, the penalty which the OFT will, in all probability, impose is not a fine, but as I have accepted, it has many of the characteristics of a fine. The relevant infringement or "offence" is a strict liability one, in the sense that whether there is an infringement or not does not depend upon establishing any element of mens rea. However, the OFT can only impose a penalty for the infringement if the undertaking has engaged in anti-competitive acts and practices intentionally or negligently. I also agree with Mr Mitchell at least to this extent, that the court should not draw fine distinctions in this area between acts which are criminal and acts which are illegal and wrongful in a quasi-criminal way.
- It was in this context that Mr Mitchell appeared to be submitting at various stages of his oral argument that since, under the Act, the penalty is imposed because it is the undertaking, here the claimants, which has engaged in anti-competitive acts and practices intentionally or negligently, applying the principles established in the fines cases and, particularly, R Leslie and Askey, the ex turpi causa rule applied to preclude recovery of the penalty from the defendants.
- In my judgment, any such submission ignores two important matters. First it is clear from the decisions of the Court of Appeal in Strongman v Sincock and Osman v J Ralph Moss Ltd that the ex turpi causa rule will only apply to exclude recovery of a fine from a third party where the claimant can be said be personally at fault. The same principle emerges from Gray, where, at paragraph 44 of his opinion, Lord Hoffmann refers to the "inconsistency of requiring someone to be compensated for a sentence imposed because of his own personal responsibility for a criminal act".
- None of the fines cases touches upon the question when a company which has received a fine will be regarded as personally at fault or as having personal responsibility for a criminal act. R Leslie appears to be the only case involving a company, but it seems that was a one-man company and the sole director was also fined for the same offence. In terms of the Stone & Rolls analysis, the company there was clearly primarily or directly liable.
- Second, it ignores the qualification to the ex turpi causa rule recognised in relation to companies in Stone & Rolls, that it only applies where there is personal or primary or direct liability upon the company. It is only where there is such liability that the company can be said to be personally at fault and the requisite level of moral reprehensibility or turpitude is reached to engage the public policy against allowing the company to recover the penalty from the individuals responsible for the wrongful acts which have led to the penalty.
- It seems to me that, if the claimants succeed in establishing in the present case that the company is liable by virtue of the general rules of agency, so that it is not directly or primarily liable, it can be said that the company is not personally negligent or otherwise personally at fault. In those circumstances, on the basis of the principle which emerges from Osman, the penalty should be recoverable.
- Mr Anderson advanced an alternative argument as to why the ex turpi causa rule should not apply in the present case, that the claimants were in truth the victims of the defendants' wrongful acts, in the sense that those for whose benefit these proceedings have in reality been brought, namely the large number of shareholders in the claimant companies, are all entirely innocent of any wrongdoing. The defendants urged that the mere fact that innocent shareholders would suffer should not influence the court, since ex turpi causa is nothing to do with justice and fairness, but with public policy.
- I accept that if the public policy is applicable, the fact that, as a consequence, innocent shareholders may suffer, is no reason for not applying the public policy. However, the fact that the shareholders of the company are entirely innocent of wrongdoing inevitably gives rise to a question mark as to whether the public policy does apply.
- The position of innocent shareholders troubled the dissenting minority in the House of Lords in Stone &Rolls, Lords Scott of Foscote and Mance. Contrary to submissions advanced by Mr Sharpe about Lord Phillips' opinion, it was a point which troubled him as well, as appears from paragraphs 59 to 61 of that opinion:
- The complications to which Lord Phillips alludes did not arise in that case, where the majority of their Lordships considered that there were no innocent shareholders, as the company was the creature of the fraudster. Equally, they would not apply in the present case where there is no suggestion that the shareholders were anything other than entirely innocent of any wrongdoing.
- There is certainly some authority for the proposition that ex turpi causa should not apply to bar a claim by a company where the company has been the victim of the relevant illegality. That is essentially the rationale of the decision of the Court of Appeal in Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 1) [1979] Ch 250, referred to with approval by Lord Walker in his opinion in Stone & Rolls at paragraphs 139 to 143. Later in his opinion at paragraph 173, he referred to the relevant principle as follows:
- The concept of the company having been a victim of wrongful acts to deprive it improperly of part of its assets is also the explanation of the unusual case of Brink's Mat v Noye [1991] 1 Bank LR 68: see the passages from the judgments of Mustill LJ and Nicholls LJ which Lord Walker discusses at paragraph 149 and 171 of his opinion. However, as he said, that decision probably cannot be given much weight.
- As that opinion and the other opinions in Stone & Rolls demonstrate, consideration of whether the ex turpi causa rule should not apply where the relevant wrongful act has caused detriment to the company itself inevitably involves the question whether the Hampshire Land principle or rule, or what is termed in United States jurisprudence, the adverse interest exception, applies. That principle, named after In Re Hampshire Land Co [1896] 2 Ch 743, is an exception to the general rule of the law of agency that a principal is affected by notice received by an agent and the agent's knowledge imputed to him. Where the agent is committing a fraud on his principal or some other serious breach of duty towards his principal, his knowledge of a matter which is relevant to the fraud or breach of duty is not attributable to the company.
- Mr Sharpe submitted in reply (although in his oral opening he had submitted that Lord Walker, at least, differed from the approach of Rimer LJ in the Court of Appeal) that on a proper analysis of the opinions of the majority of the House of Lords in Stone & Rolls, they had given the Hampshire Land principle no wider a scope than the somewhat narrow scope given to it by Rimer LJ in the Court of Appeal at [2008] 3 WLR 1146 at 1175-6 (paragraph 72). Rimer LJ had accepted Mr Sumption's submission that the principle will ordinarily only apply in circumstances in which the agent intends to harm the company or the company is the target of the agent's acts and that it is not enough to engage the principle that an agent's acts may result in harm to the company. Mr Sharpe also submitted that the Hampshire Land principle only applies to knowledge, not to acts or conduct with which the present case is concerned.
- I am unable to accept these submissions. In my judgment for the purposes of the present applications, the claimants have an arguable case that has a real prospect of success at trial that English law, like the law in a number of United States jurisdictions does recognise an "adverse interest" exception to the normal rules of attribution which (i) goes wider than fraud by the agent but applies to breaches of duty by the agent short of fraud on his principal; (ii) is not dependent upon the agent intending to harm the company; and (iii) which will apply to conduct as well as knowledge.
- That the so-called Hampshire Land principle or "adverse interest" exception is arguably that wide is recognised by the House of Lords in Stone & Rolls: see, in the opinions of the majority, per Lord Phillips at paragraphs 45 to 48, Lord Walker at paragraphs 173 and 174 (together with his treatment of the cases to which Rimer LJ had referred, McNicholas Construction Ltd v Customs and Excise Commissioners [2000] STC 553 and Morris v Bank of India [2005] 2 BCLC 328 at paragraphs 153 to 156 of his opinion) and in particular Lord Brown at paragraph 198 who said:
- Thus, the Hampshire Land principle or at least the adverse interest principle is arguably wider than Mr Sharpe contends. However the matter does not rest there. The pleaded case of the claimants includes the allegations (i) that the defendants knew about the initiatives, but in breach of contract and/or fiduciary duty failed to report them to their superiors and/or the boards of directors of the claimant companies and (ii) that the defendants participated in an unlawful means conspiracy aimed at the claimants. For the purposes of the present application the court has to assume those allegations can be made out and, accordingly, even if the Hampshire Land principle were as narrow as Mr Sharpe submits, the claimants must have an arguable case that the principle should apply here so as to preclude the application of the ex turpi causa rule.
- Furthermore, in my judgment, the question whether the Hampshire Land principle does apply in the present case is one which may well depend upon the evidence at trial as to the intentions, knowledge and conduct of each of the defendants. On this strike out/summary judgment application, it is neither necessary nor appropriate to make any final decision on the alternative argument of the claimants. It is sufficient to say that I consider it sufficiently arguable that, even if it had stood alone (in other words even if I had not already concluded that the claimants had a sufficiently arguable case to go to trial that they were not primarily or directly liable, so that the ex turpi causa rule does not apply), I would have concluded that the claimants' case on this alternative basis also had a real prospect of success at trial so that it should not be struck out nor should summary judgment be entered against the claimants.
- The defendants' alternative argument is that the claim should be barred as a matter of public policy, because it is fundamentally inconsistent with the Competition Act 1998 and other statutes. Mr Sharpe confirmed during the course of oral argument that this was pursued as an alternative and not just a cumulative argument, although I think he recognised that if he was wrong about ex turpi causa being a "knock-out blow", then this alternative argument would lose much of its force.
- The argument was developed in detail in the defendants' joint Skeleton Argument, with little elaboration in oral argument. It was submitted that the claim was fundamentally inconsistent with the competition regime for a number of reasons.
- It was submitted that the scheme of the Competition Act 1998 was prohibition against undertakings and enforcement against undertakings and there was no provision in the Act for direct civil liability on directors or employees for conduct which led to the undertaking infringing the Act. It was submitted that if Parliament had intended there to be such a remedy, it would have said so.
- That submission was developed further in relation to the Enterprise Act 2002, section 188 of which introduced a "cartel offence", which imposed direct criminal liability on individuals in respect of certain types of anti-competitive behaviour (not relevant here). Reference was made in the Skeleton to the White Paper issued before the Act was passed, a paper on the criminalisation of cartels issued by the OFT and statements made by Government ministers in Parliament during the various readings of the Bill.
- Those matters were said to give rise to three important points:
- Then it was contended that, in the area of competition, because the law is strongly influenced by economic and social policy, the courts should be careful not to intervene in an area which is for the legislature. Reliance was placed on the decisions of the House of Lords in OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1 and Norris v Government of the United States of America [2008] UKHL 16; [2008] 1 AC 920. Accordingly it was submitted that the court should be slow to create means of directly or indirectly enforcing the law of competition which were not laid down by Parliament.
- Finally, reliance was again placed upon the function of penalties under the 1998 Act as punishment, deterrence and the reversal of unjust enrichment and it was submitted that this function would be frustrated if the claimants could pass on the fines to the defendants.
- In my judgment, it is important in assessing these arguments to have in mind that the causes of action upon which the claimants rely in the present case are not new or revolutionary. They involve the application of well-established principles of contract, company law, employment law and tort. I do not accept Mr Sharpe's submission that this claim would extend the existing law. It would simply involve the application of existing law to the particular facts of this case. It is only the facts and not the law which can in any sense be said to be novel.
- If the ex turpi causa rule does not apply, I agree with Mr Anderson's general submission that it would be startling if the defendants were right that they could not owe duties as a matter of law not to put their employers in breach of competition law. As he put it in his Skeleton Argument: "Competition law would have the unique distinction of being the only area of law which employees cannot be lawfully obliged to comply with and against whom there would be no redress for any breach thereof".
- I also agree with Mr Anderson that this is not the effect of the 1998 Act. Whilst the Act applies to undertakings and not to individuals, that is true of any legislation aimed at regulating companies. It does not follow that individuals cannot owe the company duties on normal common law principles to ensure that the company complies with its statutory obligations. It seems to me that Parliament in both the 1998 Act and the 2002 Act was not intending to affect any common law remedies which an undertaking might have against its directors or employees which (unlike a claim for breach of statutory duty to which the defendants referred) arise wholly independent of the statute. If Parliament had intended by either statute to limit the effect of the normal principles of the common law, it could and would have done so by the terms of the statute.
- I also agree with Mr Anderson that the 2002 Act was aimed at a very particular mischief, that fines might not be sufficient to deter undertakings which take a very calculated and cynical approach to the law. Hence amongst other things the imposition of criminal sanctions by the statute on individuals who are responsible for that calculated and cynical approach. Neither the White Paper nor the 2002 Act were intended to have any impact on common law remedies which were not mentioned at any stage.
- The cases on judicial deference in competition law to which the defendants refer are concerned with whether the courts should extend the rules of fair competition into new areas, in OBG whether to extend the scope of the tort of causing loss by unlawful means and in Norris whether to extend the criminal law on price-fixing. Hence the caution advocated by their Lordships in the passages from the opinions in OBG which the defendants set out in their Skeleton Argument. However, as Mr Anderson pointed out in the present case, the court is not being asked to create a new cause of action or extend an existing one, but to apply well-established principles of the common law. I agree that no question of judicial deference arises.
- In relation to the function of penalties under the 1998 Act, it seems to me that once it is recognised that the claimants have a sufficiently strong case to go to trial that the ex turpi causa rule does not apply, this point can be of little force in the context of the alternative argument. However I agree with Mr Anderson that it is a peculiarly unattractive argument to be run by the very directors and employees whose breaches of duty will have led to the penalty being imposed. The suggestion that undertakings will only be deterred from breaching the Act if they are prevented from suing the individuals who caused the breach is completely illogical. I accept Mr Anderson's submission that passing on the penalty to the very people who caused the unlawful acts would not be inconsistent with the 1998 Act.
- It follows that for all the reasons set out above, the claimants have a real prospect of successfully defeating at trial any defence of ex turpi causa or that their claims are contrary to the competition regime. The applications must be dismissed. I will consider further submissions as to consequential orders and directions for the future conduct of the case.
The Honourable Mr Justice Flaux:
Introduction and background
(1) Subject to section 3, agreements between undertakings, decisions by associations of undertakings or concerted practices which—
(a) may affect trade within the United Kingdom, and
(b) have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom,
are prohibited unless they are exempt in accordance with the provisions of this Part.
(2) Subsection (1) applies, in particular, to agreements, decisions or practices which—
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
(3) Subsection (1) applies only if the agreement, decision or practice is, or is intended to be, implemented in the United Kingdom.
(4) Any agreement or decision which is prohibited by subsection (1) is void.
(1) On making a decision that an agreement has infringed the Chapter I prohibition, the Director may require an undertaking which is a party to the agreement to pay him a penalty in respect of the infringement.
(2) On making a decision that conduct has infringed the Chapter II prohibition, the Director may require the undertaking concerned to pay him a penalty in respect of the infringement.
(3) The Director may impose a penalty on an undertaking under subsection (1) or (2) only if he is satisfied that the infringement has been committed intentionally or negligently by the undertaking.
(4) Subsection (1) is subject to section 39 and does not apply if the Director is satisfied that the undertaking acted on the reasonable assumption that that section gave it immunity in respect of the agreement.
The basis for the defendants' application
(1) It infringes the principle of public policy expressed in the maxim ex turpi causa non oritur actio, and in particular the rule that a person who commits an illegal or unlawful act cannot maintain an action for an indemnity against the liability which results from the act.
(2) It is fundamentally inconsistent with the United Kingdom competition regime established by the Competition Act 1998 and other statutes.
(1) The claimants must have committed an illegal or unlawful act; and
(2) that illegal or unlawful act must be of sufficient seriousness to engage the ex turpi causa rule.
The defence of ex turpi causa
"The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this; ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. (my emphasis)
Was the unlawful act sufficiently serious?
It has, I think, long been settled law that if an act is manifestly unlawful, or the doer of it knows it to be unlawful, as constituting either a civil wrong or a criminal offence, he cannot maintain an action for contribution or for an indemnity against the liability which results to him therefrom.
"I do not accept Mr. Beloff's argument that an agreement in breach of Article 85 is not "illegal in the strict sense". Article 85 not only makes the agreement automatically void but contains a prohibition and is a penal provision. For an agreement to be illegal it need not be in breach of the criminal law.
In my judgment English law does not allow a party to an illegal agreement to claim damages from the other party for loss caused to him by being a party to the illegal agreement. That is so whether the claim is for restitution or for damages. In Boissevain v Weil [1950] A.C. 327 the House of Lords rejected a claim for restitution arising out of an illegal contract, Lord Radcliffe (at p.341) saying of an act forbidden by statute, "I do not think that it can be a source of civil rights in the courts of this country." In Tinsley v Milligan [1994] 1 AC 340 the House of Lords has laid down the applicable test for claims affected by illegal agreements, Lord Browne-Wilkinson (with whom Lord Jauncey and Lord Lowry agreed) saying (at p.376) of a plaintiff making a claim:
"he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction".
I do not see how Mr. Gemmell can avoid relying on the beer tie, which for this purpose must be taken to be illegal. Mr. Beloff's suggestion that Tinsley v Milligan does not apply because the source of Mr. Gemmell's rights is Article 85 and not the beer tie is sheer casuistry. Mr. Gemmell's case is that the illegal agreement compelled him to adhere to the beer tie and that caused him loss."
"Similarly, provided that the principles of equivalence and effectiveness are respected (see Palmisani, cited above, paragraph 27), Community law does not preclude national law from denying a party who is found to bear significant responsibility for the distortion of competition the right to obtain damages from the other contracting party. Under a principle which is recognised in most of the legal systems of the Member States and which the Court has applied in the past (see Case 39/72 Commission v Italy [1973] ECR 101, paragraph 10), a litigant should not profit from his own unlawful conduct, where this is proven."
"Since cases under the Act involving penalties are serious matters, it follows from Re H that strong and convincing evidence will be required before infringements of the Chapter I and Chapter II prohibitions can be found to be proved, even to the civil standard. Indeed, whether we are, in technical terms, applying a civil standard on the basis of strong and convincing evidence, or a criminal standard of beyond reasonable doubt, we think in practice the result is likely to be the same. We find it difficult to imagine, for example, this Tribunal upholding a penalty if there were a reasonable doubt in our minds, or if we were anything less than sure that the Decision was soundly based."
"456. As to the meaning of "intentionally" in section 36(3), in our judgment an infringement is committed intentionally for the purposes of the Act if the undertaking must have been aware that its conduct was of such a nature as to encourage a restriction or distortion of competition: see Musique Diffusion Français, and Parker Pen, cited above. It is sufficient that the undertaking could not have been unaware that its conduct had the object or would have the effect of restricting competition, without it being necessary to show that the undertaking also knew that it was infringing the Chapter I or Chapter II prohibition: see BPB Industries and British Gypsum, cited above, at paragraph 165 of the judgment, and Case T-29/92 SPO and Others v Commission [1995] ECR II-289, at paragraph 356. While in some cases the undertaking's intention will be confirmed by internal documents, in our judgment, and in the absence of any evidence to the contrary, the fact that certain consequences are plainly foreseeable is an element from which the requisite intention may be inferred. If, therefore, a dominant undertaking pursues a certain policy which in fact has, or would foreseeably have, an anti-competitive effect, it may be legitimate to infer that it is acting "intentionally" for the purposes of section 36(3).
457. As to "negligently", there appears to be little discussion of this concept in the case law of the European Community. In our judgment an infringement is committed negligently for the purposes of section 36(3) if the undertaking ought to have known that its conduct would result in a restriction or distortion of competition: see United Brands v Commission, cited above, at paragraphs 298 to 301 of the judgment. For the purposes of the present case, however, we do not need to decide precisely where the concept of "negligently" shades into the concept of "intentionally" for the purposes of section 36(3), nor attempt an exhaustive judicial interpretation of either term.
458. In view of our obligations under section 60 of the Act, and the Community case law relating to Article 15(2) of Council Regulation no.17, we do not think it useful to import into section 36(3) the concept of 'mens rea' as found in domestic criminal law."
Were the wrongful acts those of the claimants?
"The company's primary rules of attribution will generally be found in its constitution, typically the articles of association, and will say things such as "for the purpose of appointing members of the board, a majority vote of the shareholders shall be a decision of the company" or "the decisions of the board in managing the company's business shall be the decisions of the company". There are also primary rules of attribution which are not expressly stated in the articles but implied by company law, such as "the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company": see Multinational Gas and Petrochemical Co. v. Multinational Gas and Petrochemical Services Ltd. [1983] Ch. 258.
These primary rules of attribution are obviously not enough to enable a company to go out into the world and do business. Not every act on behalf of the company could be expected to be the subject of a resolution of the board or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company. And having done so, it will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort.
…….
The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person 'himself', as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company?
One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excluded ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy."
"Mr Sumption has accepted that the "reliance" test is subject to one important qualification. The unlawful conduct relied on must be that of the claimant himself, not conduct for which he is vicariously liable or which is otherwise attributed to him under principles of the law of agency."
"…..A number of authorities to which we have been referred support Mr Sumption's acceptance that in these circumstances the defence of ex turpi causa will only apply where the claimant was personally at fault and thus where his responsibility for wrongdoing was primary rather than vicarious: Burrows v Rhodes and Jameson [1899] 1 QB 816; Hardy v Motor Insurers' Bureau [1964] 2 QB 745 at p.760; Lancashire County Council v Municipal Mutual Insurance Ltd [1997] QB 897 at p. 908; United Project Consultants Pte Ltd v Leong Kwok Onn [2005] 4 SLR 214. Furthermore, there has never been any suggestion that it is contrary to public policy for a company to insure against liabilities that it may vicariously incur as a consequence of the wrongdoings of its agents. Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd's Rep 262 was such a case.
28. Thus Mr Sumption is correct to accept that, in the context of a claim for compensation for the adverse consequences of wrong-doing, ex turpi causa applies where the wrongdoing is personal, or primary, but not where it is vicarious."
"In order to impute an illegal act to the company for the purpose of the public policy defence you have to show two things; first, you have to show that the act was done in the course of the fraudster's agency or employment by the company; secondly you have to show that it was committed by someone who was the company's directing mind and will. The first of those things is all that you would need to have to show to establish vicarious liability but personal liability on the part of the company requires you to establish the second thing as well otherwise you cannot say that the company itself was guilty of turpitude. If those conditions are satisfied, it does not matter that the acts may have been unauthorised…."
"whose interests formed the subject of any duty of care owed by Moore Stephens to S&R [i.e. the shareholders, on the basis of the decision of the House of Lords in Caparo Industries v Dickman [1990] 2 AC 605 and the authorities which have followed it] namely the company's sole will and mind and beneficial owner Mr Stojevic, were party to the illegal conduct that forms the basis of the company's claim".
"It is the essence of [S & R's] claim that Mr Stojevic was its controlling mind and will. Nobody else was in a like position. In a real sense the company was his company. It was, for practical purposes, a 'one man company'. It is a further part of the claim that the company was throughout used by Mr Stojevic as a vehicle for fraud, by extracting money from KB so that it could then be paid away to the fraudsters."
"It is necessary to keep well in mind why the law makes an exception (the adverse interest rule) for a company which is a primary victim (like the Belmont company, which was manipulated into buying Maximum at a gross overvaluation). The company is not fixed with its directors' fraudulent intentions because that would be unjust to its innocent participators (honest directors who were deceived, and shareholders who were cheated); the guilty are presumed not to pass on their guilty knowledge to the innocent. But if the company is itself primarily (or directly) liable because of the "sole actor" rule, there is ex hypothesi no innocent participator, and no one who does not already share (or must by his reckless indifference be taken as sharing) the guilty knowledge."
"Here, as my noble and learned friend Lord Walker of Gestingthorpe makes plain, not merely was Mr Stojevic "the directing mind and will of the corporation, the very ego and centre of the personality of the corporation" (Viscount Haldane LC in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, 713), but Stone & Rolls Ltd (S & R) was, even on the most exacting definition of the term, a one-man company. As Mr Sumption QC put it, uncontentiously, at the beginning of his printed case:
"[Mr Stojevic] was as completely identified with the company as it is possible for a human agent to be. He had sole control over the company's every act. He was the company's sole beneficial owner. There were no independent or innocent directors whom Mr Stojevic had to deceive to make the fraud happen. There were no innocent shareholders relying upon the auditors to monitor the management. There were no employees."
199. In the present case Mr Stojevic and S & R were in effect one and the same person. It is absurd to describe Mr Stojevic as the agent and S & R as the principal for all the world as if, but for the Hampshire Land principle, the law would presume that Mr Stojevic had been disclosing to S & R his fraudulent conduct towards the Czech Bank. As Lord Reid said in Tesco Supermarkets Ltd v Nattrass [1972] AC 153, 170:
"He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company."
The fines cases
"On the broad ground that a person convicted of a criminal offence could never have the assistance of a civil court to ease himself of the punishment by the recovery over either of the amount of any fine or costs or of damages to compensate him for any imprisonment and that there could be no difference between cases where the Legislature had made an act or default punishable as a crime without the existence of a guilty mind and any other class of offence.
…
In support of this view it may be said that a law which imposes a punishment as distinguished from a payment of compensation is defeated by the punishment being passed on to another. The object sought to be secured by such a statute in the public interest is not that so much money shall be collected by way of fine, but that a person who puts himself in such and such a position shall be punished by way of a fine in order to make such persons prevent such things happening again, and I should have thought that the statute could not have its effect if the convicted person could obtain compensation in a civil Court for the punishment inflicted upon him in the criminal Court.
…..
The question is not whether the conviction involves guilty knowledge but whether the fine is punitive. Punishments would appear to be of necessity strictly personal no less when they are pecuniary than when they take the form of imprisonment."
"It is, I think, a principle of our law that the punishment inflicted by a criminal court is personal to the offender, and that the civil courts will not entertain an action by the offender to recover an indemnity against the consequences of that punishment."
"It is said that, if damages could be recovered, it would be an easy way of getting round the law about illegality. This does not alarm me at all. It is, of course, a settled principle that a man cannot recover for the consequences of his own unlawful act, but this has always been confined to cases where the doer of the act knows it to be unlawful or is himself in some way morally culpable. It does not apply when he is an entirely innocent party."
"I can well see that if there was culpable negligence on the part of the person seeking damages, he might not be entitled to recover. In Askey v. Golden Wine Co. Ltd some merchants had been guilty of culpable negligence in not taking proper steps to see whether a liquor was safe for consumption, and they were not allowed to recover. I said: "If they were allowed to be negligent and yet recover damages, it would offer an inducement to them to turn a blind eye to contamination." So, in any of these licensing cases, if the builder were negligent and yet were allowed to recover damages, it would be an inducement to him to turn a blind eye to the statute."
"Having examined the authorities as to cases where the person fined was under an absolute liability, it appears that such fine can be recovered in circumstances such as the present as damages unless it is shown that there was on the part of the person fined a degree of mens rea or of culpable negligence in the matter which resulted in the fine. The onus in cases such as the present is on the defendants, who were the true cause of the sequence of events leading to the fine, to show that there are circumstances which make that fine irrecoverable as damages by the plaintiff."
"The facts of Askey's case were thus widely different from those with which this Court is now concerned for this plaintiff was, in my judgment, entirely free of culpable negligence. I am aware that as to the recoverability of a fine in civil proceedings there are conflicting decisions. Thus, in Cointat v. Myham & Son [1913] 2 KB 220 , both fine and costs were held recoverable, while in R. Leslie Ltd. v. Reliable Advertising and Addressing Agency Ltd. [1915] 1 K.B. 652 , a similar claim was held not maintainable. But they turned on different facts, and I regard the former as preferable and certainly more applicable to the circumstances of the present case.
As to the amount of the fine, no material has been placed before us from which it would be proper to infer that in imposing a fine of £25 the Magistrates were influenced by any particularly aggravating feature in the plaintiff's conduct and for all we know to the contrary it was not an unusually heavy fine in such circumstances. I see no reason why the plaintiff should not recover it in full from the defendants."
"I would add one word on the item of £25, the fine for driving while uninsured. As I see it, the law is accurately summarized in Mayne and McGregor on Damages, 12th ed. (1961), at p. 313. There after referring to the judgment of Mr. Justice Denning (as he then was) in Askey v. Golden Wine Co. , the position is summarized thus:
. . . Thus the cases all agree that where the now plaintiff's conviction has involved mens rea he cannot recover as damages the fine which he has been ordered to pay. . . .
They then go on to suggest that where there is no mens rea , the law is not settled and to suggest that the Courts ought to follow the reasoning of Mr. Justice Rowlatt in R. Leslie Ltd. v. Reliable Advertising and Addressing Agency Ltd. [1915] 1 K.B. 652, and prefer the broad ground of public policy to the suggestion that where there is no mens rea and no personal negligence the now plaintiff should be able to recover the fine. The Court has not had a very full argument on this particular problem, but it seems to me that the argument of Mr. Justice Denning in the case referred to, and his observations, to which my Lord, Lord Justice Edmund Davies has already alluded, in Strongman (1945) Ltd. v. Sincock, [1955] 3 All E.R. 90, at p. 93, are sound and for myself, certainly in the circumstances of the present case, I should prefer them.
Here is a case of absolute liability. This man incurred that liability through no fault, no negligence or dishonesty on his part. He incurred it because he was grossly misled by the insurance brokers whose duty it was to advise him. It would, as I think, be quite wrong in such circumstances if he was not able to recover the amount of this fine as a just debt."
The claimants' alternative argument that the company is a victim
"59. Lord Scott and Lord Mance consider that a company must be able to bring a claim against a director who, in breach of duty, causes the company damage by involving it in fraud. I sympathise with their reaction. Imagine a group of investors who float a company to own and operate a yacht commercially. They engage a skipper to whom they entrust the management of the business. In breach of duty he charters the yacht to drug smugglers, with the consequence that the vessel is seized and confiscated. It would seem contrary to justice if the company could not bring an action against the skipper for misfeasance for the benefit of the shareholders. Why should the skipper be entitled to pray in aid the very thing that his breach of duty had brought about? On what principled basis can one avoid the application of ex turpi causa in such circumstances?
60. Lord Mance considers that Hampshire Land can be pressed into service. For the reasons that I have given I do not agree. It makes no sense to say that the fraud should not be attributed to the company. The fact that fraud has been attributed to the company is the very thing about which the company is complaining. The company's complaint is that its directing will and mind has infected it with turpitude. If ex turpi causa is not to apply in such circumstances, the reason should simply be that the public policy underlying it does not require its application.
61. One can readily reach that conclusion where all the shareholders are innocent. Recovery from the directing mind and will does not result in any individual recovering compensation for his own wrong. The position becomes unclear, however, if some of the shareholders were complicit in the directing mind and will's misconduct. Lord Mance states that in such circumstances some process designed to achieve the ends of justice would "without doubt" prevent the fraudulent shareholders from profiting from their dishonesty. Lord Mance may well be right, but it is not apparent to me that the law provides a mechanism for achieving this. What would seem to be involved would be a lifting of the veil of incorporation in order to ensure that shareholders who were complicit in the illegal manner of operating the company would not be able to share in the recovery from the directing mind and will. This would, I believe, be without precedent."
"It is necessary to keep well in mind why the law makes an exception (the adverse interest rule) for a company which is a primary victim (like the Belmont company, which was manipulated into buying Maximum at a gross overvaluation). The company is not fixed with its directors' fraudulent intentions because that would be unjust to its innocent participators (honest directors who were deceived, and shareholders who were cheated); the guilty are presumed not to pass on their guilty knowledge to the innocent."
"The Hampshire Land exception recognises that in reality agents will not disclose to their principals the fact that they are committing fraud, least of all when they are defrauding the principals themselves, and that it would be contrary to common sense and justice for the law to presume otherwise. Indeed, the Hampshire Land principle may well go wider than this and extend also to breaches of duty by the agent short of fraud—consider, for example, Vaughan Williams J's judgment in Hampshire Land itself and Rix J's judgment in Arab Bank plc v Zurich Insurance Co. [1999] 1 Lloyd's Rep 262—and to agents' frauds even if committed against others than their principals, and perhaps irrespective of whether the principal is to be regarded as "a secondary victim"—see again Rix J's judgment in Arab Bank. For the purposes of the present appeal, however, it is quite unnecessary to explore, let alone decide, any of this."
Inconsistency with the United Kingdom statutory competition regime
(1) Part 6 of the 2002 Act was enacted on the premise that before the Act there was no way in which individuals could be held liable in respect of infringements of the Competition Act 1998;(2) Parliament considered it appropriate under the 2002 Act to impose criminal sanctions on individuals only in the most serious cases of "hard-core" cartels. The present claim would frustrate that intention by permitting indirect personal sanctions on directors in cases which do not meet the stringent requirements of Part 6 of the 2002 Act;
(3) Parliament specifically considered to what extent it was appropriate to impose sanctions on the directors of undertakings found to have infringed Chapter 1 of the 1998 Act and concluded that disqualification, without any financial penalty was sufficient. The present claim would have the effect of imposing an indirect civil liability which was never intended by Parliament.
Conclusion