UK: Directors, Officers and Employees not Liable for Penalties Imposed by OFT investigation

Last Updated: 22 December 2010
Article by Maxine Cupitt and Simon Garrett

The Court of Appeal has today unanimously ruled that a corporate undertaking, upon which the OFT had imposed a penalty for breaches of competition law, could not sue its former directors, officers or employees for damages equivalent to that penalty or the costs of the OFT investigation that the claimant had had to bear.  The Court of Appeal held that such liabilities were intended, under the relevant statutory scheme of the Competition Act 1998, to be personal to the corporate undertaking and any claim against its directors or employees was barred by the maxim 'ex turpi causa' (i.e. a claimant cannot recover for the consequences of his own criminal or quasi criminal act).  As a consequence, the claimants' claims were struck out.

This decision reverses a first instance judgment of the Commercial Court which had held that such a claim was arguable and so should proceed to trial.

The judgment will be welcomed by those individuals occupying senior management positions (and, indeed, less senior positions) in industry and other potentially interested parties such as individuals' D&O insurers.

CMS Cameron McKenna LLP acted for 10 of the 11 defendants in the case.

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Full Article

The Court of Appeal has today unanimously ruled that a corporate undertaking, upon which the OFT had imposed a penalty for breaches of competition law, could not sue its former directors, officers or employees for damages equivalent to that penalty or the costs of the OFT investigation that the claimant had had to bear. The Court of Appeal held that such liabilities were intended, under the relevant statutory scheme of the Competition Act 1998, to be personal to the corporate undertaking and any claim against its directors or employees was barred by the maxim 'ex turpi causa' (i.e. a claimant cannot recover for the consequences of his own criminal or quasi criminal act). As a consequence, the claimants' claims were struck out.

This decision reverses a first instance judgment of the Commercial Court which had held that such a claim was arguable and so should proceed to trial.

The principal question

The backdrop for this claim is the OFT's ongoing dairy investigation.

The Court of Appeal's judgment considers whether, when an undertaking, such as Safeway in this case, infringes provisions of the Competition Act 1998 relating to anti-competitive activities and is duly penalised by the Office of Fair Trading ('OFT'), that undertaking can recover the amount of such penalties as damages from its directors or employees who were themselves (allegedly) responsible for the infringement?

Safeway argued that it could recover these sums. The defendants, on an application to strike out the claims (and thus on assumed facts) argued that any such claim was barred by the maxim ex turpi causa; i.e. a claimant cannot recover for the consequences of his own criminal or quasi criminal act.

Background

Safeway operated a well known supermarket chain (subsequently acquired by Morrisons after the alleged anti-competitive activities) and the defendants were former directors and employees (of varying degrees of seniority) of the supermarket. In 2007 the claimants agreed to pay a penalty to the OFT on account of (alleged) breaches of the Chapter I prohibition of the Competition Act 1998, which prohibits anti-competitive agreements. The penalty imposed by the OFT was originally c. £16 million although it was said that it was likely to be reduced on account of the claimants' cooperation with the OFT's investigation.

The claimants sought to recover this penalty and the costs of dealing with the OFT investigation from its former directors and employees who, it was alleged, were responsible for the anti-competitive agreements that had caused the supermarket to be penalised by the OFT.

This was not, however, a classic cartel or price fixing case. 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 because it was claimed that farmers were selling milk at a loss. In 2002 and 2003, Safeway and other supermarkets increased the price of milk and other dairy products for consumers. The price increases were not kept by the supermarkets but were passed back to the farmers. However, in January 2005, the OFT launched an inquiry into the various initiatives by Safeway, other supermarkets and dairy processors. As a result of the inquiry the OFT alleged that Safeway and other supermarkets had breached the Chapter I prohibition of the Competition Act 1998.

On 20th September 2007, the OFT gave Safeway written notice, a statement of objections, informing Safeway that as a result of the investigation, the OFT intended to make a decision that the Chapter I prohibition had been infringed. On 6th December 2007, Safeway and the OFT entered into an "early resolution" or "fast track" agreement as to the terms on which the OFT investigation into Safeway's practices would be resolved. Similar agreements were reached with other supermarket owners. As part of the terms agreed with the OFT, Safeway admitted, that by participating in the initiatives mentioned above, they had breached the Chapter I prohibition of the Competition Act through the repeated exchange of commercially sensitive retail pricing intentions. Notably none of the defendants were interviewed, consulted or given the opportunity to make any representations as part of this process.

Despite having been served with the statement of objections in September 2007, the OFT has yet to issue a "decision" under the Competition Act. In fact, in April of this year the OFT issued a press release stating that in the light of further representations and evidence presented to it, it no longer regarded two of the four initiatives as constituting a breach of competition law. This is likely to result in the quantum of the penalty being reduced. It remains to be seen whether any of the initiatives were in fact breaches of competition law since, this month, the OFT also announced that a final decision would be delayed until 2011 whilst it considered yet further representations.

The claim against the directors & employees

Safeway's pleaded case was, in summary, that each of the defendants had participated in and facilitated the initiatives and, in doing so, was in breach of his or her contract of employment and/or in breach of fiduciary duties owed to Safeway and/or was negligent.

Before filing a defence the defendants sought summary judgment and/or to strike out Safeway's claims on the basis that they were bound to fail as a matter of law on the basis of the ex turpi causa doctrine. This doctrine was most recently considered in Gray v Thames Trains Ltd [2009] 1 AC 1339 when Lord Hoffmann said that it expressed not so much a principle as a policy and that it was a rule which may be stated in a narrower form and a wider form. In its narrower form it was that a claimant cannot recover for damage which is the consequence of a sentence imposed upon him for a criminal act; in its wider version it was that a claimant may not recover for damage which was the consequence of his own criminal act.

Importantly, it was a rule that required the criminal and civil courts to act consistently so that where the criminal courts impose a fine or punishment, the civil courts should not ameliorate the effect of that fine by allowing the guilty party to recover damages in a civil court.

At first instance the Commercial Court decided that a penalty imposed under the Competition Act 1998 was equivalent to a fine and was sufficiently serious to amount to a quasi criminal penalty so that the ex turpi maxim was engaged. However, the Court decided that the claimants' liability under the Competition Act 1998 was not personal or direct (a necessary condition following dicta in Moore Stephens v Stone & Rolls Ltd [2009] UKHL 39) and that Safeway was merely vicariously liable for the defendants' (alleged) breaches of duty.

The Commercial Court held that in the context of a corporate claimant what was required to engage the ex turpi principle was personal liability, which required either approval by the board or shareholders of the conduct in question or proof that someone akin to the claimants' 'directing mind and will' had authorised or condoned the relevant conduct. All of these would require a factual enquiry at trial and so were unsuitable for summary determination.

The appeal

The focus of the appeal was whether Safeway could be said to be personally liable or not so as to engage the maxim and bring an end to Safeway's claim.

Longmore LJ, who gave the leading judgment of the Court of Appeal and with whom all of the other Lord Justices of Appeal agreed, held that no one is liable for a penalty imposed under the Chapter I prohibition of the Competition Act 1998 except the relevant undertaking. The liability for a competition law penalty is, therefore, personal to the undertaking; i.e. Safeway.

If a penalty is imposed, it will only be because the undertaking itself has intentionally or negligently committed the infringement under the Competition Act 1998 (those being the necessary prerequisites to liability under the Act; it is not an offence of strict liability). Longmore LJ went on to say that the clear language of the Competition Act 1998 therefore attributed liability to Safeway and made Safeway the only person that could be subject to a quasi criminal penalty (to be contrasted with the cartel offence under the Enterprise Act 2002 which can only be committed by an individual).

Safeway also argued that the principle in Re Hampshire Land [1896] 2 Ch 743 meant that the maxim ex turpi causa was arguably inapplicable in this case since the acts of the defendants were, for the purposes of this strike out hearing, to be assumed to be in breach of their duty to Safeway and to have resulted in financial loss in the form of a penalty to be levied by the OFT. It was argued that Re Hampshire Land prevented the attribution of the defendants' acts to Safeway since those acts were directed at Safeway.

However, Longmore LJ held that once it was appreciated that the claimant companies are personally and not vicariously liable to pay the penalties under the Competition Act 1998, Safeway cannot invoke the Hampshire Land principle to say that they were not "truly" liable since it would be inconsistent with that liability for Safeway to be able to recover those penalties in the civil courts from the defendants.

Conclusions & comment

This is a significant decision for anyone who occupies a senior management position in industry (or, indeed, potentially a more junior employee). The first instance decision left the door open to corporate entities penalised by the OFT to seek recourse against existing and/or former employees who were alleged to be responsible for the anti-competitive agreements or practices. Given that penalties under the Competition Act 1998 are based on a percentage of an undertaking's turnover those penalties (and the resulting claim for damages) have the potential to be very significant indeed.

The Court of Appeal's decision means that employees and directors cannot be made to compensate or reimburse their current or former employers if such a penalty is imposed by the OFT. Such a claim is barred as a matter of law and public policy.

The decision will also be of some relief to D&O insurers who might have been senior management's first port of call if such claims had been permitted.

Further reading: Safeway Ltd & Others v Simon Twigger & Others [2010] EWCA Civ 1472

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 21/12/2010.

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