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.

To view the article in full, please see below:


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. Ł16 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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.