UK: Court of Appeal ruling on liability for fines

01 January 2011

Jeremy Robinson

The Court of Appeal has decided a case that raised the important question of whether an undertaking which infringes the provisions of the Competition Act 1998 and is penalised by the Office of Fair Trading (“OFT”), can recover the amount of such penalties from its directors or employees who were themselves responsible for the infringement.  The Court of Appeal ruled that it cannot do so, because of the principle that a person cannot pursue an action in connection with their own wrongdoing. The infringements were personal to the undertaking and the liability was not merely vicarious based on the employees’ conduct.

Background

The defendants were former employees and in some cases directors of the claimant companies.  The principal claimant was a supermarket retailer before it was sold.

In January 2005, OFT began an investigation into collusion between supermarkets and dairy processors concerning the retail prices of certain dairy products.  On 20th September 2007, the OFT sent a Statement of Objections (“SO”) to various supermarkets and dairy processors, including Asda, Morrisons, Safeway (later bought by Morrisons), Sainsbury Tesco, Arla, Dairy Crest, Lactalis McLelland, The Cheese Company and Wiseman.  The SO alleged that the undertakings had colluded over the price of dairy products in 2002 and/or 2003.  In December 2007, the OFT announced that it had concluded early resolution agreements with Asda, Sainsbury, Safeway (in relation to conduct before its acquisition by Morrisons), Dairy Crest, The Cheese Company and Wiseman.  The signatory companies admitted their involvement in the agreements which the SO identified, accepted liability for the infringement and the imposition of a fine.  In July 2009, the OFT sent a supplementary SO.

Under its early resolution agreement with the OFT, Safeway agreed to pay a fine of £16,449,893, to be reduced to £10,692,431, to take account of its cooperation with the OFT.

Companies in the Safeway Group then brought an action for damages and/or equitable compensation against former employees (including directors).  They sought an indemnity against liability for the penalty to be imposed by the OFT.  The claim included an amount to cover the costs of the OFT investigation, including legal costs, of £200,000.  The claimants alleged that the defendant employees and directors had breached their employment contracts, breached fiduciary duties owed to Safeway, and were negligent.  They also claimed that the defendants conspired to procure Safeway’s participation in the anti-competitive practices as a result of their participation initiatives in the industry to increase the price paid to farmers for dairy products.

The defendant employees applied for summary judgment against the claimants, or to have the claim struck out.  The defendants argued that the principle of ex turpi causa non oritur actio (a claimant cannot pursue an action if it arises in connection with his own wrongdoing) would have been infringed.  The defendants argued that it was inconsistent with the UK Competition Act 1998 and other statutes.

On 15 January 2010, the High Court declined to strike out the case, and ruled that it should proceed to trial.  The Court found that an infringement of the Chapter I prohibition was sufficiently serious to engage the ex turpi causa rule in principle.  However, the judge did not consider that the claimant companies’ liability for the wrongdoing was sufficiently primary or direct for the rule to apply.  He thought it arguable that Safeway’s liability was not personal, and that the question depended on whether it could be said that each of the defendants was the “directing mind and will” of the Safeway companies (which could not be determined at this stage of the proceedings).  He concluded that the claimants had a real prospect of successfully defeating any defence based upon ex turpi causa at trial.  The judge also considered that the principle was arguably inapplicable here, since the acts of the defendant employees were in breach of their duty to Safeway and resulted in financial loss in the form of the penalties imposed by the OFT.  Finally, the judge also stated that passing on the penalty to the people who caused the unlawful acts would not be inconsistent with the Competition Act.

Appeal to the Court of Appeal

The defendants appealed to the Court of Appeal, which found in their favour.  The Court of Appeal found that the defendants were entitled to summary judgment, and struck out the claimants’ claims.  The three judges found that the ex turpi causa principle did apply, and prevented Safeway from recovering from the employees in question, either the fine imposed or the costs of the OFT investigation.

The key findings of the Court of Appeal were as follows:-


  1. Safeway’s liability for the breach of competition law was personal, i.e. it was Safeway that was liable for the infringement, not vicariously liable for the acts of its employees.  Section 36 of the Competition Act allows the OFT to fine undertakings, but not individual employees.

  2. Since Safeway had accepted that it had participated in an infringement, the question of whether the defendant employees were “directing the mind and will” of the company did not arise.  Where liability is personal, not vicarious, the ex turpi causa rule prevents the company recovering from the employees that it claims were responsible for the breach of the law.  The Court noted that the situation might be different in cases of strict liability, but under the Competition Act, the question was whether the companies had intentionally or negligently infringed the law.

  3. The purpose of the ex turpi causa rule was consistency – “the need for the criminal courts and the civil courts to speak with a consistent voice.”  A claimant could not both be personally liable to pay penalties to the OFT but able to argue before the civil courts that it was not personally answerable for the conduct.

  4. The deterrence policy aspect of the Competition Act as against undertakings would be undermined if undertakings were able to pass on liability for infringements to their employees.

  5. The principle that acts of an agent are not to be regarded as attributable to the principal if the acts are deliberately fraudulent or intended to cause loss to the principal (the “Hampshire Land” principle) does not apply in this case.

Comment

This ruling clarifies the position as regards the liability of undertakings that have infringed competition law.  Such liability cannot be passed on by means of civil actions to their directors and employees who were responsible for the infringements.  The judgment makes clear that an undertaking’s liability for infringing competition law is personal to it, and not vicarious liability based on its employees’ actions.

Source: Court of Appeal judgment in Safeway Stores Limited & Others and Twigger & Others, [2010] EWCA Civ 1472; http://www.bailii.org/ew/cases/EWCA/Civ/2010/1472.html