TORTIOUS ACTS AND DIRECTORS

• Published date: 01 December 2011
• Author: TAN Cheng Han SC LLB (Hons) (National University of Singapore), LLM (Cambridge); Professor and Dean, Faculty of Law, National University of Singapore.
• Date: 01 December 2011

The issue of when directors are jointly liable for the tortious acts of their companies can be a difficult one. On the one hand, an expansive approach to liability may affect the ability of companies to attract competent people to become directors. Yet setting the bar too high for director liability raises the question of whether directors are treated more favourably than other officers and employees of companies. It is suggested in this article that an appropriate balance can be reached by giving greater weight to the principle that directors must act bona fide in the best interests of the company. The law should be slow to impose joint liability on directors where they have purported to act in the best interests of their companies.

I. Introduction

1 The issue of when company directors acting as such are jointly responsible for the tortious acts of their companies can be a difficult one. Too expansive an approach to director liability could have a chilling effect on entrepreneurship and the ability to attract competent persons to become board members. On the other side of the spectrum, questions can be raised as to whether directors are being treated more favourably than other employees or agents of a company. The problem is well set out in the Singapore case of Gabriel Peter & Partners v Wee Chong Jin1 (“Gabriel Peter”) where the appellant law firm had been appointed by a company to represent it in a property transaction. The appellant commenced defamation proceedings against the directors of the company alleging that a board resolution that had been passed to dismiss the appellant as solicitors in the transaction contained defamatory remarks. Yong Pung How CJ, delivering the grounds of judgment of the Court of Appeal, said:2

The issue of personal liability of a director who is acting within his sphere of competence is a perplexed one, especially since the act which is done is an act of the company, for which the company should be wholly responsible. What is at stake is a very difficult question of policy. On the one hand, there is the principle that a company is separate and distinct in law from its shareholders and directors, and it is in the interests of the commercial purposes served by the incorporated enterprise that they should as a general rule enjoy the benefit of the limited liability afforded by incorporation. On the other hand, there is the principle that everyone should answer for his tortious acts. A cause of concern is that, if the directors are made liable too easily, many commercial decisions will be fraught with the danger of personal liability being imposed on the directors, who might then become overcautious in making management decisions lest it render them vulnerable to legal suits. This will in turn be disadvantageous to the company commercially. On the other side of the coin, a director of a company should not be allowed to escape personal liability to third parties for torts which he personally committed by his own hand or mouth merely because he committed the tort in the course of carrying out his duties as a director of the company.[3]

2 It should be stated at the outset that the issue raised in this article, namely, when is a director responsible for a tort committed by the company, is distinct from instances where a director commits the tort personally. In this sense, the issue posed by Yong CJ in the final sentence of the quote above poses little complication. Where a tortious act has been committed personally by a director of a company, whether in his or her capacity as an employee or officer of the company, such director will be liable for the tort. Thus, a director who enters another person's land that he mistakenly believes the company has an easement over will be liable for trespass even if such director believed in good faith that he was acting properly in the best interests of the company. Similarly, a director who in the course of his employment drives negligently and causes personal injury to a bystander will be personally

liable to the bystander in tort regardless of the vicarious liability of the company. Another good example is the case of Yuille v B & B Fisheries (Leigh) Ltd.4 In that case, the captain of a motor fishing vessel who had suffered injury sued the company that owned the vessel and the managing director of the company for negligence, alleging that the injury had been caused by such negligence. In holding both the company and the managing director liable, Wilmer LJ said5 as regards the latter that members of the crew of a ship improperly sent out to sea in an unseaworthy condition were in a sufficiently close relationship with the responsible director of the company to create a legal duty on the part of the latter to exercise reasonable care within the doctrine recognised by Lord Atkin in Donoghue v Stevenson.6 As the managing director knew or ought to have known that the vessel was not in a seaworthy condition, he was personally liable to the captain for the injuries suffered by the captain.7 However, while the distinction between procuring the tort and personally committing it is easily appreciated, it becomes hazy in practice in the case of “small” companies (particularly single person companies) and cases involving representations or words.

3 The position is well summarised by Slade LJ in C Evans & Sons Ltd v Spritebrand Ltd8 as follows:9

On these assumed facts, the director himself, personally, would have infringed the plaintiffs' copyrights in the manner specified in section 1(2) of the Act of 1956. He himself would prima facie be rendered a tortfeasor through the operation of the statute. Mr Watson,

as I understood his argument on behalf of the director, did not attempt to submit that a director of a company will escape personal liability to third parties for torts which he has personally committed by his own hand (or mouth) merely because he committed the tort in the course of carrying out his duties as director of his company. He can escape personal liability for such torts no more than can an employee acting in the course of his employment for a company, or an agent acting in the course of his agency for a company. I think it is important to emphasise these points lest it should be thought that the argument in this case has cast doubts on these particular principles of the law of tort.

II. Authorising, directing or procuring the commission of a tort

4 Having set out the problem in Gabriel Peter, Yong CJ proceeded to set out the Court of Appeal's conclusion:10

After giving much thought to the opposing considerations above, we came to the conclusion that the principles echoed in C Evans & Sons Ltd v Spritebrand Ltd and its predecessor cases represent the position as to the liability of directors for a tort committed by the company. It is an established principle of law that a director can, in certain circumstances, be liable for a tort committed by the company if he directed or procured the commission thereof. Employees or servants of the company can be potentially liable personally for torts committed in the course of employment, if it is found that responsibility can be fixed on the particular individual in question. A director should not be able to escape personal liability for such torts any more than can an employee acting in the course of his employment for a company, or an agent acting in the course of his agency for a company. In our judgment, it would offend common sense if the law of tort were to treat the director of the company any more kindly than the servant, who took his orders from the director. Of course, whether a director is so liable depends very much on the factual situation at hand. The level of his involvement needs to be looked at in determining if he did authorise, direct or procure the commission of the tort. This is a matter of degree. If a particular tort is one which requires the satisfaction of the proof of mens rea before personal liability can be founded, then the state of mind of the director when he authorised, directed or procured the act will be relevant. This is only logical as a director should not be more vulnerable to tortious liability than any other individual. However, if the tort is one for which liability can be imposed in the absence of any intention or state of mind of the tortfeasor, the knowledge or the recklessness of the director as to whether the act was tortious will not be relevant.

This passage potentially conflates two separate and distinct issues. The fact that a director can be liable for torts committed personally by him even in his capacity as an employee or officer of the company does not mean that such director should be liable for torts committed by the company. The two propositions are not inextricably linked.11 With respect, it was unfortunate that the court appeared to conflate the two to arrive at the conclusion it did given that the act complained of arose from the directors apparently performing their constitutional role within the board of directors which is regarded as an organ of the company.

5 Nevertheless, there is a long line of authority that establishes director liability for torts committed by the company that were authorised, directed or procured by the director. In such circumstances, the director is regarded as a joint tortfeasor with the company.12 This principle is not limited to corporate directors. A person who authorises, directs or procures the commission of a tort by a third party is liable as a tortfeasor. If A procures B to trespass on C's land, both A and B are joint tortfeasors for the act of trespass. It should make no difference that A is a director of a company and B an employee of that company. It should also make no difference whether B's tortious act as an employee causes liability or not to the company. Practically, therefore, it will usually only be necessary to link the director to the company's tortious act where the...