Recovering penalties from directors and employees: Safeway revisited

Can a company which has been fined for anticompetitive conduct seek to recover the fine from the directors and employees responsible by suing them for damages?

The question is moot in light of last week’s Supreme Court judgment in Jetivia SA and another v Bilta Ltd (in liquidation) and others [2015] UKSC 23, which casts some doubt on the Court of Appeal’s decision on this issue in Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472.

Safeway had settled an OFT investigation into the alleged dairy cartel and agreed to pay a penalty. It then sought to recover the penalty from the directors and employees who had engaged in the anti-competitive conduct, alleging breaches of various contractual, fiduciary and tortious duties. On the question of whether it was entitled in principle to recover the penalty as damages, Safeway succeeded in the High Court but lost in the Court of Appeal. The problem was that its claim relied on its own unlawful act and was therefore barred by the illegality defence, ex turpi causa.

Although the illegality defence has been the subject of a series of House of Lords and Supreme Court decisions over recent years, there is still a surprising lack of consensus on certain fundamental points.

The most important area of disagreement for these purposes relates to the scope of what used to be known as the “fraud exception”. I say it “used to be known” that way because there are passages in Jetivia that suggest that, since the exception is wider than just fraud, it should now be known as the “breach of duty exception”. There are also passages which suggest that it isn’t really an exception at all, but rather an aspect of the general rule. It may be best simply to call it the Hampshire Land principle, after the 1896 case in which it was first clearly stated. What it amounts to is the proposition that, in certain circumstances, an agent’s knowledge of his breach of duty cannot be attributed to his principal in order to invoke the ex turpi causa principle to prevent the principal from suing the agent for breach of duty.

The question is whether the breach of duty exception would allow a company fined for an anti-competitive infringement to recover the penalty as damages from its employees and officers.

The essential reasoning in Safeway Stores was that, since the statutory infringements could be committed only by Safeway “directly” or “personally”, and not by the directors and employees, to allow Safeway to rely upon the breach of duty exception would be inconsistent with the statutory scheme and could not be permitted. It is that reasoning which the Supreme Court’s judgment in Jetivia calls into question.

Lords Toulson and Hodge offer the most critical analysis. At paragraph 160 they note that Safeway’s “direct” liability under the Competition Act arose through the acts of its employees as its agents, but agreed with an article by Professor Watts that:

“… it simply does not follow that because under the law of agency a principal becomes directly a party to an illegal agreement as a result of its agents’ acts, it is thereby to be deprived of its rights under separate contracts, not otherwise illegal, with its employees and other agents to act in its interests and to exercise due care and skill. Indeed, it would not follow even if the 1998 Act were found to have invoked some sui juris concept of direct liability other than the law of agency. In the absence of some countervailing policy reason, it is not just for someone who falls foul of a statute by reason of the acts of its employees or other agents to add to its burdens and disabilities by depriving it of any recourse against those employees or other agents.”

Lords Toulson and Hodge did, however, state at paragraph 162 that Safeway Stores may have been correctly decided for another reason, namely that the policy of the Competition Act might be undermined if undertakings were able to pass on their liability to their employees.

Lord Sumption had little to say about Safeway Stores: he described its reasoning in paragraph 83 but did not explicitly endorse it. It is interesting to note that, in an extra-judicial context, Lord Sumption has previously raised a doubt over whether the policy of the Competition Act really would be undermined if undertakings could pass on their liability to their employees. The alternative analysis would be that the best way to ensure compliance with the Act is to enable companies to take action against those responsible for breaching it.

Lord Neuberger, with whom Lord Clarke and Lord Carnwath agreed, indicated at paragraph 31 that he would take a great deal of persuading that the Court of Appeal did not arrive at the correct conclusion in Safeway Stores, but he expressed no concluded view on the topic.

Jetivia, which on the face of it had nothing to do with competition law (it concerned a VAT fraud committed by the directors of a company in liquidation), therefore sets the scene for a fresh challenge to the Safeway Stores decision.

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