On 21st December 2010 the Court of Appeal handed down judgment in the Safeway Stores Limited v Twigger case. The Court found in favour of the defendant directors and rejected Safeway’s claim that they were entitled to claim indemnity for a breach of section 31 of the Competition Act 1998.
The more general question as to the circumstances in which it may be possible to seek indemnity in respect of fines and penalties (which I have also discussed in an earlier blog) is still, to some extent, left open.
You will remember that this case arises out of an Office of Fair Trading (OFT) investigation into various marketing practices undertaken by a number of supermarkets, including Safeway (now part of the Morrisons Group). The OFT alleged that these practices amounted to a breach of the prohibition against distortion of competition within the UK under the Competition Act 1998.
Safeway and the OFT entered into a ‘fast track’ agreement under which Safeway admitted breaches of the Competition Act through the repeated exchange and disclosure of commercially sensitive retail pricing information. Although the exact size of the penalty which the OFT will impose is unclear, the amount is likely to exceed £10,000,000.
Safeway brought proceedings for breach of employment contract, breach of fiduciary duty and negligence against eight former employees of the Safeway Group, including the former chairman and four individuals who were directors.
The defendants applied to strike out a claim against them arguing that it was barred as a matter of public policy because it infringed the “ex turpi causa non oritur actio” principle. This is a rule of public policy which means that a person (in this case Safeway) who commits an illegal or unlawful act cannot maintain an action for indemnity against the liability which results from the act.
The Decision at First Instance
At first instance Flaux J. (the Commercial Court) declined to strike out the claim on the basis that there was no evidence that Safeway was primarily liable for the relevant breaches of the Competition Act in the sense that it had committed the offence itself or expressly authorised its commission through its board of directors or through its shareholders acting in general meeting.
Flaux J. also declined to strike out the claim on the basis that there was no clear rule of English public policy to the effect that where a fine or penalty is levied in the absence of personal negligence or fault, a subsequent attempt to recover insurance or indemnity is not permitted by virtue of the ex turpi principle.
The Court of Appeal Judgment
In a short but unanimous judgment the Court of Appeal, in effect, side stepped many of the interesting and difficult questions associated with the circumstances in which individuals’ knowledge and actions are to be attributed to a corporate entity. It did so on the basis of the conclusion it reached that the only form of liability countenanced by the relevant provisions of the Competition Act was a personal one imposed on the undertaking itself.
In paragraph 23 of his judgement, Longmore L.J. said:
No one is liable for the penalty imposed by the Competition Act except the relevant undertaking. The liability is therefore personal to the undertaking. If there is a liability it cannot be imposed on any person other than the undertaking and the undertaking is personally liable for the infringement. If a penalty is imposed, it will only be because the undertaking itself has intentionally or negligently committed the infringement. In those circumstances it is the undertaking which is personally at fault (there can be no one else who is) and, once the maxim is engaged, the undertaking cannot say that it was not personally at fault in order to defeat the application of the maxim. The whole hypothesis of the undertaking’s liability is that it is personally at fault’
Doors Wide Open
The Court of Appeal decision clarifies the law to a limited degree where a statutory offence of which a corporation is guilty contains specific ingredients of either intent or negligence. In such cases, the ‘ex turpi’ maxim operates so as to prevent any claim for indemnity.
At least two important doors are left open by the Court of Appeal through which further attempts to pursue indemnity or recourse may be made in the future. The first relates to the engagement or otherwise of the ex turpi principle in the case of strict liability offences where there is no need to show negligence or intent on the part of the perpetrator of the crime.
The second door opens onto the possibility that recovery actions may still be brought by companies or individuals who or which have incurred a vicarious liability as opposed to a personal one. If the liability arises not because of the company’s own legal acts but by virtue of the illegal acts of its agents or employees, the outcome might well be different.
Although going some way towards clarifying English public policy in this important and interesting area, there is still plenty of uncertainty around. In particular, the extent to which fines and penalties are recoverable as a matter of English public policy remains a question which will have to be examined by reference to the specific ingredients of each offence.
Although Safeway applied to the Court of Appeal for leave to appeal, such leave was declined. It remains to be seen whether an application will be made to the Supreme Court for leave to appeal to it and, if so, whether each application is granted.