COURT OF APPEAL DRAWS THE LINE ON WHETHER COMPANIES CAN PASS LIABILITY FOR COMPETITION ABUSE TO EMPLOYEES

Where a company faces fines for competition abuse under the Competition Act 1998, can it recover that fine and associated costs from the directors and employees whose actions led to the fines being imposed in the first place?

The answer, according to the Court of Appeal in the recent decision in  Safeway Stores Limited & Others -v- Twigger & Others, is “No”, representing an important limitation on civil liability of directors and employees in relation to competition abuse and a corresponding increase in exposure on the part of employers.

The story behind the claim started in January 2005 with the launch of an inquiry by the Office of Fair Trading (OFT) into possible price fixing between UK supermarkets and dairy processors.  The claimants (along with a number of other supermarkets) agreed to terms with the OFT in which they accepted that they had breached the Chapter I prohibition in the Competition Act by the repeated exchange of commercially sensitive retail pricing intentions – that is, cartel activity.

Although the fine to be imposed on Safeway has yet to be determined, it is expected to be around £10 million.  Safeway (which was acquired by Morrisons in 2004) duly issued proceedings against eight former directors and/or employees for breach of their employment contracts, breach of fiduciary duties and negligence.  The remedy sought was an indemnity in respect of the OFT’s fine and the costs incurred by the claimants in respect of the OFT’s investigation.

The former directors and employees sought summary judgment against the claimants on the grounds of the legal maxim “ex turpi causa non oritur actio”; this is the principle that a claimant cannot recover for damage arising from its own criminal or quasi-criminal wrong doing.  Although the judge agreed that the nature of the OFT’s penalty meant that the ex turpi causa principle was engaged, he was not convinced that the claimants had no prospect of success and refused to grant summary judgment.

The Court of Appeal overturned this initial decision: its reasoning was that the OFT’s penalty will be imposed on the claimants under Section 36 of the Competition Act, whereby the OFT has power to require an undertaking which is a party to an agreement infringing the Chapter 1 prohibition to pay a fine.   The Court of Appeal held that any such liability is purely personal to the undertaking and is not based on the undertaking’s vicarious liability for the acts of its employees.  The ex turpi causa principle therefore barred Safeway from recovering the fine or related costs from its former employees and directors.

Although this decision may appear somewhat counter-intuitive at first glance, it must be remembered that the Competition Act is concerned only with the activities of “undertakings” – typically companies – and not individuals.  Where competition abuse is concerned, therefore, the buck stops with the company.

Company directors can still be disqualified under Section 9A of the Directors’ Disqualification Act 1986 where their company has been found to have breached competition law; and individuals can also be prosecuted for cartel offences under Section 188 of the Enterprise Act 2002.  But it is up to the OFT to pursue any such actions against individuals and not in the gift of their employer.

The lesson from the Court of Appeal’s decision is that companies need to make sure that their directors and employees fully understand the nature of the law on competition and adhere to it.  Companies may therefore need to review their conduct of business and whistle blowing policies and employee handbooks; first, to identify clearly what constitutes anti-competitive behaviour and second, to make clear that any such behaviour on the part of employees will be deemed to be misconduct and treated as a disciplinary matter. 

However any potential dismissals need to be approached with care since much will depend on whether employees were directed to carry out the anti-competitive behaviour by the company itself. In addition, senior employees often have directors’ and officers’ liability insurance, which may be used to bring claims for unfair and wrongful dismissal.  Companies should also bear in mind that express terms in service agreements that normally permit them to recover losses caused by an employee are not enforceable once the ex turpi causa principle has been found to apply.

If you have any questions or would like any further information about any of the issues addressed in this article, please contact Julia Dodds, Tim Foster or Ranjit Dhindsa.