PI Brief Update

Director’s Liability for Lack of Employer’s Liability Insurance - Douglas McGregor, Brodies LLP

07/04/15. The decision by the Inner House of the Court of Session to allow the defender’s appeal in Campbell v Peter Gordon Joiners Ltd & Anr [2015] CSIH 11 has opened up the possibility that the Supreme Court will now be asked to consider the rule laid down in Richardson v Pitt-Stanley [1995] QB 123. The Court of Appeal in England decided in that case that a director cannot be found personally liable to meet an award of damages where a company has failed to fulfil its statutory obligation to put in place employer’s liability insurance cover.

Mr Campbell claimed for an injury caused by a circular saw while employed by the first defender. The insurance which had been taken out by his employer excluded injuries caused by electrically powered woodworking machinery. He sued his employer but they were insolvent so he also included the sole director of the company as a defender. No evidence has been heard by the court as yet. Instead, the focus has been on the relevance of Mr Campbell’s case against the director.

At first instance Lord Glennie (Campbell v Peter Gordon Joiners Ltd [2013] CSOH 181) held that civil liability could in principle attach to an individual director for a breach of the Employers’ Liability (Compulsory Insurance) Act 1969 and allowed the case through to proof. In doing so he explicitly declined to follow the approach taken in Richardson v Pitt-Stanley.

By a 2:1 majority the Inner House allowed the director’s appeal and dismissed the action against him. Lord Brodie and Lord Malcolm gave separate Opinions allowing the appeal. Lord Drummond Young delivered a strong dissenting judgment but found himself in the minority. It is understood that the decision is now to be appealed to the Supreme Court.

Civil liability: the general rule and the exception

All the judges in the Inner House were agreed that the general rule is that where an Act creates an obligation and enforces its performance in a specified manner, it may generally be taken that performance cannot be enforced in any other manner. So an Act enforced by criminal sanction will not normally give rise to civil liability. However, all the judges also accepted that the 1969 Act was enacted for the benefit of a particular group of people – the employees. That meant the Act was capable of falling within an exception to that general rule which may entitle members of that particular group to sue for a breach of the statute. It’s important to note that this is a significant departure from the position adopted in Richardson v Pitt-Stanley where it was decided that the duty to insure was for the benefit of both employers and employees and so the exception could not apply.

The majority view in the Inner House

The leading judgment was given by Lord Brodie who largely followed the approach of the English Court of Appeal. His view was that any civil right to claim for breach of the 1969 Act would be a right against the employer company and not against a director of the company because the duty to insure in s.1(1) is imposed on the company. But in his view a right against an insolvent and uninsured company would be “a palpably redundant worthless and perhaps illusory sort of right” and since such a right would be “useless” it must be assumed that Parliament didn’t intend to create it.

If the Act does not create a right against the company then there can be no right against a director. In any event, the wording of the Act does not impose a duty directly on directors – it merely allows them to be “deemed” guilty of an offence committed by the company if there has been consent, connivance or neglect on their part.

In addition, the law is slow to recognise a right to claim for pure economic loss and the Act cannot be interpreted as creating a right in an employee to sue a director for the value of an unsatisfied award of damages. Incorporation is intended to limit financial liability and company officers are not guarantors of the company’s insolvency. If there is no insurance and the company is insolvent then there will be no remedy for the employee.

Lord Brodie makes it very clear that he does not consider it appropriate that a director should have to shoulder the risks or “act as an insurer” for employees. He sees no reason to think directors will have deeper pockets than an insured employee; directors may struggle to get insurance and may become personally liable for what may be a “trivial oversight”.

Lord Malcolm agreed that it was unlikely that Parliament had intended to impose civil liability on directors and the fact that it would involve “piercing the corporate veil” weighed against the existence of such liability. The duty to put insurance in place fell on employers alone and not on the directors.

The minority view in the Inner House

Lord Drummond Young’s approach contrasts starkly with the views of the majority. He saw the issue as being relatively straightforward.

“The question that has arisen in the present case is whether sections 1 and 5 of the 1969 Act impose civil liability upon any director who has consented to a corporation’s failure to insure in accordance with section 1, or who has connived in or facilitated any such failure to insure. In my opinion those sections do impose such liability.”

He considered that the Act creates a right against the employer and will also create a direct right against a director in appropriate circumstances. The focus should be on the purpose of the Act which is to ensure that funds are available to compensate workers who are injured. That underlying purpose supports the idea that a director who is complicit in breach of the statute should be liable as well as the company.

Although the Act places the primary duty to insure on the company that is because it is the company that must take out insurance in its name. But, since a company can only act through its officers who have a duty to ensure so far as possible that the company fulfils its statutory duties, s.1(1) by itself must impose a duty on the directors.

Directors who personally commit a delict in the course of their duties may be found personally liable. Failure to maintain insurance is a wrongful act giving rise to civil liability and consent, connivance or neglect on the part of a director are therefore sufficient to render the director personally liable.

Lord Drummond Young goes on to confirm that he does not consider that his view results in any unfairness. If a director has ignored or deliberately disregarded the company’s statutory duty then there is nothing unfair about him being found liable for that failure. The wording of the Act makes it clear that a director will only be liable if he is implicated in the failure to obtain insurance.

We will now have to wait and see what the Supreme Court makes of it. With both the Court of Appeal in England and the Inner House in Scotland having reached similar conclusions as to civil liability for breach of the 1969 Act the law in this area may be regarded by some as being settled. However, both were majority decisions with significant dissenting judgments and the results seem to have turned to a considerable degree on policy considerations. If, as anticipated, the Supreme Court is given the opportunity of considering the issues it will be fascinating to see which approach finally wins out.

Douglas McGregor
Brodies LLP

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