Companies Liability for Negligent Actions

Critically discuss the following statement: “If companies are legal persons, then they should be held liable for their negligent actions in the same manner as a natural person”

Introduction

In Salomon v Salomon & Co [1] , the House of Lords held that once a company is registered, it must be treated be treated like any other independent person with its own rights and liabilities. [2] Since Salomon, the law has regarded companies as independent legal persons with their own rights and responsibilities. However, the fact that companies exist as separate from the natural persons who carry out their running has caused difficult issues of liability for wrongful acts carried out by those natural persons. [3] This brief critically discusses the statement that if companies are legal persons, then they should be held liable for their negligent actions in the same manner as a natural person. The brief starts by examining types of legal persons and relationships. Then, it critically examines companies as artificial legal persons and how they are held liable for negligent actions. The brief will argue that although companies are legal persons, they are not held liable for their negligent actions in the same manner as a natural person due to their legal recognition as artificial entities other than natural persons capable of entering into some legal relationships.

Types of legal persons and relationships

Common law acknowledges two types of legal persons, natural persons and bodies corporate. In construing statutes, the word “person” is taken to include any “body of persons either corporate or unincorporate”. [4] A body corporate must be a corporation sole or a corporation aggregate. Thus, a corporation is a group of individuals (i.e. a corporation aggregate), or a series of holders of an office (i.e. a corporation sole), who are deemed in law to be a single legal entity. Such a body corporate is legally distinct from all the individuals who compose it, has legal personality in itself. It has legal personality in the sense that it enjoys rights and subject to duties different from those enjoyed or borne by its members. [5] It can accordingly sue and be sued, hold property and transact, incur liability and generally act as though it were a natural person. It has perpetual succession and continues indefinitely notwithstanding changes to the identity of the persons who from time to time compose it. Members’ rights are confined to receiving from the company their share of the profits or, after a winding-up, of the surplus assets, and their liabilities to paying the amount due from them to the company. [6]

However, although companies are legal persons, they are not held liable for their negligent actions in the same manner as a natural person. The law recognises that entities other than natural persons can enter into some legal relationships. [7] Basically, the law is concerned with relationships such as duties of care, which are entered into by persons who have the rights and duties attached to those relationships. [8] These types of relationships studied in law are based on the transactions and activities of natural persons. However, legal principles are concerned with relationships with a nature of a legal relationship. [9] This legal relationship can be applied not only when a natural person enters into the relationship but also when other entities do. [10] For the purposes of the relationships in which their participation is recognised, these entities are said to have legal personality subject to the fact that the entities are not human being [11] and any other limitation imposed by the incorporation process. [12] The separate legal personality of the company is, therefore, an inevitable consequence for a company upon which the privileged status of incorporation is conferred. [13]

Various views criticise the fiction that the incorporation process creates a separate, artificial legal person. For example, the early individualistic view holds that only human beings can claim legal rights and obligations and have rights and duties arising from legal relationships. [14] Recent individualistic view (methodological individualism) seeks argues for the study of society in terms of individual human beings and not as entity itself. [15] However, the individualistic view ignores the fact that company is a useful legal concept precisely because the common law regards it as both a separate person and an association of its shareholders. [16] Nevertheless, the individualistic view reminds that the doctrine of legal personal liability has problems manifested by in the controversy over piecing the corporate veil. [17] Other problems include the extent to which a company, as a separate legal person, can be said to have interests and the extent to which companies should be accorded human rights. [18]

The realist/natural-entity theory sees a corporation as having a real existence as a group and being possessed of a group will. Supporters of this theory refer to the artificial-entity theory as the fiction theory on the basis that that it denies the reality of corporate personality. [19] However, the realists fail to describe the personality they ascribe to a corporate body. [20] The fiction theory views a company as an entity which is not a true legal person but is merely treated as if it were a human being and is regarded by the law as being entirely distinct from its members. The more recent autopoietic (self-creating) theory argues that a real personality of an entity derives from the mere fact of its being refereed to as a unit. [21]

Counter argument of the artificial-entity theory is that the characteristics of entities which justifies them being granted legal personality should be left to the legal system to decide which entities should have legal personality. [22] The realist and fiction theories produce two different policies. In a realistic legal system, entities with real personality would have legal personality and entities without real personality would not. A fictional legal system legal system grants legal personality simply on the basis of whether it is beneficial to do so.  Although particular judgments can be cited as evidence of a judicial approach to specific facts which may lend itself to classification in accordance with one of these theories [23] and the realist theory in Daimler Company Limited v. Continental Tyre and Rubber Company (Great Britain) Limited, [24] English law is not committed to any single theory and none of the theories adequately explain the approach taken by the courts in all cases. [25] The English system grants separate legal personality to subsidiary companies for commercial reasons and to one-member companies to enable individuals to trade with limited liability though realist would argue that subsidiary companies and one-member companies do not have a real separate personality.

Once an entity is classified as being a body corporate it is generally treated by law as being capable of bearing rights and being subject to duties, just as if it were a natural person. [26]  At the core of the concept lies the juristic metaphor of a human being. The body corporate differs from a natural person in that it may potentially live for ever, but depending on its constitution a company may lack certain capacities which the law attributes to a natural person. The principle of separate legal personality of a company and its distinct from its members was established in Salomon v Salomon & Co. [27] In that case, the House of Lords held that regardless of the number of the shares and debentures owned by one man, the company’s actions were not his actions even if he held other shares in trust for himself. The courts apply this principle strictly when seeking to attribute the rights and liabilities of a company to its members, or regarding the company property as belonging in law or equity to members. The fact that all shares in a company are owned by one member is not a sufficient reason to ignore the legal personality of the company. [28]

Company liability for negligent actions

Liability to a person in negligence for damage depends upon the existence of a duty of care. Although a person’s negligence may have unending consequences, the law has always sought to limit the scope of the tort of negligence so as to make the system workable. Basically, for a person to be held liable in negligence, it must be shown that s/he breached a legal duty of care which caused damage to the injured party. [29] The necessary ingredient in any situation giving rise to a duty of care is that the damage caused must be foreseeable, that there must be a sufficient proximity between the parties, and that the situation must be the one in which the court considers it fair, just and reasonable to impose the duty of care. [30] Therefore, a driver of a car owes other road users a duty of care not to drive dangerously. If s/he breaches that duty, s/he will commit the tort of negligence. Likewise, a doctor owes a patient of his/her a duty of care to treat him/her with a certain degree of care and skills; the care and skills that a professional doctor would exercise in treating a patient. If the doctor breaches that duty s/he will commit the tort of negligence. Similarly, an occupier of land will his/her visitors a duty of care to take reasonable steps to ensure that they will be reasonably safe for the purposes for which they are on his/her land. If s/he breaches the duty s/he will commit the tort of negligence.

The scope of a duty of care owed by the defendant to the claimant is the extent of the damage which the defendant must save the claimant from, and which defendant must compensate the claimant for if it occurs as a result of the defendant breaching the duty of care. The courts have always said, for example, that liability will not be imposed for losses which are characterised as being too remote from the breach of duty or which are unforeseeable. The common law has especially reluctant to hold that it is within the scope of a duty of care to save a person from economic losses. Since Hedley Byrne and Co Ltd v Heller and Partners Ltd, [31] it has been possible to sue for pure economic loss caused by a person’s negligent misstatements in the person who made the statements owed a duty of care to the person who suffered the loss.

The most important legal characteristic of a registered company is that it has a separate legal personality. Section 15(1) of the Companies Act 2006 provides that, on the registration of a company, the registrar must give a “certificate that the company is incorporated. Describing a registered company as “incorporated” means that it is a body corporate. [32] Their separate legal personality is described as artificial person in contrast with a human being, a natural person. [33] The nature of this separate legal personality gives rise about how it can be held liable for its negligent actions. It has always been generally accepted that a chartered company has all powers of a natural person. However, most companies are incorporated under statute and exist only in contemplation of law such, as the Companies Act 2006.

As Lord Halsbury described in Welton v Saffery, [34] a company is an artificial creature, which must be dealt with as an artificial creation. [35] Whatever their origin may be, the characteristics common to companies are a distinctive name, a common seal, and perpetuity of existence. This existence is quite independent of human beings who are members of the company. As such, “it is incapable itself of doing any physical act or being in the state of mind” [36] simply because it has no mind of its own anymore than a body of its own. [37] If a company is to act, then, it can only do so through natural persons who are capable of performing physical actions. Decisions on behalf of the company may be taken by the board or members in general meetings, officers, agents or employees of the company.

In every case where an artificial person owes someone else a duty of care, we are confronted with the problem – whose actions should we look at to determine whether or not that person breached duty? Although the law threats companies as independent legal persons, they are abstraction. They do not have minds or bodies of their own. [38] Necessarily, a company make decisions and carries out it business through natural persons who are capable of performing physical actions. These natural persons are often regarded as agents of the company and sometimes its employees. However, such natural individuals do not always act as agents or employees of the company. They have their own individual lives and some have other business to take care of. This can be a source of great difficulty especially where such individual cause injuries to a third party and it is necessary to determine whether such individual or the company or both are responsible to the injured party.

When a company acts through natural persons, creates a problem when determining whether or not a company breached a duty of care that it owed to someone else. [39] The law has developed rules of attribution to determine when an act of individual such as an agent or employee will be treated as act of the company. For most purposes of civil liability, acts of individual may be attributed to a company in accordance with its own, or primary rules of attribution. These rules can be found in the company’s constitution or can be implied by company law and in combination with such rules or in accordance with general of attribution that apply also to individuals such as agency and vicariously liability.

For example, the court can impose vicarious liability where there is sufficiently close connection between the negligent actions of the agents or employees and the activities which those persons were employed to undertake. [40] What a company did at a particular time can be ascertained by looking at the acts of those who represented the “guiding mind or will” of the company at the time, the alter ego of the company. [41] If this is right, then the “guiding mind or will” principle may be adopted when determining whether or not a company breached a duty of care that it owe to someone else. However, how we ascertain what a company did may depend on the nature and purpose of the legal rule which requires us to find out what the company did. [42]

The fact that companies have legal personality separate from human beings who carry out the companies’ activities has caused a difficult issue of attributing liability to companies for negligent actions carried out by those human beings. [43] The commercial reality is that although a company can only act through a medium of human beings, those human being are directors of companies acting on an individuals. Of course, the company should be liable for negligent actions committed by a director where the director was merely acting on behalf of the company and vice versa. [44] However, there are many situations where it is difficult to determine on whose behalf the director was acting. More problems can arise when the law of tort and the law of contract come together to regulate the process of contracting. [45] This difficulty is more acute in one-man companies where it is difficult to draw a distinction between the director’s personal and corporate roles. [46]

In Williams v Natural Life Health Foods, [47] the claimants claimed damages for negligent advice given to them under a franchise agreement they had made with the company. They contended that the company’s managing director was personally liable for the negligent advice because the company’s own advertising made clear that it relied on his expertise. The claimants had not dealt with the managing director personally, though he had helped to prepare the negligent advice. The House of Lords held that the managing director did not owe a duty of care of care to the claimants in respect of the advice and so was not liable. The House of Lords stated that a person who makes negligent misstatements whilst contracting on behalf of a company does not assume personal responsibility for the veracity of the statements made as responsibility has to be treated as assumed only on company’s behalf. Accordingly, the company liability is direct, not vicarious. The decision is not explicit on whether the company was liable for negligent misstatement. However, it is inherent in the view that responsibility was accepted on the company’s behalf that this was the case. [48] The House of Lords made it clear that this approach applies to negligent misstatements as well as cases of negligent delivery of services due under contract.

The decision in Williams represents the protective approach adopted by the common law to limit the circumstances in which the corporate shield of limited liability may be removed. The House of Lords attached more importance to the enterprise goal and less importance to the personal responsibility goal to ensure that the law works in such a way as to encourage enterprise. Whether a director was an integral part of the company’s directing mind or will, will not be presumed to have assumed responsibility which is determined objectively unless he expressly or impliedly affirmed assumption of personal responsibility. [49] This suggests that those acting for the one behalf of the company would not escape liability where assumption of responsibility is not a necessary requirement for tortious liability. [50] Also, the decision has implications for the conceptual nature of the doctrine of assumption of responsibility and for the basis upon which the tension between company law and the law of torts is to be reconciled. [51] However, it should be noted that a person owes a duty of care in the tort of negligence not because he assumed legal responsibility but because the law imposes the duty on the basis of what s/he said or done.

Conclusion

Companies are legal persons. However, they are not held liable for their negligent actions in the same manner as a natural person due to their artificial legal personality. Companies are abstraction. Unlike natural persons, they do not have minds of their own anymore than bodies of their own. Being artificial legal persons, they can only act through natural legal persons. Their active and directing will must be found in natural persons acting on their behalf. Therefore, the issue for determination has been which people in which circumstances can be regarded as having acted as the company in order for a company to be liable for its negligent actions. The law has developed rules of attribution to determine when an act of a natural person will be treated as act of the company. Although the question of corporate liability for negligent actions is central to a core feature of separate legal personality of the company, its answer is to be found in the general rules of the law of tort. The requirement of assumption of responsibility in the law of negligence has operated to avoid clashes between the principle of limited liability and the rules on tortious liability.