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Direct and vicarious liability of bodies corporate for conduct of natural persons

September 22nd, 2015 · No Comments

A woman sued a Melbourne school for injuries and distress occasioned by its headmistress’s sexual abuse of her as a girl.  Represented by Lennon Mazzeo solicitors’ Nick Mazzeo, Dyson Hore-Lacy QC and David Seeman, she obtained judgment from Justice Rush of the Supreme Court of Victoria for $1.25 million, a substantial proportion of which was for exemplary damages.  The exemplary damages were awarded in part because as soon as persons at or associated with the highest levels of governance at the school decided there was substance to complaints of abuse by the headmistress, they arranged and paid for her to fly most hastily to Israel on a one-way ticket instead of reporting the claims to the police and allowing local justice to take its course.

Justice Rush provided an instructive summary about when a body corporate itself may be said to have acted through a person and when it is only vicariously liable for the actions of a person acting, for example, as the company’s employee.  It is set out below.  The application of that law to the facts followed at paras [95] to [118], and resulted in a finding that the school had sexually abused the girl.  See Erlich v Leifer [2015] VSC 499.

’78 The primary submission of the plaintiff concerning liability put by Mr D.F. Hore-Lacy QC, senior counsel for the plaintiff, was that the role, function, conduct and scope of authority of Leifer was such that she was the mind and will of the School, that it can be said the acts of Leifer are the acts of the School itself and, as such, the School is directly liable for her conduct.

79 On behalf of the School, Mr Blanden submitted that the evidence could not support a finding Leifer was the embodiment of the School – the administrative structure and her responsibilities did not support such a finding. Importantly, it was not contended that the concept of direct liability was not applicable to the circumstances of this matter. The School’s Defence is solely based on the contention that Leifer was not ‘the embodiment of the AIS Inc (the School)’ – a question of evidence.

80 Mr Hore-Lacy referred me to the decision of the New South Wales Court of Appeal in Nationwide News Pty Ltd v Naidu & Anor; ISS Security Pty Ltd v Naidu & Anor (‘Nationwide News’).[185] Mr Naidu was employed by ISS Security Pty Ltd. By a contract between ISS Security and Nationwide News, Mr Naidu’s services were made available to Nationwide News. Mr Naidu alleged he was subjected to humiliating and harassing treatment by a Mr Chaloner, the fire and safety officer for Nationwide News whilst providing security services at the premises of Nationwide News. Mr Naidu pleaded Nationwide News had breached its duty of care to him. One of the issues determined by the Court was whether the conduct of Chaloner could be directly attributed to Nationwide News.

81 Beazley JA (as she then was) referred to a number of authorities concerning the principle of direct liability, observing they had been consistently applied in Australia. She set out a passage from the judgment of Lord Reid in Tesco Supermarkets Ltd v Nattrass (‘Tesco’):

A corporation…must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company’s servant or agent. In that case any liability of the company can only be a statutory or vicarious liability.[186]

82 Beazley JA then set out matters that resulted in her finding that Chaloner’s position and responsibilities were such that he was the mind and will of Nationwide News so far as the management of its security requirements were concerned. Those matters included that, even though Chaloner reported to a more senior manager, he had a high level of seniority and his role gave him charge of security operations at the firm.[187] In his, ‘appropriate sphere’, the arrangement and implementation of security, he was the embodiment of the company.[188]

83 Spigelman CJ agreed with Beazley JA that Chaloner was Nationwide News.[189] His Honour stated: ‘It can fairly be said that his act or omission is that of the company itself’.[190] Chaloner was, for all relevant purposes ‘the company irrespective of the existence of lines of authority and reporting to those in the management hierarchy above him’.[191]

84 In Christian Youth Camps Ltd v Cobaw Community Health Services Ltd (‘Christian Youth Camps’),[192] the Victorian Court of Appeal considered whether the conduct of an employee could be attributed to his or her employer company in order to find that the employer company itself had engaged in discriminatory conduct under the Equal Opportunity Act 1995. In finding that the conduct of the employee could be attributed to the employer, Maxwell P cited Nationwide News with approval, concluding that the employee represented the ‘mind and will’ of the business he was there considering.[193] Neave JA accepted the principle of direct liability and stated that in such circumstances ‘[t]he employer will be liable for the wrongful act even if the employer could not have been held vicariously liable because the act fell outside the scope of the employee’s course of employment …’.[194]

85 Before considering whether the position of Leifer was such that her conduct should be attributed to the School, it is important to clarify the theoretical basis on which such a finding of direct liability may be made. While I agree with the conclusion in Nationwide News, on one reading it appears to stand for the proposition that when a natural person represents the ‘mind and will’ of a company, the conduct of that person will necessarily be attributed to the company; that is the submission of Mr Hore-Lacy. With respect, and without making any assumptions as to whether or not Spigelman CJ or Beazley JA meant to convey this, this is not the state of the law of attribution in Victoria.

86 The authorities cited in Nationwide News do not expound a rule of attribution that will apply in all circumstances. Rather, these cases provide a framework for determining when the conduct of a natural person should be attributed to a company. As observed by the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission (‘Meridian’),[195] in each of these cases the courts determined that the conduct of a natural person should be attributed to the defendant company ‘as a matter of interpretation or construction of the relevant substantive rule’.[196]

87 So, for example, in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd,[197] the House of Lords held that ‘upon a true construction’ of s 502 of the Merchant Shipping Act 1894 (UK), the fault of the managing director should be attributed to the defendant company.[198] Similarly, in Tesco, the House of Lords held that the conduct of shop managers should not be attributed to the defendant company because to do so would ‘be to render the defence [pursuant to s 24(1) of the Trade Descriptions Act 1968 (UK)] nugatory and so thwart the clear intention of Parliament in providing it’.[199]

88 In Meridian, the Privy Council held that these were ‘exceptional cases’ in which the courts attributed the conduct of a natural person to a company because the law in question was intended to apply to companies in those circumstances.[200] These decisions were made despite the fact that the primary rules of attribution[201] and the general principles of agency and vicarious liability did not require this result.[202] In these exceptional cases, the Privy Council held that:

…the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.[203]

89 Meridian was accepted as a ‘correct’ statement of the law of attribution in Victoria in Director of Public Prosecutions Reference No. 1 of 1996[204] by Callaway JA, with whom Phillips CJ and Tadgell JA agreed.[205] In line with Meridian, many cases in Australia have found that a company is directly liable for the conduct of its employees on the basis of the intended application of the substantive law in question.[206]

90 Therefore, rather than expounding a particular rule of attribution that will apply in all cases, these authorities have created a ‘framework for analysis’ of corporate liability.[207]As stated by the Privy Council in Meridian, it is a ‘question of construction rather than metaphysics’.[208] Applying this framework to the present case, I must assess whether (and if so, in what way), the policy and content of the common law rule of negligence requires that the conduct of Leifer be directly attributed to the School.[209] As stated by McHugh JA in Hawkins v Clayton,[210] the principle objects of the law of torts are:

…to deter wrongdoing, to compensate losses arising from conduct contravening socially accepted values, and where appropriate to distribute losses among those in the community best able to afford them.[211]

91 In my opinion, these objects demonstrate that the conduct of Leifer should be attributed to the School. The School, and employers generally, have a significant ability to deter the tortious conduct of their employees.[212] Further, it is clear that the School is in the best position to afford the losses required to compensate the plaintiff. While it is arguable that vicarious liability is sufficient to achieve these ends, it is clear from both Nationwide News and Christian Youth Camps that the availability of vicarious liability does not prevent a finding that a company is directly liable for the conduct of its employees[213] and further, that vicarious liability may not be available in certain circumstances.

92 A slightly more difficult question to answer is whose acts, in order to achieve these objects, are to be attributed to the company. However, as in Christian Youth Camps, it is not necessary for me to determine the outer limits of the rule of attribution in this case, suffice to say that it undoubtedly applies to Leifer due to her extensive powers and responsibilities, as set out below.[214] As in Nationwide News, Leifer’s powers were such that she would properly be considered the ‘mind and will’ of the School.[215]

93 Finally, before setting out the further evidence which demonstrates Leifer’s extensive powers within the School, it is necessary to address a point of contention in relation to the rules of attribution. In Beach Petroleum NL v Johnson,[216] von Doussa J stated that the:

…Tesco principle is one appropriate to be applied to determine criminal responsibility of a company, but the wider notions of the principles of agency should be applied where the issue is civil responsibility arising under the general law.[217]

94 With respect to His Honour, I do not agree with this proposition. Nationwide News and Christian Youth Camps make clear that these principles will be applicable in civil cases. Further, although the majority of cases that have considered the notion of direct liability have been in the context of criminal liability or liability pursuant to a particular statutory provision, nothing in the authorities suggests that these principles should be limited to such circumstances.[218] Mr Blanden on behalf of the School made no such submission. That these principles may be applicable in cases involving a common law cause of action is implicitly considered in Meridian, where the Privy Council stated that the ‘language of the rule’ in question is relevant only insofar as the rule in question ‘is a statute’.[219]

[185]  [2007] NSWCA 377;  (2007) 71 NSWLR 471.

[186]  Nationwide News Pty Ltd v Naidu & Anor; ISS Security Pty Ltd v Naidu & Anor [2007] NSWCA 377;  (2007) 71 NSWLR 471, 505 [233] (‘Nationwide News’) quoting Tesco Supermarkets Ltd v Nattrass [1971] UKHL 1;  [1972] AC 153, 170 (‘Tesco’).

[187]  Nationwide News [2007] NSWCA 377;  (2007) 71 NSWLR 471, 505 [235] (Beazley JA).

[188] Ibid, 505 [236].

[189] Ibid, 488 [84].

[190] Ibid, 488 [85] citing Wilmer LJ in Arthur Guiness, Son & Co (Dublin) Ltd v The Freshfield (Owners) (the “Lady Gwendolen”)  [1965] P 294, 343.

[191]  Nationwide News [2007] NSWCA 377;  (2007) 71 NSWLR 471, 488 [86].

[192]  (2014) 308 ALR 615 (‘Christian Youth Camps’).

[193] Ibid, [116].

[194]  Christian Youth Camps (2014) 308 ALR 615, [370] (Neave JA) citing Tesco [1971] UKHL 1;  [1972] AC 153.

[195]  [1995] 1 AC 500.

[196] Ibid, 507.

[197]  [1915] AC 705.

[198] Ibid, 713 (Viscount Haldane L.C.).

[199]  Tesco [1971] UKHL 1;  [1972] AC 153, 203 (Lord Diplock).

[200]  Meridian  [1995] 1 AC 500, 507.

[201] Namely, those rules set out in a company’s constitution and implied by company law by which conduct of employees will be attributed to a company.

[202]  Meridian  [1995] 1 AC 500, 507.

[203] Ibid.

[204]  [1998] 3 VR 352.

[205] Ibid, 355.

[206] See for example Christian Youth Camps  (2014) 308 ALR 615, 637 [99] and 638 [101] (Maxwell P) and 693 [370] (Neave JA); Director General, Department of Education and Training v MT [2006] NSWCA 270;  (2006) 67 NSWLR 237, 242 [17] (Spigelman CJ); North Sydney Council v Roman [2007] NSWCA 27;  (2007) 69 NSWLR 240, 252-253 [43] (McColl JA).

[207]  DPP Reference No. 1 of 1996  [1998] 3 VR 352, 355 (Calloway JA, with whom Phillips CJ and Tadgell JA agreed).

[208]  Meridian [1995] 1 AC 500, 511.

[209] As the substantive law in question in this case is not a statutory provision, the question is not what the Legislature intended, but rather what is ‘contemplated by the case-law rule’ (Austin, Ford and Ramsay, Company Directors; Principles of Law & Corporate Governance (Butterworths, (2005)), 14.13).

[210]  (1986) 5 NSWLR 109.

[211] Ibid, 138.

[212] See for example Cassidy v Ministry of Health [1951] 2 KB 343, 360 (Denning LJ).

[213]  Nationwide News [2007] NSWCA 377;  (2007) 71 NSWLR 471, 488 [87] (Spigelman CJ) and 506 [239] (Beazley JA); Christian Youth Camps  (2014) 308 ALR 615, 643 [124]-[125] (Maxwell P) and 703 [401] (Neave JA). I note that some have interpreted the ‘exceptional cases’ referred to in Meridian as only arising in circumstances where vicarious liability is not available (see for example Paul Davies, ‘The Attribution of Tortious Liability between Director and Company’ [1998] (March) The Journal of Business Law 153, 160). However, the weight of authority in Australia demonstrates that this is not the case.

[214]  Christian Youth Camps  (2014) 308 ALR 615, [116] 642 (Maxwell P).

[215]  Nationwide News [2007] NSWCA 377;  (2007) 71 NSWLR 471, 505 [236] (Maxwell P).

[216]  [1993] FCA 283;  (1993) 115 ALR 411.

[217] Ibid, 571.

[218] See also R. Grantham, ‘Attributing Responsibility to Corporate Entities: A Doctrinal Approach’ (2001) 19 Companies and Securities Law Journal 168, 175: ‘There is nothing in his Lord Hoffman’s [sic] comments to suggest he sees them limited to any particular context’. Note that this comment was made in relation to the primary rules of attribution, although in my opinion it applies equally to the ‘exceptional cases’ identified by the Privy Council.

[219]  Meridian  [1995] 1 AC 500, 507.’

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Tags: Negligence · Sex and drugs · Sex with clients