Strict Liability and the Nature of the Rule in Rylands v Fletcher

It is perhaps not surprising that counsel could not find a reported case since the second world war in which anyone had succeeded in a claim under the rule.  It is hard to escape the conclusion that the intellectual effort devoted to the rule by judges and writers over many years has brought forth a mouse

This was Lord Hoffmann’s description in Transco v Stockport MBC of the rule in Rylands v Fletcher (it is another matter that India has moved on to absolute liability). In its recent judgment in Mark Stannard v Gore, the Court of Appeal has considered two important questions about the rule: (a) whether the inherently dangerous thing must itself “escape” or may contribute to the escape of something else (such as “fire”); and (b) whether there is a special rule for liability arising out of a fire. The judgments of Ward, Etherton and Lewison, LJJ contain a careful and instructive analysis of the law on this subject, and is another example of the importance of incremental reasoning in the common law. As another great judge (Lord Greene MR) once put it in a different context, the temptation to do “what may appear to be fair in an individual case” must be resisted because “principles of construction are not to be outraged” (see Hankey v Clavering [1942] 2 KB 326, overruled on the substantive point it decided in Mannai Ltd v Eagle Star Life Assurance [1997] AC 749).

Mr Stannard ran a tyre business. He kept more than 3,000 tyres in his compound and in the space between his compound and the plaintiff, Mr Gore’s compound at the rear. On 4 February 2008, a fire broke out in Mr Stannard’s premises because of faulty wiring. The tyres, which are ordinarily not combustible, caused the fire to spread rapidly and Mr Gore’s property was entirely destroyed and reduced to rubble the following day. Mr Gore naturally felt that he was blameless (which he was) and sued Mr Stannard for compensation. The claim was put in two ways: ordinary negligence, and strict liability. The negligence claim was destined to fail, which it did once the Recorder found that Mr Stannard had done all he could to ensure that the electricity system was as it should be. The case therefore turned entirely on Rylands v Fletcher, the Recorder holding that the plaintiff was entitled to judgment since Mr Stannard had, within that rule, kept combustible tyres that could cause a fire to break out at his peril. Of course, the “tyres” had not escaped – they had stoked the fire, which had.

Mr Stannard appealed. The first point in the Court of Appeal was that the Recorder had failed to distinguish between the escape of the dangerous “thing” which a defendant must keep or collect on his land to fall within the rule, and the escape of a fire that was stoked by something which did not itself escape.

Ward LJ’s review of the authorities (the leading post-Ryland cases are Cambridge Water Co and Transco) established that the rule had never been invoked in respect of a fire that had broken out accidentally, since, by definition, nothing had “escaped” the land. There was one exception, and that is the case of Musgrove v Pandelis [1919] 2 KB 43, in which the defendant’s servant failed to shut off the supply of petrol to a burning car that was in a garage below the plaintiff’s property. This led to a fire that destroyed the car and the plaintiff’s property. Bankes LJ in the Court of Appeal had expressed the view that the car was the dangerous thing (apparently overlooking that the “car” was very much in the land, it was the “fire” which had escaped). Ward LJ notices the criticism to which Musgrove has subsequently been subjected, and explains that if the Rylands rule at all applies to fire, it is confined to fire that is deliberately kindled. In that case it does no more than reaffirm the ancient English custom of the realm (ignis suus) by which an occupier of land was liable for “his” fire unless it was caused by a stranger (a person who entered without his leave) – in other words, deliberately by himself or who entered his property with his leave.

Etherton and Lewison LJJ go even further. Etherton LJ holds that it is impossible to apply Rylands v Fletcher to “fire” cases because the first condition that the inherently dangerous thing must have been “kept” or “collected” in one’s land can never be satisfied; the defendant in such cases does not keep the fire, he keeps the thing that starts or stokes the fire. Lewison LJ holds that Musgrove was wrongly decided. The judgments of Ward and Lewison LJJ contain a valuable historical analysis of liability for fire, and of the influence (in this area of the law as in many others) of the old forms of action on the modern law.

Perhaps the most important point that emerges from this judgment is that Rylands v Fletcher is a principle of limited application: after Transcoand Stannard, it is confined to cases in which a defendant keeps a thing that he knows will cause exceptional damage if it escapes, and it can be said that keeping that thing was as an exceptionally unusual use of his land given the context of the land and general practices. It is sometimes tempting for a court to compensate a “victim” by fastening liability on the person from whose land or because of whom (in a “but for” sense) the loss emerged; this judgment emphasises that this approach is not correct, for liability, if any, can arise only on a recognised cause of action in accordance with existing principles of law.

Parent's Duty to Employees of its Subsidiary: Chandler v. Cape affirmed

In an earlier post, we had discussed the judgment of the England & Wales High Court in Chandler v. Cape plc, [2011] EWHC 951. In that case, the Court had held that in certain circumstances, a parent company would owe a duty of care to the employees of the subsidiary even in situations where the tests for lifting the corporate veil are not satisfied. This judgment has been affirmed today by the Court of Appeal in Cape v. Chandler, [2012] EWCA Civ 525.

The Court of Appeal “emphatically rejected” the proposition that the case was concerned with principles pertaining to lifting the corporate veil. It was common ground between the parties that the tests for lifting the veil were not satisfied; and the Court (para 70) expressly clarified that the issue was not one of separate legal personality, but of whether the parent company had a direct duty to the employees of the subsidiary.

The Court of Appeal noted that the law of negligence develops incrementally, and also pointed out that an analogous principle was available in the line of authority on the duty of a person to intervene to prevent damage to another. The Court referred to Lord Goff’s statement in Smith v Littlewoods Ltd., [1987] AC 241, that there is in general no duty imposed on a person to prevent third parties causing damage to another. However, Lord Goff had qualified this general rule: there could be a duty to third parties causing harm to each other in situations where there was “a relationship between the parties which gives rise to an imposition or assumption of responsibility”. The Court of Appeal held that this “assumption” of responsibility need not be a voluntary or conscious assumption of responsibility (Customs and Excise Commissioners v Barclays Bank, [2007] 1 AC 181).

The Court concluded (para 80), “… this case demonstrates that in appropriate circumstances the law may impose on a parent company responsibility for the health and safety of its subsidiary's employees. Those circumstances include a situation where, as in the present case, (1) the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary's system of work is unsafe as the parent company knew, or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees' protection. For the purposes of (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. The court may find that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues…”

One issue which arises is this: is this “incremental development” of the law of negligence confined to “employee health and safety” cases, or would it extend beyond those cases in a more general commercial context? Can a parent have a duty of care to prevent a pure contractual breach by its subsidiary? The tests for liability in a commercial context would perhaps become clearer only after further development of the common law in this regard.

Illegitimate pressure in economic duress

Traditionally, duress rendered a contract voidable only if it was physical duress (which involved a threat to the person or belongings of an individual), but following the decision of the Privy Council in Pao On v Lau Yiu Long, the concept of economic duress was also recognised. It is now fairly settled law that there are two essential ingredients for voiding a contract on grounds of economic duress: (a) there should be illegitimate pressure, and (b) the pressure should be a significant cause for the claimant entering into the contract (Per Mance J, Huyton v Cremer). However, each of these requirements gives rise to a controversial issue:
First, can a legal act by defendant ever amount to illegitimate pressure, and if so, in what circumstances?
Secondly, does the claimant also need to establish that the illegitimate pressure left him with 'no reasonable alternative' other than to enter into the contract? Or is this merely another way of satisfying the causation requirement?
The second of these issues has been the subject of much debate, with some High Court decisions (for instance, Adam Opel v Mitras Automotive) holding 'no reasonable alternative' to be a third requirement, and several academics dismissing it as an unnecessary third wheel. However, it was with the first of the issues that the High Court in Progress Bulk Carriers Limited v Tube City IMS LLC [2012] EWHC 273 (Comm) grappled, making some interesting observations.
The facts of the case involved the proposed charter of a vessel to carry goods from the Mississipi River to China. The identity of the vessel (the "Cenk K") and the time of delivery, were significant elements of the contract between the charterer (the Claimant) and the recipient of the goods in China (the Recipient). This fact was communicated by the Claimant to the owner of the vessel proposed to be chartered (the Respondent). A week before Cenk K was to be provided, the Respondent chartered it to another charterer, without the Claimant's approval. Instead, on the date of delivery to the Claimant, the Respondent offered a substitute vessel. The Claimant objected, and stated that any substitution would be subject to approval by the Recipient. Although the act of chartering Cenk K to another party without the Claimant's consent was a repudiatory breach of the charter party, the Claimant did not terminate the charter party. Two days later, the Respondent admitted it had made a mistake, and that it would compensate the Claimant for any losses suffered due to the substitution. Based on this assurance, the Claimant did not look for other alternatives. The Claimants then communicated the revised timetable and the new vessel to the Recipient, which accepted the changes subject to a reduction in the purchase price of $6 per metric ton. This was above the market price of the commodities at that time, and hence was accepted by the charterer as a reasonable discount. However, when this was communicated to the Respondent, it refused to grant the charterer a discount of more than a $2 per metric ton. Given the lack of alternatives, the Claimant informed the Respondent that it would accept the discount, but would reserve its rights in respect of claims for damages arising out of the owner's breach of the charter party. In response, the Respondent made the Claimant a 'take it or leave it' offer, where the Claimant had the option between (a) not having any discount from the Respondent, or (b) having a $2 per metric ton discount, contingent on the waiver of all claims for loss or damages arising out of the substitution of the vessel. Given the situation, the Claimant accepted option (b) under protest.
Against this backdrop, the issue before the Court was whether this waiver could be challenged on the ground of economic duress. There were no issues of causation, and the arbitral tribunal below had found that the Claimant had no reasonable alternative to granting the waiver. Hence, the only question was whether the 'take it or leave it' offer amounted to illegitimate pressure.
For these purposes, the Court relied on the Court of Appeal's decision in CTN, Cash and Carry v Gallaher. In this case, a threat to refuse to enter into future contracts was held to be legitimate because (i) the defendant was not obliged to enter into any future contracts, (ii) the defendant bona fide believed that it was entitled to the amount it was claiming and (iii) the parties were in a purely commercial relationship. Against this backdrop, Steyn LJ in CTN had held there that the key question is not whether the conduct was 'lawful', but whether it was 'morally or socially acceptable'. He went on to observe that it would only be in rare cases that the Court would conclude that in a commercial relationship, a lawful act would amount to economic duress.
On the facts here, the Court concluded that the breach of the charter party by the owner, combined with the subsequent failure to live up to the assurance given to the charterer was sufficient to make the pressure illegitimate. Thus, although the 'take it or leave it' offer was legal, and although the parties were in a purely commercial relationship, the defendant had acted in bad faith. Reliance was placed on the Privy Council's decision in Borrelli v Ting for the proposition that an illegality in the past, which coloured the subsequent pressure, could render the pressure illegitimate. Hence, since the waiver of claims under the charter party was procured by the application of illegitimate pressure, the waiver was held to be voidable.
Although the result appears to be right, it is important to identify the real basis of the decision. The reliance on Borrelli, though persuasive, is made suspect by the fact that the impugned settlement agreement in that case required the defendant to do that which he was anyway statutorily obliged to do. On the other hand, on the facts here, the waiver merely imposed a new contractual obligation on the Respondent, to replace an earlier contractual obligation it had breached. Hence, although the similarities with Borrelli should not be understated, it is important to note that the existence of a purely commercial relationship, and the absence of a legal obligation to fulfil the assurance made following the breach, amounts to an extension of Borrelli.
The decision reiterates the highly fact-specific nature of any economic duress claim, with findings that the Respondent had 'lulled the charterer into a false sense of security' and 'driven the charterer into a corner from which it could not escape' playing an important role. However, in terms of legal principle, the notable addition is that when there is an unjustified past illegality/breach of contract which colours or leads to subsequent pressure, any subsequent unconscionable conduct by the defendant aggravating that pressure (although not amounting to the breach of a legal obligation), can be sufficient to render the pressure illegitimate.

The Court of Appeal on the illegality defence

The role of illegality as a defence to a claim for damages has always been the subject of much debate. There are two principal rationales that can be proposed for illegality being a defence: (a) that the claimant cannot be allowed to rely on his illegal conduct (reliance-based rationale); and (b) that allowing the claim will result in stultifying the law which rendered the claimant’s conduct illegal (stultification/policy rationale). To take a concrete example, let’s assume that A pays B on the assumption that B has it in his power to ‘arrange’ a knighthood for A. If B subsequently fails to deliver, or if A discovers that B never could have arranged such a knighthood, can A claim damages from B? The English High Court in Parkinson v College of Ambulance held not, and seems clearly right. However, what is debatable is whether the claim is denied because A, in making the claim, necessarily must rely on his being party to an illegal act; or because allowing A to recover the amount would stultify the law rendering the procurement of knighthoods illegal. Over the last few years, English courts appear to have moved from the reliance-based rationale to the policy rationale for illegality as a defence. This was also recognized and affirmed by the latest report of the Law Commission of England on illegality, where it observed that legislative reform was not necessary since the policy rationale was gaining judicial ground.^*

A recent decision of the Court of Appeal in Delaney v Pickett again revisited the issue of illegality as a defence to a civil claim. The claim was by the passenger of a car against the driver, for damages caused by negligent driving. However, since the purpose of the journey in this case was the collection and transportation of illegal drugs for subsequent re-sale, the High Court denied recovery. The High Court judge held that since the negligent driving occurred during the course of an illegal activity, it arose ‘directly ex turpi causa’, and hence no claim could lie. The judge also observed that “the conduct upon which the Claimant was engaged in concert with the first Defendant was sufficiently anti-social that public policy prevents him from pursuing a claim arising out of it”.

On appeal, the Court of Appeal considers two important cases on the meaning of ‘directly’ when used in conjunction with ex turpi causa. In Pitts v Hunt, the claim was by the injured pillion passenger on a motorcycle being driven by his friend, both of them drunk, and deliberately driving in a manner designed to frighten others. The Court held that since the pillion passenger was party to, and encouraged the negligent and reckless driving, he could not claim damages for injuries suffered by him from such driving. Dillon LJ observed that what was important was not the seriousness of the illegality, but the connection between the illegality and the injury sought to be compensated. In his words, “Where the plaintiff's action in truth arises directly ex turpi causa, he is likely to fail … Where the plaintiff has suffered a genuine wrong, to which allegedly unlawful conduct is incidental, he is likely to succeed”. This causal view of the ex turpi causa rule was further explained by Lord Hoffman in Gray v Thames Trains Limited, where he observed:

It might be better to avoid metaphors like "inextricably linked" or "integral part" and to treat the question as simply one of causation. Can one say that, although the damage would not have happened but for the tortious conduct of the defendant, it was caused by the criminal act of the claimant? Or is the position that although the damage would not have happened without the criminal act of the claimant, it was caused by the tortious act of the defendant?

Lord Hoffman held that if the criminal act of the claimant caused the injury, no claim would lie. But if the tortuous act caused the injury, even if the tortuous conduct was occasioned by the criminal activity, a claim would still lie.

Relying on this passage from Gray, Ward LJ in Delaney v Pickett holds that,

We are not concerned with the integrity of the legal system. We do not need to ask whether the claim would be an affront to the public conscience. There is no need for an analysis of the pleadings to establish whether or not the claimant is relying on his illegality to found his claim. It is not a question of the claimant profiting from his own wrongdoing. Here the crucial question is whether, on the one hand the criminal activity merely gave occasion for the tortious act of the defendant to be committed or whether, even though the accident would never have happened had they not made the journey which at some point involved their obtaining and/or transporting drugs with the intention to supply or on the other hand whether the immediate cause of the claimant's damage was the negligent driving. The answer to that question is in my judgment quite clear. Viewed as a matter of causation, the damage suffered by the claimant was not caused by his or their criminal activity. It was caused by the tortious act of the defendant in the negligent way in which he drove his motor car. In those circumstances the illegal acts are incidental and the claimant is entitled to recover his loss. (emphasis supplied)

The underlined lines from the passage are clear support for the growing body of judicial and academic opinion that reliance by the claimant on his illegal act is immaterial to the applicability of the illegality defence. However, the passage is unclear as to whether the policy-based rationale is always applicable. The suggestion appears to be that the only question to be asked on the facts of this case was one of causation. While that is certainly one of the important questions to be answered, it is doubtful whether it can be conclusive. In Gray, the claimant, who had suffered post-traumatic stress disorder caused by a train accident, killed a person due to the disorder and was convicted of manslaughter. In a claim against the train operator, he also sought damages for loss of earnings after his detention and for loss of his liberty and damage to reputation and for his feelings of guilt and remorse consequent on the killing. It was denying this claim that Lord Hoffman held that since the detention and damage to reputation was caused by his illegal act and not the train accident, no damages would be recoverable. However, that does not suggest that the causal test is determinative of the illegality question. Undoubtedly, it is possible to ‘explain’ the decision in Delaney on policy grounds, given that it is not inconsistent with the stultification rationale. However, the absence of a specific mention of the rationale, and the emphasis placed on the causal view of the ex turpi causa principle suggests that the case was actually not decided on the policy-basis either.

In sum, the role of illegality as a defence to civil claims is still unclear. While the stultification/policy-based rationale appears to have the most appeal, and does explain several of the cases, it does not seem easy to apply and is not universally followed. Delaney is another example where on facts, causation or some other test may be conclusively applied, without reference to the underlying rationale of the illegality defence.

^*The only exception is the landmark decision in Tinsley v Milligan, where the majority held that in the context of presumed resulting trusts, as long as the claimant does not need to rely in his pleadings on the illegality, the claim will succeed. Although Lord Millet in Tribe v Tribe does appear to have narrowed Tinsley to its facts, this narrowing is not very convincing, and is arguably obiter.

Court of Appeal on the Award of Damages

A recent decision of the UK Court of Appeal revisits the issue of alternative remedies, one on which there has been significant academic debate. An earlier post discussed the issue of concurrent liability in contract and tort, where the Court of Appeal had clarified some doubts in the area. However, the issue in Ramzan v Brookwide was different- not so much the existence and scope of different remedies in contract and tort, and the prevention of duplication of the remedy through different heads of damage.

The ‘unusual’ facts before the Court involved the misappropriation of property belonging to the claimant, by the respondent. The High Court judge awarded damages under the heads of lost profits, mesne profits, and damages for the breach of trust. In the Court of Appeal, the respondent’s contention was that the third head of damages duplicated the first, and that setting off was required to prevent duplication of damages. While there are also discussions on the individual heads, and the award of exemplary damages, for the present purposes, only the discussion on the prevention of duplication is relevant here (paragraphs 49-67; 90-100).

The Court begins by observing that both mesne profits and the damages for breach of trust were compensating for the profits which the respondent had earned from the use of the property, and hence awarding both would amount to double counting. The award of the latter was held to preclude the award of mesne profits on that ground. However, the more troublesome issue was whether damages for breach of trust could be awarded in addition to the loss of profits. The locus classicus on this area is the speech of Lord Nicholls in Tang Man Sit v Capacious Investments Ltd, where he draws a distinction between two types of alternative remedies- inconsistent and cumulative. In the case of the former, the claimant has to choose between the two possible remedies, in order to prevent duplication. However, in some cases (for instance when more than one defendant is liable for conversion successively), the claimant can maintain a cumulative claim against each of them. However, in this case too, while the mere existence of a claim against one tortfeasor does not preclude a claim against the second, full compensation for the loss from one defendant does prevent recovery from the second defendant. In other words, if A’s bicycle is converted by B and then C, the A can bring claims in conversion against both B and C. However, if the damages the Court awards against B is sufficient to compensate A for his loss, then he cannot again recover from C. Thus, both in single defendant and multiple defendant cases, the Court has the responsibility of preventing double recovery. The same principle was again approved by the Court in Severn Trent Water v Barnes, and followed by Lady Justice Arden in this case. She holds that since both damages for breach of trust and the damages for lost profits compensate the claimant in accordance with the defendant’s gain and the claimant’s own loss respectively. Allowing both would amount to double recovery. In this scenario, it was for the claimant to elect which of the two heads of damages he wanted to claim. On facts, it was held that the award of loss of profits was appropriate, and no additional award for damages for breach of trust could be awarded. That gave rise to the issue of whether mesne profits could be awarded in addition to damages for the loss of profits (note above that if damages for breach of trust had been awarded, there would be no award of mesne profits). The question was whether the claim for mesne profits was also compensatory, and hence required to be limited. Lady Arden, relying on her decision in Devenish Nutrition, holds that it is incorrect to classify user damages (mesne profits) as compensatory in the strict sense, since what they are awarded for is to prevent the defendant from profiting from his wrong. Hence, the underlying principle is that of restitution and not compensation. However, the measure of this benefit to the defendant was the same as that for the claim for lost profits, and hence, could not be awarded as an additional award. Also, on facts, no additional loss was caused to the claimant either, to justify a compensatory award.

Besides the discussion on preventing double counting in the award of damages, what is particularly significant about this decision, and is likely to lead to further judicial debate is a comparison of paragraphs 66 and 67 of Lady Arden’s decision, with paragraph 95 in Lloyd LJ’s decision. While Arden LJ classifies mesne profits more an restitutionary than compensatory, Lloyd LJ suggests that they continue to be compensatory in nature. The difference can be clarified by means of an example- if a trespasser makes a profit from using land belonging to the claimant, which the claimant would otherwise not have used; the defendant makes a gain from the illegal use of the land, although the claimant technically suffers no loss (apart from the violation of the right to the land). A restitutionary award would order the defendant to pay over the gains, while a compensatory award would not. Tomlinson LJ in paragraph 100 does acknowledge this difference between the two approaches, but observes that “There is a slight difference of approach between my Lady and my Lord as to the treatment of a possible claim in respect of mesne profits for a store room with shared access to the fire escape- see paragraphs 45 and 95 of their respective judgments. Since this difference is of no relevance to the ultimate outcome and arises simply out of the very unusual facts of this case and the manner in which it was argued at trial, I need express no view of my own”. While he is correct that the difference was not of relevance to the ultimate outcome, I doubt that it arises simply out of the unusual facts of the case. In any event, given the importance of this difference in approach, it is to be expected that there will be some judicial debate on this issue in the future, to clarify whether mesne profits are meant to be restitutionary or compensatory. On the principle of preventing double counting, however, the decision seems quite clear and helpful.

Parent Company's duty to employees of its Subsidiary

In an interesting judgment delivered earlier this month, Chandler v. Cape Plc. [2011] EWHC 951 (dt. 14/4/2011), it has been held that a parent company owes a duty of care to employees of its subsidiary. The decision contains a detailed analysis of the scope of the duty of care in such situations; and provides some indication that the existence of the corporate veil between the parent and its subsidiary (which was not pierced in the case) may not prevent a direct duty of care between the parties.

The Claimant, Chandler, was employed between 1959 and 1962 by a company – Cape Products. In 2007, the Claimant discovered that he was suffering from asbestosis which was caused due to exposure to asbestos in the course of his employment. Further, this exposure was caused in turn by negligence on the part of Cape Products. Cape Products, however, had long ceased to exist; and the Claimant framed his claim by alleging that at the relevant times, a duty of care was owed to him by Cape Plc., the parent of Cape Products. In effect, the claim was that Cape Products (subsidiary) and Cape Plc. (parent) were joint tortfeasors, jointly and severally liable to pay damages to the Claimant.

The Court began its analysis by noting:

…the fact that the Claimant was owed a duty of care by Cape Products does not prevent such a duty arising between the Claimant and other parties.  No doubt, the fact that a duty situation exists between the Claimant and his employer is a factor to be taken into account when deciding whether another party owes the Claimant such a duty.  But, to repeat, the existence of the duty between the Claimant and his employer cannot preclude another person being fixed with a duty of care.  Second, the fact that Cape Products was a subsidiary of the Defendant or part of a group of companies of which the Defendant was the parent cannot mean by itself that the Defendant owes a duty to the employees of Cape Products.  So much is clear from Adams and others v Cape Industries plc & another [1991] 1 AER 929.  Equally, the fact that Cape Products was a separate legal entity from the Defendant cannot preclude the duty arising.  Third, this case has not been presented on the basis that Cape Products as a sham – nothing more than a veil for the activities of the Defendant.  Accordingly, this is not a case in which it would be appropriate to “pierce the corporate veil.”

The Court also accepted (on the authority of Smith v. Littlewoods Organisation Ltd [1987] A.C. 241) that in general, the law imposes no duty of care upon a party to prevent a third party from causing injury to another. However, the Court held (on the basis of Caparo v. Dickman) that this statement was subject to some exceptions. The exceptions were: “… a) where there was a special relationship between the Defendant and Claimant based on an assumption of responsibility by the Defendant; b) where there is a special relationship between the Defendant and the third party based on control by the Defendant; c) where the Defendant is responsible for a state of danger which may be exploited by a third party; and d) where the Defendant is responsible for property which may be used by a third party to cause damage…”

On the facts, it was held that Cape plc. had actual knowledge of the working conditions of the claimant – and this was “no failure in day-to-management; this was a systemic failure of which the Defendant was fully aware.” In such circumstances, the Claimant’s injury should have been foreseen by Cape plc. Further, “At any stage [Cape plc] could have intervened and Cape Products would have bowed to its intervention…” In view of this, it was held that the there was enough proximity between the Claimant and the Defendant to impute a duty of care on the defendant.

The Court did note that merely because there was a parent subsidiary relationship, it did not follow that the parent had a duty of care to the subsidiary’s employees. But besides the normal incidents of a parent-subsidiary relationship (such as the potential to address ‘systemic failures’), the only fact which the Court highlighted was that Cape plc. was itself medical officers who were given the responsibility of looking at the health and safety issues of all group employees.

This fact would of course be insufficient for piercing the veil of the subsidiary; but the Court has held that the absence of a factual foundation strong enough to pierce the veil need not mean that an independent duty of care cannot be established. On the facts, as Cape plc. retained the potential to alter the policies of its subsidiary, a duty of care was held to exist. In the context of a parent-subsidiary relationship, however, it would appear that such potential control would almost always exist. It is not clear when, on the Court’s analysis, the parent company would not have a duty of care to third parties which it knows are dealing with its subsidiary.The decision is an illustration of how the corporate veil may not always be an adequate protection for shareholders.

Court of Appeal on Concurrent Liability

Earlier this year, the UK Court of Appeal was called on to consider an important question dealing with concurrent liability in contract and tort. The facts in Robinson v. Jones involved the defective construction of a house by a builder, which caused economic loss to the purchaser. However, the contractual remedy was barred by limitation. As a result, the purchaser sought to argue that he had a concurrent remedy in tort, which was not barred by limitation (since the limitation period for tort commences only from the date on which the party comes to know of the breach). It was also contended that the contractual exclusion of this tortious liability fell foul of the Unfair Contract Terms Act [“UCTA”]. Against the backdrop of an excellent summary of the English law relating to concurrent liability, the Court of Appeal held that there was no concurrent liability in tort. It also held obiter, that the contractual exclusion was reasonable, and did not violate the UCTA.

In Henderson v. Merrett, Lord Goff laid down the present English position on concurrent liability, by holding that the existence of a contract between parties does not necessarily exclude the concurrent existence of liability in tort. When the facts suggested that the defendant had assumed a responsibility towards the claimant, on which the claimant relied to his detriment, there would exist a concurrent liability in tort. The question before the Court of Appeal was whether a builder could be considered to have assumed responsibility in relation to economic loss resulting from economic loss.

The Court held that apart from the liability under the contract, the law of tort (independent of the assumption of responsibility) imposed an obligation on the builder to protect the purchaser and subsequent users against personal injury and damage to other property. In order to show liability for economic loss, reliance would have to be placed on the assumption of responsibility. The facts of Henderson involved insurance agents, and was itself based on Hedley Byrne, which was a case of professional negligence. However, the Court of Appeal held that this assumption of responsibility could not be easily assumed outside the realm of professional retainers. The explanation for this conclusion was as follows:

Contractual and tortious duties have different origins and different functions. Contractual obligations spring from the consent of the parties and the common law principle that contracts should be enforced. Tortious duties are imposed by law, as a matter of policy, in specific situations. Sometimes a particular set of facts may give rise to identical contractual and tortious duties, but self-evidently that is not always the case.

Lord Justice Jackson also examines Lord Goff’s speech in Henderson and points out that not every contract is held to lead to an assumption of responsibility. All that Lord Goff was clarifying was that the existence of a contract did not, by itself, exclude tortious liability. On facts here, there was held to be nothing which suggested that the builder had assumed any responsibility, and the parties were not in a professional relationship “whereby, for example, the claimant was paying the defendant to give advice or to prepare reports or plans upon which the claimant would act”. Finally, on the possible inequity of the contractual claim being barred by limitation, the Court held that it was but a manifestation of the contractual allocation of risk between the parties, and could not be disturbed.

Lord Justice Stanley Burton adopts a slightly different line of reasoning, arguing for a distinction between “a person who supplies something which is defective and a person who supplies something (whether a building, goods or a service) which, because of its defects, causes loss or damage to something else”. Even in the context of negligent advice by a professional, the tortious claim does not arise due to the defective nature of the advice itself, but because of the damage that it causes to the claimant’s assets.

In sum, the following propositions on concurrent liability in contract and tort appear from the decision-

(1) The existence of a contract does not necessarily result in a co-extensive liability in tort. The liability in tort must either be imposed by law, or be assumed by the defendant on the facts of the case. On this issue, however, Lord Justice Jackson’s decision is a little unclear, and seems to co-opt both sources of the tortious liability being public policy (¶¶ 76 and 79).

(2) Contracts with professional advisors and other contracts may be treated differently, with responsibility being more easily assumed in the former than the latter. This is where there may be a slight divergence between Jackson LJ and Burton LJ. The former seems to think that public policy may have something to do with the different treatment of professional advisers, while the latter relies solely on the fact that in negligent advice cases, the claimant is usually suing for the damage to assets caused by the advice and not for the negligent advice itself.

Exclusion of Jurisdiction of Civil Courts under the SEBI Act

Legally India has made available certain expert witness statements filed before US Courts in the class action litigation concerning Satyam, which was recently settled. One of the witness statements, by Mr. Sandeep Parekh, makes an interesting point; but I am not entirely sure of the tenability in law of that point. Mr. Parekh’s declaration / statement as an expert witness is available here. I am concerned in this post particularly with the claim made by Mr. Parekh in para 11(a) of his statement: “Private parties have no right to sue to recover damages resulting from the Satyam fraud under Indian statutory or common law because the Indian civil courts have no power to hear disputes where, as in this case, SEBI is empowered to act.” Essentially, this means that a private party cannot maintain a suit in tort in respect of the “Satyam fraud”. Mr. Parekh’s reasoning is effectively based on the bar on jurisdiction in Section 15Y and Section 20A of the SEBI Act. He also places reliance on a Bombay High Court judgment in support of this proposition. With great respect, it is submitted that none of these reasons are strong enough to support Mr. Parekh’s conclusion.

Section 15Y says:

“No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.”

The key phrases here are, (a) “no court shall have jurisdiction” (b) “to entertain any suit or proceeding” (c) “in respect of any matter which an adjudicating officer appointed under this Act… is empowered by or under this Act to determine.” The issue turns on the scope of (c) above. Are tort claims within the scope of “any matter” which an adjudicating officer or SAT is entitled to determine? In my submission, no. The adjudicating officer is entitled to examine violations of the Act; he has no powers to determine any tortuous liability whatsoever. The same facts which give rise to a statutory violation may very well also constitute a tort claim – this does not mean that the adjudicating officer has jurisdiction to hear and decide the tort claim as well as the statutory violation.

To get over this reasoning, Mr. Parekh relies on the judgment of the Bombay High Court in Kesha Appliances v. Royal Holdings Services Ltd. He relies specifically on this sentence: “The contention of the learned counsel for the plaintiff that there was a pre-existing common law right under section 9 of the CPC and that pre-existing common law right is not taken away by the provisions of sections 15Y and 20A also cannot be accepted.” In Kesha, however, the right in question was a right of rectification. The very next sentence in the judgment says, “It is because the common law right of rectification which is sought to be enforced and exercised by the plaintiff in the present case arises out of the right conferred on the basis of Take Over Regulations and once the provisions of the Take Over Regulations are invoked then the entire jurisdiction by virtue of the provisions of Section 15Y and 20A is exclusively conferred on the SEBI authorities.” 

The right to maintain an action in deceit or in negligence does not arise out of any provision in the SEBI Act. In Kesha Appliances, the case of the plaintiff was that certain preference share allotments to one defendant by another defendant were violative of Regulation 12 of the Takeover Regulations and hence illegal. Accordingly, the plaintiff sought for rectification. Thus, the actual right which the plaintiff was exercising was a right arising out of statute/regulation – in other words, the statutory violation was an essential basis for challenging the allotment and seeking for rectification. 

The case with a tort situation is in my submission completely different. The Kesha judgment itself clarifies, “Though it is not necessary still I feel it is important to clarify that when the rectification of the share register is dehors the provisions of the Takeover Regulations or any other provisions of the SEBI Act and rules and regulations made thereunder then the court would certainly have jurisdiction to entertain and try such a suit under Section 9 of the CPC. It is because what is barred under section 15Y and 20A is only those acts which falls either under the said Act or under the regulations framed thereunder.” The reason why in Kesha it was ultimately held that there is a bar on jurisdiction is this: “the entire suit is based on the sole ground of violation and/or breach of the Take Over Regulation and no other ground has been invoked for rectification of the Share Register.”

In one of the footnotes to his statement, Mr. Parekh also relies on the decision of the Delhi High Court in M.R. Goyal v. Usha International. In that decision, too, it was found that “on the basis of the averments made in the plaint and the contents of the application, it is apparent that the main thrust of the case of the plaintiffs is that the impugned notice issued by defendant No. 1 is in violation of the guidelines issued by the Sebi Act and the rules and regulations framed thereunder.”

In my view, these decisions are clearly distinguishable from a case where the cause of action is not a statutory/regulatory violation but a tort. If at all, clarificatory observations in Kesha support the proposition that a tort claim can be decided in civil courts notwithstanding the SEBI Act bar on jurisdiction.

Mr. Parekh then highlights the fact that any penalties collected by SEBI would go to the SEBI and not to shareholders of Satyam. This is eminently logical if the shareholders are entitled to a remedy in tort. Thus, the fact that penalties would go to the SEBI would – if at all relevant – tend to support the argument that civil claims are not barred.

It is submitted that, with great respect, a legally untenable result will be reached if one says that the SEBI Act bars a suit in tort in the circumstances. 

The Red Jaguar: Apparent Authority and Tortious Liability

Ironically, many significant propositions in private law have been advanced in the course of a court’s attempt to unravel a transaction or scheme engineered by a rogue with considerable ingenuity – so much so that judges not infrequently ask the question “which of two innocent parties should bear the loss caused by a rogue” (See, for example, Re Jones [1926] All ER Rep 36). The immediate context for this observation is the decision of the Court of Appeal on 16 December, 2010, in Quinn v CC Automobile – where yet another rogue left one of two innocent parties to bear a loss of some £11,000.

In Quinn, a Mr and Mrs Quinn, who had a Silver Jaguar through a hire-purchase agreement with Black Horse Ltd., approached Car Craft, an automobile dealer, with the intention of purchasing a Red Jaguar in time for their daughter’s wedding, scheduled for 22 July, 2005. There they had the misfortune to meet a Mr. Khan, at the time employed by Car Craft as a car salesman, from whom they agreed to purchase a Blue Jaguar for £7500 plus the Silver Jaguar, with Car Craft to clear their remaining obligations under the hire purchase agreement with Black Horse. The next day, Mr. Khan told the Quinns that he had found a Red Jaguar after all, and, ten days later, met them at a service station on a motorway to cancel the Blue Jaguar agreement. At this meeting, it was agreed that the Red Jaguar would be sold on the same terms - £7500 plus Silver Jaguar plus hire purchase obligations – and the judge found at first instance that the Quinns did not subjectively find it odd or unusual to meet Car Craft’s agent at a service station or to conclude an agreement in this manner. On 20 July, two days before the wedding, Mr. Khan demanded an extra £700 to deliver the car, but settled for £400 when he was told that this was all the Quinns could afford, delivered the car and took possession of the Silver Jaguar. Mr. Quinn, happy with the transaction, was aghast when he subsequently received a letter from Black Horse informing him that the dues under the hire-purchase agreement had not been paid, and investigation revealed that Mr. Khan had sold the Silver Jaguar to an innocent third party, and had failed to clear the dues with Black Horse. It also transpired that the Red Jaguar never belonged to Car Craft. Mr. Quinn brought an action against Car Craft contending that it was vicariously liable for the tort of deceit committed by its agent.

Before considering the result in the case, it is useful to briefly describe certain basic propositions in the law of agency. It is well known that a principal is bound to a third party for the acts of an agent within either his actual or apparent authority. However, actual authority not only refers to the obvious case where a principal specifically authorises an agent to perform the act in question, but also to “implied actual authority”. The third party is said to be a stranger to actual authority, which is a relationship between the principal and the agent, and it follows that his knowledge or lack thereof is irrelevant. It is therefore important to distinguish implied actual authority from apparent authority, because apparent authority is a relationship to which the agent is a stranger, arising as it does on principles analogous to estoppel. Apparent authority prevents a principal from setting up the agent’s lack of actual authority because of his representation to the third party to the contrary. The representation may be specific, either by word or conduct or a state of dealing (“genuine apparent authority”) or general, where the apparent authority is said to arise from the position in which the principal has placed the agent. It follows that the third party cannot rely on apparent authority when he is aware of lack of actual authority. In all these cases, the principal is liable directly, not vicariously. This description is essentially a summary of the masterly analysis of the subject in Bowstead and Reynolds on the Law of Agency, especially Chapter 3, Section 1 and Chapter 8, Section 1.

In cases like Quinn, there are two additional complications – the principal is a company with limited legal power, and the claimant seeks to hold the principal vicariously liable in tort, not directly liable in contract. The reason the first of these matters is that it is possible for the company to resort to the doctrine of constructive notice to defeat a claim of apparent authority, subject to the doctrine of indoor management. While this difficulty did not arise on the facts of Quinn (it was found that Mr. Khan undoubtedly had apparent authority to sell the Red Jaguar and that there was no constructive notice), it is often a contentious point. A more detailed analysis is available in Mihir’s article, ‘The Law of Agency as Applied in Company Transactions’ 3 ECFR 280 (2008).

The second point – that liability is tortious – proved to be a source of controversy. The traditional approach to this question was to say that the principal/master is liable for tortious acts committed by the agent/servant in the course of his employment, which was understood to cover any wrongful act actually authorised, and any authorised act committed in a wrongful manner. In Lister v Hesley Hall, the House of Lords formulated a wider test, holding that the principal is liable for a tortious act when that is fair and just on the basis of the “close connection” between the act and the employment. However, Lister was not a case of deceit, and the House had held in Armagas v Mundogas that a principal is liable in such cases only if the representation is itself within apparent authority. The rationale is said to be that the torts of misrepresentation, deceit, and negligence (in statements) necessarily involve an element of reliance by the third party, which cannot reasonably arise when the representation is not apparently authorised (Bowstead and Reynolds, Chapter 8, Section 3).

In Quinn, the question for the Court was to identify the proper doctrine of authority that applies in defining “course of employment” for deceit purposes. The judge at first instance had held that although the Quinns subjectively believed that Mr. Khan was authorised to sell the Red Jaguar, they were “put on enquiry” by his sudden demand of an extra £700 and his unexplained willingness to accept a lower sum. The Court of Appeal (Gross LJ), after referring to Armagas and Lister, rejected this finding, in a crucial passage:

To my mind, an analysis founded on reliance and belief leaves little room for any consideration of whether the third party was “put on enquiry”. If there is proper scope for such consideration, it would seem to arise as an aspect of whether the third party turned a “blind eye” to his suspicions as to the employee’s apparent authority; possibly too, there could be debate as to whether the third party was put on enquiry if the employee was acting outside of the usual authority of a person holding the position he holds: see Bowstead and Reynolds on Agency (19^th ed.), at paras. 8-054 – 8-055. But on no view can it be said that the third party is put on enquiry because of mere unreasonableness in failing to see through the employee’s deceit; a fortiori, if the transaction is within the class of acts that an employee in the position of the rogue is usually authorised to do [emphasis mine].

Although Court did not resolve the controversy over the scope of Lister in relation to deceit, the clarification that a third party cannot (save the “blind eye” case) be “put on enquiry” when the agent acts within his apparent authority is an important one, with potential ramifications for some areas of company law as well.