Scope of accessory liability for torts and of requirement to account for profits
The Supreme Court has ruled, in a judgment handed down in May 2024, in the case of Lifestyle Equities CV and another v Ahmed and another, that two company directors were not personally liable for the infringement of a third party’s trade mark, in circumstances where they were not aware of the essential facts that made the companies’ use of the Claimant’s trade mark wrongful. The case also confirms that a defendant director who is ordered to account for profits that they have received through their wrongdoing can only be ordered to account for profits which they have personally received.
The context of the case was that two companies had been sued for trade mark infringement and passing off by the Claimant, Lifestyle. The companies were insolvent and therefore Lifestyle turned its focus onto the directors themselves, asserting that they were jointly liable for the infringements because they had authorised or procured the companies to commit the infringements or had engaged in a common design, either with each other, or with the companies, to commit the infringements.
There is no general principle of English law which exempts directors, agents or employees from the ordinary principles of tort liability: the same principles govern their liabilities (whether as primary wrongdoers or as accessories) as apply to anyone else.
Thus, an employee who commits a tort in the course of his employment and his employer are jointly responsible. Likewise, a company director and the company itself may be regarded as joint tortfeasors where the director is sufficiently bound up in the company’s acts to make him personally liable. This will certainly occur where the wrongful acts complained of arise from a director’s participation in a manner that goes beyond the mere exercise of his power of control through the normal mechanisms of the company. Conversely, a director will not be treated as being liable with the company as a joint tortfeasor if he does no more than carry out the duties entrusted to him as such by the company under its constitution – i.e by voting at board meetings.
The trial judge found that the companies were liable for trade mark infringement and that the directors were jointly and severally liable on the grounds of procuring the infringement and had engaged in a common design. He made no finding that the directors either knew or ought to have known that there was a likelihood of infringement but since the infringements attracted strict liability under the Trade Marks Act 1994, this was deemed to be irrelevant. He also found that the directors were liable to account to Lifestyle for profits but only for profits that they had made personally, as opposed to profits made by the companies. He decided that 10% of their salaries plus a large loan made by one of the companies to one of the directors equated to profits made by them personally.
There is no general principle of English law which exempts directors, agents or employees from the ordinary principles of tort liability. They can be found to be personally liable. The same principles govern their liabilities (whether as primary tortfeasors or as accessories to the company’s misdeeds) as apply to anyone else. Thus, the agent who commits a tort on behalf of his principal and the principal himself are joint tortfeasors; so are the employee who commits a tort in the course of his employment and his employer..… Finally, a company director and the company itself may be regarded as joint tortfeasors where the director ‘is sufficiently bound up in [the company’s] acts’ to make him personally liable. This will certainly occur where the wrongful acts complained of arise from a director’s participation in a manner that goes beyond the mere exercise of his power of control through the constitutional organs of the company. … A director will not be treated as liable with the company as a joint tortfeasor if he does no more than carry out his constitutional role in the governance of the company – that is to say, by voting at board meetings. Nor will it be right to hold a controlling shareholder liable as a joint tortfeasor if he does no more than exercise his power of control through the constitutional organs of the company – for example by voting at general meetings and by exercising the powers to appoint directors. But there is no reason why a person who happens to be a director or controlling shareholder of a company should not be liable with the company as a joint tortfeasor if he is not exercising control though the constitutional organs of the company and the circumstances are such that he would be so liable if he were not a director or controlling shareholder. In other words, if, in relation to the wrongful acts which are the subject of complaint, the liability of the individual as a joint tortfeasor with the company arises from his participation or involvement in ways which go beyond the exercise of constitutional control, then there is no reason why the individual should escape liability just because he could have procured those same acts through the exercise of constitutional control.The courts will, in appropriate cases, apply equitable principles to allow a victim to claim an account of profits achieved by the wrongdoer. At trial, the judge found the companies liable for infringing Lifestyle’s trademarks and passing off. He found that the directors were jointly and severally liable with them for the infringement on the grounds of procurement and common design, but made no finding that the directors knew or ought to have known that there was a likelihood of infringement. This was because there was strict liability for trade mark infringement and therefore knowledge or intention did not matter. Lifestyle argued that the directors were liable to account for the profits made by the companies. This was rejected by the trial judge who decided that the directors were only liable to account for profits received by them personally, which included a 10% proportion of their salaries and a large loan made by one of the companies to one of the directors.
Both sides appealed. The main issue for the Supreme Court was whether the directors’ liability – like that of the companies – was strict, or whether it was necessary for Lifestyle to show that the directors had sufficient knowledge of the wrongdoing in order to be found liable. As to their alleged joint liability as accessories, the directors did not dispute that their actions induced the companies to infringe the trade marks. However, they did dispute that they had acted wilfully or knowingly such as to justify holding them liable.
The Supreme Court concluded that in order for directors to be held jointly liable with a company, they must have knowledge of the essential facts which make the acts wrongful. That was the case whether or not the primary tort in question (i.e the trademark infringement) was a strict liability offence and whether or not the accessory liability arises from authorising / procuring a tort or by common design. Here the directors were not aware of the essential facts that made the use of that trade mark wrongful. It was not the case that just because strict liability was applicable to the primary wrongdoer, that also extended to any accessory. A person who causes another to do a wrongful act will only be jointly liable as an accessory for the wrong done if they have knowledge of the essential facts which make the act done wrongful. The burden of proof of the existence of the required knowledge sat with the claimants, not with the directors. Notably, strict liability-based infringement of the Trade Mark Act 1994 involved using an offending sign in certain ways but didn’t include authorising or procuring someone else to use an offending sign.
In this case, the Supreme Court noted that the trial judge had not made any finding that the directors knew of Lifestyle’s design until Lifestyle’s letter before action was sent to them; nor that they knew or even should have known that there was a likelihood of confusion between their design and that of Lifestyle itself. On that basis, the directors could not be found to have had the requisite knowledge of the essential facts which made the companies’ acts wrongful under the 1994 Act. Accordingly, the directors were not jointly liable for the infringements.
The Court went on to state that even if it had been the case that the directors were liable, the account of profits that they would have to give would be the profits which they had personally received. They could not be ordered to account for profits that the companies had made from the infringement, notwithstanding any “joint and several” liability for the infringement. To order a person to account for someone else’s profits would not be accounting for a profit, but paying a penalty or fine and that was not the purpose of the remedy.
The loan made by one of the companies to one of the defendants was not a profit. Further, their salaries were not profits, but ordinary remuneration at fair value. The Supreme Court made it clear that the fact that a director had a substantial interest in a company that knowingly received profits that might be “tainted” by the infringement does not make the fiduciary personally accountable for those profits. Any claimant would have to show that the profits passed from the company to the defendant personally (e.g as a dividend).
In this instance, even if the trial judge had been right on the question of liability, he had been wrong to treat any proportion of the salaries paid by the company to the directors, and the loan, as profits for which they were liable to account. As to the loan, the Court observed that a person does not make a profit just by borrowing money, unless perhaps it was an interest-free loan, or if it could be shown that the loan was really a disguised dividend. There was nothing to suggest that that was the case here. As to the salaries, the trial judge had accepted that they had been paid in respect of work done by the directors and there was no evidence to suggest that the payments had been in any way disproportionately high.
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.