Hiding your Guilt behind a Fig Leaf?

Within the last week the Supreme Court has considered a Scottish case relating to the contents of Section 1 (1) of the Employers Liability (Compulsory Insurance) Act 1969. That provision applies to all employers carrying on any business in Great Britain who are required under the Act to insure and maintain insurance under one or more approved policies with an authorised insurer or insurers against liability for bodily injury or disease sustained by employees arising out the course of their employment in Great Britain.

The facts of the Scottish case are simple, but may be astonishing to many.

The employee, Mr Campbell, was employed by a company whose sole director was a Mr Gordon. Mr Campbell was employed as an apprentice joiner. Although the company had employers’ liability insurance the policy excluded claims arising from the use of “woodworking machinery” powered by electricity! Amazing, but true!

The insurance policy therefore did not cover the circumstances of a claim arising out of an accident at work involving Mr Campbell, as he had injured himself with an electric circular saw. The company’s failure to have in place appropriate insurance was a breach of the 1969 Act.

Unfortunately for Mr Campbell the company who employed him went into liquidation and Mr Campbell then directed his attention to Mr Gordon the former sole director on the basis that he ought to be liable in damages to Mr Campbell for the company’s failure to provide adequate insurance cover.

The only question the Supreme Court needed to consider was whether civil liability attached to the director Mr Gordon for that failure.

Three law lords out of five found in favour of the director Mr Gordon. Why you may ask did he escape liability when there was a clear breach of the 1969 Act?

Lord Carnwath stated in his judgment, supported by two other law lords that the 1969 act did not impose any duty to insure on a director or other officer as such let alone any civil liability for failure to do so. The company, which itself is a legal entity, has that duty not the directors. The directors are protected by the so called “veil of incorporation” which Lord Carnwath stated could only be pierced in limited circumstances and those circumstances did not apply here.

Lord Toulson and Lady Hale both disagreed.

Lord Toulson cited a dissenting judgment by Sir John Megaw in a 1995 case where a similar point was considered. Essentially Sir John Megaw had taken the view that he had found it difficult to believe that the parliamentary draftsman would have intended to make provision that there should be no civil right or remedy when drafting the 1969 Act especially where there was provision for regarding an act of omission to be unlawful and to indicate that such an act or omission would give rise to some criminal penalty. To put it another way if it was a criminal offence not to have appropriate insurance in place then how could a guilty party argue that no civil liability should arise from the same set of circumstances?

Lady Hale also made it clear that she thought it was “absolutely plain that parliament did intend there to be such civil liability” in the circumstances of a breach of the 1969 Act. She pointed out that under the Act there is a very specific duty imposed upon employers and that duty is also imposed upon specified officers where, as here, the employer is a limited company

Lady Hale pointed out that the purpose of the 1969 Act was to protect a very specific class of people, namely employees who might be injured by the employers’ breach of duty (whether arising by statute or common law). The aim being, of course, that such a class of people should be compensated for their injuries and she added: “failure to insure means that the employee is denied the very thing that the legislation is intended to provide for him”.

So one could argue that the majority of the Supreme Court reached the wrong conclusion by essentially allowing the “corporate veil” to act as a “fig leaf” for Mr Gordon’s guilt in not obtaining appropriate insurance to protect his employees.

Alternatively, in contrast one could state that the whole purpose of incorporation is to avoid directors facing personal liability for the defaults of the company. Hence, you may conclude that the Supreme Court got the decision right.

It might be an idea, however, to suggest that employees check their employers’ insurance to see whether it is adequate or not – or is this going too far?

Share

Jane Crosby

Partner, Dispute Resolution

Jane specialises in commercial litigation and employment law acting for both employers and employees in both contentious and non-contentious matters. She has also over recent...

Partner, Dispute Resolution

Jane Crosby

Jane specialises in commercial litigation and employment law acting for both employers and employees in both contentious and non-contentious matters. She has also over recent years carved out something of a niche in the field of mobile homes legislation acting for an owner with a number of sites.

Having studied geography at University College London Jane worked for a number of years in the aviation industry which has given her a real insight into the challenges faced by most businesses. Jane qualified as a Solicitor in 2004 before joining Hart Brown in 2011 and becoming a Partner in July 2018. Not only is Jane our specialist in employment law but she is also a prolific blogger within Hart Brown. You can find many of her articles on the 'News' section of the website.

Jane often receives praise from her clients:

“I appreciated the clarity of advice given at a stressful time”.

“A sensitive and highly professional approach and efficient work in the interests of the client”.

“Your advice, conduct and assistance have been indeed outstanding and very professional but also – and most importantly – very humane”.