Dis-Attribution Fallacy and Directors’ Tort Liabilities

The issue of personal liability of directors in tort when acting for or on behalf of companies has arisen on a number of occasions before the courts in the UK and other common law jurisdictions in recent decades. The courts have often regarded the separate entity doctrine as imposing a bar or restriction on personal liability of directors, notwithstanding the directors’ own involvement in the tort. UK courts have now provided welcome clarity in emphasising that directors can be personally liable in the same manner as other agents when acting for a company. However, Australian courts still largely adopt a restrictive approach to director liability. I analyse and critique the Australian approach in a recent article, “Dis-Attribution Fallacy and Directors’ Tort Liabilities”.

Under the UK approach as set out in cases such as Standard Chartered Bank v Pakistan International Shipping Corp [No 2] [2003] 1 AC 959 and MCA Records Inc v Charly Records Ltd [2003] 1 BCLC 93, directors can be personally liable if they have themselves committed the tortious acts or are involved in the commission of a tort so as to be liable pursuant to ordinary principles of joint tortfeasance.

Australian courts have explicitly rejected that approach and, instead, apply special tests on directors’ liabilities. Following the decision of the Western Australian Court of Appeal in Keller v LED Technologies Pty Ltd (2010) 268 ALR 613, the favoured test of liability in Australia is to assess whether the director has engaged in acts such that the director can be regarded as having “made the tort his/her own”. The Australian approach is based on the premise that where a director’s tortious conduct is attributed to the company, there is also a necessary dis-attribution of that conduct from the director such that prima facie the director is not personally liable in tort for that conduct. It is widely thought that the above is required by the separate entity principle in company law.

However, I argue that it is fallacious to assume that dis-attribution must follow from the separate entity principle in the context of tort liabilities. I call this the “dis-attribution fallacy”. As is now accepted by the UK Supreme Court, whether to attribute directors’ conduct to a company depends on the context and the purpose of attribution (Bilta (UK) Ltd (in liq) v Nazir [No 2] [2015] 2 WLR 1168). Equally, whether there should be dis-attribution of conduct from a director should also depend on the context of the particular legal rule in question. Dis-attribution is appropriate in, for example, the context of identifying the parties to a contract entered into by directors for or on behalf of a company. But neither principle nor policy requires dis-attribution to absolve a director from liability in tort for his or her own tortious conduct.

Application of the special tests for liability such as the “make the tort their own” test effectively means that directors can often escape liability despite their commission of, or participation in, a tort. This gives rise to serious problems of accountability for wrongdoing in the corporate context. This is a problem both from the perspective of the corrective justice (or interactive justice) objectives of tort law and also from the perspective of economic efficiency (as immunity from liability exacerbates the problem of externalisation of risk).

Once it is recognised that there is no necessary dis-attribution of tortious conduct of a director, there is no doctrinal difficulty in holding a director personally liable for his or her own tortious conduct. Imposing personal liability on the director in this context does not conflict with the separate entity doctrine, properly understood. An approach to director liability that requires directors to bear legal responsibility for their own tortious acts or omissions better meets the policy objectives of the law and helps ensure accountability for wrongdoing. 

Stefan H.C. Lo is a Deputy Principal Government Counsel (Ag) at the Department of Justice, Hong Kong.