Knowledge is Key: Accessory Liability for a Strict Liability Offence Clarified
The UK Supreme Court earlier this year clarified that liability as an accessory for a strict liability tort does not automatically follow, and instead proof of knowledge of, or the turning of a blind eye to, the essential facts which make the act wrongful is required. The court also addressed the purpose and extent of an account of profits as an equitable remedy.
Though UKSC judgments are not binding on Cayman Courts they are highly persuasive, and this decision, now being the leading case on the attribution of accessory liability to directors for company wrongs, carries significant implications for Cayman-based directors and other company employees who could be subject to accessory liability. This article considers the ruling of the UKSC and then looks at the key takeaways from a Cayman perspective, particularly for Cayman office holders.
Background and key issues
In the recent UKSC judgment, Lifestyle Equities CV and anor v Ahmed and anor [2024] UKSC 17, Lifestyle Equities CV (“Lifestyle”), being two companies holding trademark rights, pursued legal action against (1) various family-owned companies alleging trademark infringement for using a similar design to Lifestyle’s trademarked designs on items of clothing, and (2) directors of the family-owned companies, Mr. Ahmed and Ms. Ahmed (the “Directors“), arguing that they were jointly liable with the family-owned companies.
At first instance, the Directors were found to be liable for the family-owned companies’ trademark infringements (under the Trade Marks Act 1994 (the “Act”)), on the grounds that, inter alia, they had procured the infringement of the trade marks. The Judge made no findings regarding knowledge, however, on the Judge’s view of the law, the absence of knowledge did not affect their liability. Further, the first instance Court found that the Directors were liable to account to Lifestyle for profits that they had personally made from the infringements in relation to only one of the family-owned companies, Hornby Street Ltd (Hornby Street), though they were not held liable to account for profits made by Hornby Street. The Judge found that the profits for which they were accountable comprised 10% of their salaries during the relevant period and a loan made by the company to one of the directors. On appeal, the Court of Appeal upheld the decision of the lower Court.
The Directors appealed to the Supreme Court and the following were the key issues on the appeal:
- Strict liability vs. knowledge requirement: Whether the Directors’ liability was strict, aligning with the strict liability imposed by the Act on Hornby Street, or whether it was necessary to prove that the Directors had knowledge of the essential facts making the acts wrongful.
- Personal liability for profits: Whether the Directors could be personally liable for account for profits derived from the infringements, in particular, whether the profits that they were ordered to account for by the lower courts were justifiable.
UKSC decision
The UKSC unanimously allowed the appeal of the Directors, finding that:
- Accessory liability required knowledge: It was held that for the Directors to be held liable as accessories to Hornby Street committing a tort of strict liability, it must be shown that they had knowledge of the essential facts that made the acts wrongful or that they had turned a blind eye to the facts. This applies irrespective of whether the primary tort (in this case, trademark infringement) is a tort of strict liability or whether the accessory liability arises from procuring a tort or on participation of a common design. Given that the Directors did not have the relevant knowledge for accessory liability, they could not be held liable for Hornby Street’s trademark infringements.
- Directors and accessory liability: The UKSC also held that there was no principle of English law (whether of company law, the law of agency or the law of tort) which exempted directors or employees from accessory liability.
- Account of profits: Despite the UKSC finding that the Directors were not liable as accessories, the account of profits issue was still considered. It was held that the purpose of an account of profits (at least in the case of infringement of intellectual property rights) was neither designed to punish nor to deter the infringer but to enable the owner to enjoy the fruits of its exploitation. The infringer was treated for this purpose as if they had conducted the infringing business on behalf of the claimant and the intention was to put the infringer back in the same position they would have been in had the infringement not taken place. Accordingly, an account of profits would only be ordered in respect of profits which the infringers had themselves made and where, as here, the primary infringer was the company, the accessory liability of the directors (should they be found liable) was limited to profits which they themselves had made rather than the entirety of the company’s profits arising from the infringement. In the current case neither the remuneration or the loan (which had formed the basis of the account in the courts below) would have been recoverable on an account.
- Employee indemnity: An innocent employee who commits a tort of strict liability as a result of obeying an order given on behalf of the employer, is entitled to an indemnity from the employer which arises as an implied term of the employment contract.
Key takeaways for Cayman entities
Given that UKSC rulings hold persuasive authority in the Cayman Islands, this decision carries significant implications for Cayman-based directors and other company employees who could be subject to accessory liability. Here are the key takeaways:
- Protection for directors: While the UKSC found that there was no exemption from accessory liability of a director, this ruling nonetheless limits potential liability. Thus, directors who either do not have direct knowledge of the facts or who do not turn a blind eye to such facts of the infringing activities of companies will not find themselves liable. It is, however, important to remember that directors are under a duty to familiarise themselves with the company’s business,[1] and failure to do so may amount to liability on the basis that they turned a blind eye to the facts which can found accessory liability.
- Limited scope of personal liability: Directors’ liability is limited to the profits they have personally accrued from the infringing activities. This limitation protects directors from being unduly penalised for profits earned by the company as a whole, provided they did not directly benefit.
- Corporate Governance: Proper corporate governance practices can help directors distance themselves from potential infringing activities. This practice can be pivotal in defending against claims of personal liability, as well as ensuring that a director’s duty to familiarise themselves with the company’s business is discharged.
- Implications for Insolvent Companies: The ruling indicates that if an insolvent company is held to be liable for an infringement, it will not be worth pursuing directors unless it can be established that they had the required knowledge and state of mind. This aspect is particularly relevant for risk management and contingency planning in financially distressed companies.
[1] Re Barings PLC, Secretary of State for Trade and Industry v Baker (No 5) [1999] 1 BCLC 433, followed in this jurisdiction in Weavering Macro Fixed Income Fund Limited (in liquidation) v Stefan Peterson and Hans Ekstrom [2011] 2 CILR 203.
