We are, of course, used to the idea that directors can be personally liable for wrongful acts committed in the course of performing their duties, and that in some cases they can be liable as accessories for procuring a company to act unlawfully. But what if the wrongful act in question is one of strict liability – that is, one that does not require a finding of fault? Is a director, or senior employee, who caused the company to commit such an act automatically liable, even if he or she is not aware of the facts that make it wrongful? That was one of the questions that the Supreme Court had to answer in the case of Lifestyle Equities and Another v. Ahmed & Another [2024] UKSC 17.
The facts
The case concerned a brother and a sister – the Ahmeds – who were directors of a clothing retail company, Hornby Street Limited ("the Company"). The Company used logos showing the words 'SANTA MONICA POLO CLUB' and pictures of polo players on horseback that were similar to those used by the Lifestyle companies ("Lifestyle"), who sued for trademark infringement.
Trademark infringement is a strict liability tort. It is committed simply by using a sign that is identical or similar to that which is trademarked; there is no need to show that the defendant knew of the existence of the trademark. One of the remedies that the Court can award is an account of profits, where the defendant pays over any profit it has made as a result of the infringement to the claimant.
At first instance, the trial judge found that Lifestyle's trademark had been infringed. The Ahmeds were found to be jointly liable with the Company, on the basis that they had procured the infringements and were therefore liable as accessories. Crucially, the judge did not find that the Ahmeds had known – or even ought to have known – that there was any likelihood of infringing Lifestyle's trademark, but concluded that this did not affect their liability.
The Company became insolvent and was liquidated. Accordingly, Lifestyle pursued the Ahmeds personally for an account of the profits both they and the Company had made from the infringements.
Directors' liability for a strict liability tort
In answering the question of whether an accessory's liability for a strict liability tort is itself strict – or whether proof of knowledge (or any other kind of mental state) was needed – the Supreme Court, looking beyond the narrow issue of directors' liability, found that an accessory's mental state did not need to mirror that of the primary wrongdoer.
In support of this, the Supreme Court gave examples from other areas of law where the accessory and the primary wrongdoer may have different states of mind. One of these was a solicitor who persuades a trustee to commit an act which the solicitor knows to be a breach of trust, but the trustee honestly (but wrongly) believes to be permissible: in that situation, the solicitor does not escape liability as an accessory simply because the trustee (as primary tortfeasor) is innocent.
Accordingly, the Supreme Court concluded that a person who causes another person to commit a strict liability wrongful act will only be jointly liable as an accessory if he or she has knowledge of the essential facts which make it wrongful. In this case, since the Ahmeds were not found to have known of the existence of the trademarks in question, they could not be jointly liable for the Company's infringements.
The Supreme Court did, however, find against the Ahmeds in one respect. They attempted to argue that directors who act with reasonable care and in good faith cannot be held jointly liable with the company for infringements because their acts are treated in law as being the company's acts. This argument was rejected because the fact that the company is regarded as a separate person does not extinguish its directors' liability, just as the fact that an employer can be vicariously liable for its employees does not free employees from liability.
Directors' liability to account for profits
The other principal question for the Supreme Court to consider was whether, if the directors had been liable, they could have been ordered to pay over the profits wrongfully made by the Company, even where they had not personally received them. The Supreme Court's answer to this was no: the directors could only have been liable for any profits they made themselves, not those received by the Company, as that would amount to a penalty. The remedy of an account of profits is not intended to be punitive; rather, its purpose is to put the owner of the trademark back in the position that it would have been, had the trademark not been infringed.
Commentary
There has been some criticism of the Supreme Court's judgment, on the basis that it can act as a "get out of jail free" card for directors and leave victims of trademark infringement (or any other relevant wrongful act) without any legal remedy in circumstances where the company does not have sufficient assets to meet a claim, or has been liquidated.
Certainly, from now on, a claimant who pursues directors personally for procuring the Company to commit a strict liability wrongful act will have the additional hurdle of having to prove that they knew – or ought to have known – about the essential facts that make the act wrongful. Such a claimant will also only be able to claim for profits received by the directors personally, thereby significantly limiting the potential recovery.
