Formality over functionality: an appeal based on inadequate employee liability dismissed by Supreme Court’

By a majority of 3:2, the Supreme Court has today upheld the majority decision of the Inner House in a case brought under sections 1 and 5 of the Employers’ Liability (Compulsory Insurance) Act 1969 (“the Act”).

The Inner House had previously dismissed the appeal of an injured worker who was seeking damages against a director after claiming his employer at the time (a company) failed in its duty to provide comprehensive insurance for employees. Fiona Pask, commercial litigation partner at Harper Macleod LLP acted for the successful respondent with Roddy Dunlop QC and Richard Pugh instructed respectively as senior and junior counsel. Andrew Smith QC and Craig Murray, instructed by Lefevre Litigation, acted for the appellant.

The appellant, Mr Campbell, had injured himself in 2006 whilst using a circular saw during his employment as an apprentice joiner. At this time, Mr Gordon was the sole director of the company who employed the appellant. Whilst the employer had in place employees’ liability insurance, the insurance policy excluded claims arising from electrical woodworking machinery, which was the very cause of the appellant’s injury. The company’s failure to have adequate insurance in place against workplace accidents was a breach of its obligation under section 1(1) of the Act.

Section 5 provides that it is a criminal offence, on the part of the employer, if the employer has failed to carry adequate insurance. The section goes on to provide certain circumstances in which the corporate veil can be pierced, resulting in directors and officers also being guilty of the same criminal offence and be punished accordingly.

The appeal rested on the sole issue of whether civil, as well as criminal, liability could also attach to Mr Gordon, as company director, for the company’s failure to provide adequate insurance under section 1(1). The judgements provided by the Supreme Court concentrated on the interpretation and modern application of sections 1 and 5 of the Act.

The majority judgement provided by Lord Carnwath, with whom Lord Mance and Lord Reed agreed, held that section 5 - “the heart of the appeal” - failed to impose any civil liability on a director or officer for actions undertaken by the corporate employer.

They accepted that sections 1 and 5 of the Act were indeed in place for the benefit of employees, as opposed to employers, but that was “not enough” for the appellant. The majority founded upon the fact that section 5 did not impose any duty to insure, directly on the director or other company officer because the duty under section 1(1) rested with the corporate employer:

“Parliament has recognised that a director or officer may bear some responsibility for the failure to insure, but had dealt with it, not by imposing direct responsibility equivalent to that of the company, but by a special and closely defined criminal penalty, itself linked to the criminal liability of the company.”

His Lordship returned to this intention of Parliament in holding that no definitive wording of the Act, or any caselaw mentioned thereafter, persuaded him that an individual could have civil liability indirectly transferred to him for the negligent actions of another legal entity, which in this case, was the corporate employer.

The approving majority stressed that the appeal did not centre on questions of ‘fairness’, but rather the formal contextual interpretation of the Act. The precise wording of the Act, instead of the potential for implied objectives held by the dissenting minority, is what the majority in this appeal rallied around. Additionally they gleaned support from the particular phraseology of section 5, imposing criminal liability on directors and other officers of the company, having a long history within Parliamentary legislation without any apparent corresponding attachment of civil liability.

Conversely the two dissenting judgements, written by Lord Toulson and Lady Hale, were in agreement that the appeal should be allowed.

Lord Toulson felt that the Act, whether viewed formally or functionally, held Mr Gordon liable to the appellant. In his role as sole director, he failed in his statutory duty under section 1 to ‘insure, and maintain insurance’ for employees. In considering the caselaw referred to during the Appeal, his Lordship was not persuaded that there was any reason as to why the appellant could not seek redress under the Act.

Lady Hale, in broad agreement with the argument of Lord Toulson, also felt that if an employer or corporate body failed in their statutory duty under sections 1 and 5, to provide adequate insurance, then their injured employees have every right to seek redress under the Act. If that were not to be the case, as the majority held, then this leaves the very class of people the Act seeks to protect without that protection. The crux of the dissenting argument is that if a sole director was, or is, in breach of his duty to adequately insure his employees, then he is liable for that breach and any injuries arising from it.

The minority held that the majority’s rigid interpretation of sections 1 and 5 of the Act actually went some way to remove from employees the very protections the Act was meant to provide. They felt the onus taken by the majority on formality, as opposed to functionality in the working world, was incorrect.