Profiting from your own mistakes: Common law liability and working directors

Profiting from your own mistakes: Common law liability and working directors Author: Tim Wardell Special Counsel

Edwards Michael Lawyers Profiting from your own mistakes: Common law liability and working directors This paper deals with the issue of whether, and to what extent, a working director can recover damages for a breach of the employer s duty of care in circumstances where the relevant negligence was that of the working director, in the sense that the working director has designed and implemented a system of work which fails to take reasonable steps to avoid risk of injury and, if so, as to how the issue of contributory negligence is to be approached. At first blush, it would appear incongruous that a person could recover damages in respect of an injury arising out of their own negligence. As will be demonstrated, however, the High Court has determined that damages are recoverable in these circumstances, subject to deduction for contributory negligence. The issue has led the High Court to reverse one of its own decisions and the reasoning employed in doing so highlights both the magic of the corporate veil and, perhaps, the influence of the existence of insurance on judicial reasoning. The liability of a company to one of its working directors in negligence was first considered by the High Court in Nicol v Allyacht Spars Pty Limited (1987) HCA 68. In that case, the company had three directors, each of whom were employees and one of whom was the Plaintiff. One of the director s duties were mainly administrative in nature, one supervised fabrication in the company s workshop and the Plaintiff was, in effect, a labourer. The company was approached by a client to rectify a flagpole supplied by the company for advertising purposes and the Plaintiff and the director usually involved in workshop fabrication undertook to perform the task. Before attending the job, both directors had engaged in discussions at the workshop with other employees regarding how the job was to be undertaken. Ultimately, the Plaintiff undertook the work by climbing a ladder placed on a trestle table and fell as a result of the structure being unstable. Suffice it to say that the system of work employed to undertake the work was clearly unsafe and that both the Plaintiff and the other director agreed to the adoption of that system. It was found by the trial judge that in so doing neither was subordinate to the other. The trial judge dismissed the Plaintiff s claim on the basis that he had in effect been the author of his own injury and the Queensland Court of Appeal dismissed an appeal by the Plaintiff on much the same grounds. The majority of the High Court (Mason CJ, Toohey and Gaudron JJ) upheld the Plaintiff s appeal on the basis that his injuries were not caused solely by his own fault, in which event it was accepted that he could not succeed, but were caused partly by his own fault and partly by the fault of other employees, including the other director. It was therefore held that the employer was liable for the proportion of liability which could be attributed to employees other than the Plaintiff himself. The majority considered it appropriate to apportion liability 40% to the Plaintiff and 60% to the employer. Brennan J concurred with the majority and, in so doing, succinctly summarised the approach adopted by the majority: 2

In this case, the company s duty of care to its employees fell to be discharged by its executive directors of whom the Plaintiff was one. Can he recover for breach of the employer s duty? There have been cases in which an injured employee has failed to recover for breach of an employer s statutory duty where the employee was himself responsible for performing a duty. These are cases where the employee was solely responsible for the failure to perform the duty and was therefore the sole author of his own wrong as Pearson J said in Ginty v Belmont Building Supplies Limited (1959) 1 ALL. ER. 414 If there is some fault on the part of the employer which goes beyond or is independent of the wrongful act of the employee, and was a cause of the accident, the employer has some liability. The failure of the Plaintiff and the failure of the other executive directors to prescribe a safe system for reaching the horizontal arm of the flagpole together caused the Plaintiff s injuries. The Plaintiff was entitled to damages reduced according to his share in the responsibility for the injury. Brennan J agreed with the apportionment of 40% to the Plaintiff and 60% to the employer. Dawson J dissented from the majority view and rejected the proposition that the test of whether a working director could recover damages for breach of the employer s duty of care will depend upon whether that director was solely responsible for the cause of his injury or whether there was some further or additional negligence which could also be attributed to the employer through the actions of directors and employees other than the Plaintiff. In so concluding, Dawson J said: It does not seem to me that the duty of an employer and an employee in such regard can ever be co-extensive or co-terminous. The duty is that of the employer and even if the employee is entrusted with its performance it remains an independent obligation of the employer of a more comprehensive kind to ensure that reasonable care is taken. The personal or non-delegable nature of the duty precludes the imposition upon an employee of the same burden as is shouldered by the employer and even if in the failure to take steps to avoid the unnecessary risk of injury the employee is at fault, that fault will arise from the breach of a lesser duty than that of the employer or, perhaps more accurately, a duty of a different kind. Of course, there can be no recovery by an employee who has failed to take reasonable care of his own safety where the employer has discharged his obligation to provide proper equipment and a safe system of work. That however is a different situation. That is sufficient to dispose of any contention based upon the proposition that the Plaintiff was the sole cause of his own injuries. The defendant company could not equate its obligation to the Plaintiff as its employee with any duty imposed upon him as an employee to take reasonable care for his own safety. Dawson J further rejected the proposition that the Plaintiff s position as a director altered the position otherwise applicable to a worker who had caused, in whole or in part, his or her own injury. This was because the duty owed by directors was not a duty owed to themselves or other employees of the company but a duty owed to the company itself. Thus, his Honour considered that the acts of the Plaintiff were to be regarded as acts of the company by reason of the fact that the company was a legal entity distinct from its directors and employees. Applying this logic, his Honour did not consider that any deduction should be made for contributory negligence on the basis that the Plaintiff s contribution to devising an unsafe system of work was not his own act but the act of the company as a distinct legal entity. The liability of a company for negligence causing injury to an employed director was again considered by the High Court in Andar Transport Pty Limited v Brambles Limited (2004) HCA 28, in which the view of the majority in Nicol was overturned and the minority opinion of Dawson J adopted. 3

Edwards Michael Lawyers Profiting from your own mistakes: Common law liability and working directors The facts of the case involved a manifestation of the increasing trend for large companies to require its employees and/or contractors to become incorporated legal entities and involved a working director who was the only director of the company directly concerned with the actual work being undertaken and was, therefore, the sole devisor, implementer and supervisor of the system of work adopted. The Plaintiff had previously been employed by Brambles to undertake a linen delivery run but had, at the instigation of Brambles, formed a company by which he was employed and which in turn was contracted to Brambles to undertake laundry delivery services. The Plaintiff suffered injury when attempting to remove a trolley from his truck which became jammed. The Plaintiff sued Brambles, in effect for providing an unsafe system of work, the trolleys having been provided by that company and the system adopted by the Plaintiff having effectively been a continuation of the system in use when he was directly employed by Brambles. Brambles in turn crossclaimed against the company of which the Plaintiff was a director and by which he was employed, Andar, claiming indemnity under a contract which is not here relevant and, in the alternative, contribution based on an allegation that Andar was a joint tortfeasor on the basis that it had breached its duty of care to the Plaintiff as his employer and was therefore also liable to him. At first instance, the Plaintiff succeeded against Brambles but had his damages reduced by 35% by reason of contributory negligence and the claims for indemnity and contribution brought by Brambles were dismissed. Brambles failed in an appeal to the Victorian Court of Appeal against the judgment in favour of the Plaintiff but succeeded in an appeal against the dismissal of its crossclaim. Andar appealed to the High Court, arguing (so far as is relevant to this paper) that it had no liability to the Plaintiff as, so far as it was concerned, his own negligence was the sole cause of his injury. Andar s position was succinctly put by the majority in the High Court; Andar complains that it should not be made liable to (the Plaintiff), in his capacity as an employee, for a breach of duty committed by him in his capacity as a director. In so contending, Andar relied upon Nicol. The majority (Gleeson CJ, McHugh, Gummow, Hayne and Haydon JJ) began its consideration of this issue by confirming the non-delegable nature of the duty owed by an employer to an employee, which cannot be discharged by delegation to an employee unless the employee provides the reasonable care which the employer was under an obligation to bring to bear, and also that the duty is imposed upon all employers, however the business be formed or structured. Expressly accepting the reasoning of Dawson J in Nicol, the majority emphasised that an individual may act both as a director of a company and that company s employee without unduly affecting the company s legal capacity, meaning that the acts or omissions of an individual can be taken to be the acts of the company. Because the common law duty to take reasonable care for the safety of employees is imposed solely upon an employer, the acts of the working director relevant to the discharge or breach of that duty were the acts of the company itself, it having the legal capacity of an individual notwithstanding that the actions of a company must, of necessity be carried out by natural persons. Thus, the majority considered that: In this way, it is possible here to distinguish between the common law duties owed by Andar and those owed by (the Plaintiff) in his personal capacity as a director or employee. The common law duty to take reasonable care for the safety of employees is imposed directly upon Andar by virtue of its status as an employer. The duty is not imposed upon individual directors of a corporate employer. To seek, as Andar does, to derive some significance from the circumstance that the board of the company is limited to two directors and that one of those directors (the Plaintiff) ordinarily manages aspects of the delivery business is therefore to ignore the nature of the obligation relevantly imposed upon Andar by the common law. 4

The majority then proceeded to conclude that Andar, through the actions of its servant or agent, the Plaintiff, had breached the duty to provide a safe system of work, such duty resting solely upon it as a discrete legal entity and the Plaintiff s employer. Consequently, Andar was found to be liable to the Plaintiff in negligence and therefore susceptible to the claim for contribution brought by Brambles on the basis that it was a joint tortfeasor. Kirby J delivered a separate judgment in which he effectively adopted the view taken by the majority regarding the liability of the employer to the Plaintiff and, in so doing, emphasised that Andar was a corporate legal entity separate from the Plaintiff and which owed him the legal duties owed by an employer to an employee. Callinan J delivered a dissenting judgment in which he adopted a more practical approach: Let it be assumed that (the Plaintiff) had sued (Andar). It seems to me that had he done so he would have been bound to fail. No other person had any involvement in fact in the events which led to (his) injury. It follows that if the Appellant were negligent, its negligence was coextensive with, and in all respects the negligence also of the relevant executive director, here, (the Plaintiff). His negligence was (Andar s) negligence and visa versa. Why should the practical and legal result be any different when (the Plaintiff) was both the person entirely responsible for devising the method of carrying out the employing company s work and suffering injury in the course of doing so? Corporations can only think, decide and act by natural persons. If as Dawson J thought correct in Nicol, and as the Appellant here contended, the duty of an employer and employee can never be coterminous, in practice a corporate employer, obliged as it is to think and act by natural persons, would always be at risk, no matter how diligent it may have been, of being held not to have discharged its duty to its employees. I am unable to accept that there is some robotic unidentifiable agency remote from human agency for which a company may be held to be responsible. It is not, however, entirely clear whether the outcome considered to be correct by Callinan J was based upon the primary issue of the liability of the employer to the Plaintiff or was founded in the application of the doctrine of contributory negligence. Elsewhere in his judgment, Callinan J certainly acknowledged that Andar as a corporate entity owed its employees a duty of care and, when discussing the issue of contributory negligence, he said: For the reasons that I have given, (the Plaintiff s) contributory negligence should and would have been held to be complete and only contributory cause as between him and (Andar) of his injuries. Any action by him against the Appellant would therefore have failed. The High Court by majority remitted the matter to the Victorian Court of Appeal for consideration of the extent of the contribution to which Brambles was entitled but the majority made a number of comments concerning this issue. It is noted that the relevant Victorian legislation relating to contribution was similar to that applicable in New South Wales, namely that such contribution should be determined by reference to what is just and equitable. Andar submitted that it should not be required to make a contribution because the causative fault of the Plaintiff was precisely equivalent to the fault of Andar. The majority rejected this proposition on the basis that, for the reasons discussed above, the negligence of (the Plaintiff) and that of Andar are not to be equated. It followed that the apportionment of liability between the Plaintiff and Brambles in the court below was not determinative of the quantum of contribution, if any, recoverable by Brambles from Andar. Andar further submitted that as it had inherited the system of work from Brambles ordering a contribution by it would be to reward Brambles for its own negligence. This submission was also rejected on the basis that Andar possessed an independent personal obligation to take reasonable steps to ensure that a safe system of work was established and maintained for its employees. The majority did, however, consider that this issue may be relevant to the determination of the extent of contribution. 5

Edwards Michael Lawyers Profiting from your own mistakes: Common law liability and working directors It is significant to note that the High Court in Andar was not required to consider the deduction of 35% for contributory negligence made in the Plaintiff s proceedings against Brambles and therefore no express comment was made in relation to the view expressed by Dawson J in Nicol to the effect that in a claim between a working director and the company which employed him there could be no deduction for contributory negligence because the injured worker s contribution to the failure to devise and maintain a safe system of work was not his own act but the act of the company. The majority in the High Court did, however, accept and adopt the reasoning of Dawson J leading to that conclusion and there would therefore appear to be some doubt as to whether a deduction for contributory negligence remains available in these circumstances. That said, the somewhat unconvincing rationale expressed by the majority in Andar for rejecting Ginty and Nicol was that the displacement of the absolute defence of contributory negligence to a claim for breach of statutory duty and the revision of the concept of causation in March v Stramare (E & MH) Pty Limited (1991) HCA 12 meant that the law now acknowledged apportionment of damages between those at fault in accordance with the degree of their individual responsibility and that the replacement of the single, immediate or but for test of causation had been replaced by a more flexible approach to causation which acknowledged that a consequence can have multiple material causes justified the departure from the approach taken in Nicol. This rationale was unconvincing in that in Nicol it was accepted, and indeed fundamental to the reasoning, that the Plaintiff s injuries had been partly caused by his own actions and partly caused by the actions of other servants and agents of the employer. The position in relation to contributory negligence may, therefore, be regarded as uncertain and unsatisfactory. In a case where an injured working director was solely responsible for the system of work adopted and maintained it remains difficult to understand how the individual responsibility for the injury can be less than 100%. On the other hand, if one applies the logic of Dawson J as accepted in Andar and divorces the actions of the individual from the actions of the company through that individual, then it is difficult to see how the individual can have any individual responsibility when the relevant acts or omissions are in effect deemed to be the actions of the company. This approach appears consistent with a well established principle of the law of contributory negligence, namely that a worker will not be guilty of contributory negligence when performing his or her duties according to a practice or system of work that had the apparent or actual approval or acquiescence of the employer and was not acting contrary to any rule, instruction, advice or practice made, given or established by the employer; see, for example, Davies v Adelaide Chemical and Fertiliser Co. Limited (1946) HCA 47, McLean v Tedman & Anor (1984) HCA 60 and Ghunaim v Bart (2004) NSW CA 28. Thus, if acting as the employer, a working director fails to devise, implement and maintain a safe system of work, then that working director in his role as an employee is merely carrying out his work in an unsafe manner as prescribed or accepted by the employer and, in those circumstances, no deduction for contributory negligence would ordinarily be made. It is, therefore, considered arguable that a working director solely responsible for his own injury ought not be subject to any deduction for contributory negligence. Whichever approach be the correct one, however, there does not appear to be any logic to the making of an order for a partial deduction for contributory negligence as the acts and omissions of a working director are both the acts and omissions of that person as an individual and the acts or omissions of the employer. Thus, while the approach taken in Nicol may have justified a partial reduction for contributory negligence on the basis of attempting to separate the negligence of the working director from the additional negligence of the employer acting through its other servants and agents, the approach adopted in Andar would appear to preclude such an approach, notwithstanding that the majority did not expressly adopt the dissenting comments of Dawson J in Nicol in relation to contributory negligence. 6

In summary and by way of conclusion, an employer company (and its insurer) will be liable to a working director for a breach of the duty of care owed by an employer to an employee even where the defective system of work in question was wholly devised, implemented and maintained by that working director because: If, on the other hand, it be the case that a partial or total deduction for contributory negligence is able to be made, then regard must be had to s.151n of the 1987 Act, which confirms that common law and legislation relating to contributory negligence is applicable to an award of Work Injury Damages but are modified in that: The exercise required by s.151n(2) would appear to be to assume that the pre-conditions for commutation have been satisfied and to make an assessment of the monetary amount on which the parties would have been likely to agree prior to seeking approval of the commutation by WorkCover. (a) the employer is a separate legal entity; (b) which, by reason of being the employer, owes its employees a duty of care which is not shared by or delegated to any other person, including employees and directors; and (c) the acts or omissions of the working director are to be taken to be the acts or omissions of the company relevant to the discharge of that duty of care. The more interesting and less clear question is whether and to what extent the doctrine of contributory negligence has a part to play in these circumstances. It is considered to be arguable having regard to the logic applied by the High Court in Andar and the acceptance by the majority in that case of the reasoning adopted by Dawson J in Nicol that no deduction should be made for contributory negligence because, in failing to take care for his or her own safety, the working director has been acting as the company and the unsafe system of work adopted is, therefore, one accepted or acquiesced in by the employer. (2) Damages for deprivation or impairment of earning capacity are not to be reduced because of contributory negligence below the amount that the court estimates would have been payable by way of a commutation of weekly payments of compensation under division 9 of Part 3 if the person concerned were eligible to be paid a lump sum under that division. The provisions concerning commutations contained in Part 9 of Division 3 prescribe a number of pre-conditions which must be satisfied before a commutation will be approved by WorkCover but the Division does not contain any provisions concerning the amount payable in respect of a commutation and this is a matter left to agreement between the parties. In order to make the assessment required under s.151n(2) the court hearing a claim for Work Injury Damages would therefore presumably require expert evidence as to the going rate for a commutation. As a general rule, commutations are paid on the basis of a 5 to 8 year purchase of weekly benefits at the rate such benefits are being paid as at the time when the agreement is reached, although all cases will depend upon their own circumstances. 25 August 2010 Tim Wardell, Special Counsel 7

Edwards Michael Lawyers Level 11, 75 Elizabeth Street, Sydney 2000 DX 1209 Sydney Phone: (02)9232 5033 Fax: 02)9223 3626 em@edwardsmichael.com.au www.edwardsmichael.com.au