Supreme Court gives guidance on accessory liability of company directors and the remedy of account of profits

The Supreme Court has given guidance on the circumstances in which directors may incur personal liability as accessories to a tort committed by the company and, where they do, the scope of orders that may be made against them for an account of profits: Lifestyle Equities CV v Ahmed [2024] UKSC 17.

Although the case concerned a situation where the underlying primary liability of the company is strict (ie there is no requirement to establish knowledge or fault on the part of the company), various aspects of the Supreme Court's analysis are likely to be of broader relevance.

The key takeaways are as follows:

• There is no general principle of English law which exempts company directors, acting in that capacity, from ordinary principles of tort liability. Normal tortious principles of accessory liability apply to directors in respect of their company's actionable wrongs.
• Where the company's liability is strict, it does not follow that an individual's liability as an accessory is also strict. Rather, to be liable as an accessory, the individual must have (i) known the essential facts which made the company's conduct unlawful; and (ii) intended to procure that conduct or to participate in a "common design" to that end.
• The only profits for which accessories should be ordered to account are those which they have made personally, and not the profits of the company. This is not necessarily all of the profits they have made – where the primary liability is IP infringement (as was the case here), the liability is only to account for profits which are specifically attributable to that infringement.

Background

The claimants, "Lifestyle", brought proceedings against 16 defendants, claiming remedies for infringement of registered trademarks and passing off. One of those sued was a family-owned company, Hornby Street, a wholesale business engaged in the manufacture and sale of various apparel. Lifestyle alleged that Hornby Street had offered to its customers items with logos (or "signs") which infringed trademarks registered by Lifestyle.

Siblings Mr and Ms Ahmed were directors of Hornby Street and co-defendants to the action. In an initial trial, Hornby Street was found liable under sections 10(2) and 10(3) of the Trade Marks Act 1994 for infringing Lifestyle's trademarks and also for passing off. There was no appeal and Hornby Street was subsequently dissolved. In a second trial, Lifestyle claimed that the Ahmeds were jointly and severally liable as accessories to Hornby Street's infringement.

At first instance, the judge found in Lifestyle's favour. He dismissed the Ahmeds' defence that neither of them had any improper motive or intention to infringe. In the judge's view, neither of these matters were relevant to their liability as accessories and no finding was made as to the Ahmeds' respective states of mind.

Lifestyle elected to seek the remedy of an account of profits against the Ahmeds. The judge found that sales of infringing goods accounted for approximately 10% of Hornby Street's turnover on average and calculated that its profits amounted to just over £3 million. However, he rejected Lifestyle's claim that the Ahmeds were liable to account for these profits. Rather, he held they were liable only to account for the profits they had made personally from the infringements. He apportioned 10% of their salaries during the relevant period to such profits. The judge also found that a loan made by Hornby Street to Mr Ahmed was also a profit derived from the infringements and ordered Mr Ahmed to account for that as well. 

The parties both appealed to the Court of Appeal: the Ahmeds on the question of their liability as accessories and also whether they had made any profits from Hornby Street's infringements; Lifestyle on the decision that the Ahmeds were not liable to account for Hornby Street's profits.

The Court of Appeal dismissed both appeals, save for finding that Mr Ahmed did not need to account for the loan made to him by Hornby Street.  Both parties appealed to the Supreme Court.

Decision

The Supreme Court unanimously dismissed Lifestyle's appeal and allowed the Ahmeds' appeal. Lord Leggatt gave the leading judgment, with which Lord Lloyd-Jones, Lord Kitchin, Lord Stephens and Lord Richards agreed.

In summary, the key questions before the Supreme Court were as follows:

1. Can company directors be found liable as accessories where they cause the company to commit an actionable wrong?
2. If yes, to what extent does the mental element required for liability as an accessory mirror that required for primary liability?
3. Where a director is liable as an accessory, what is the proper remit of the remedy of account of profits?

The court found that the Ahmeds could not be liable as accessories in circumstances where they were not aware of the essential facts which made Hornby Street's use of the relevant signs wrongful. In any case, the Ahmeds could not be liable to account for Hornby Street's profits (and, on the facts found, had not themselves made any profits from the trademark infringements).

(1) Accessory liability of company directors

The first issue before the Supreme Court concerned whether company directors are capable in that capacity of being jointly liable (as accessories) with the company for the relevant infringements.

The Ahmeds submitted that, where directors act in good faith and with reasonable care in the discharge of their duties to the company, and without actual or constructive notice that their acts will cause the relevant tortious wrong (in this case, infringement of intellectual property rights), they cannot be held jointly liable with the company. This is because, they argued, the acts are treated in law as the company's acts. The general purpose of the Companies Act, they said, is to enable individuals to trade through a company with limited personal liability, and imposing liability on owners and directors who manage the company contradicts this purpose, because it treats them as separate from the company, rather than one and the same.

Lord Leggatt rejected these arguments, stating:

"I do not accept that there is any general principle of English law – whether of company law, the law of agency or the law of tort – which exempts a director, acting in that capacity, from ordinary principles of tort liability."

1. Attribution

First, as to the argument attributing the Ahmeds' acts to those of the company, Lord Leggatt explained that this commits what is known as the "dis-attribution fallacy". Although there are certain legal rules by which acts of a director may be attributed to their company (eg principles of agency and vicarious liability), that does not mean that acts attributed to the company are to be dis-attributed from the individuals who actually did those acts.

On the contrary, Lord Leggatt explained, employees who commit torts in the course of their employment for which their employers are vicariously liable are not thereby freed from personal liability. Agents too are generally personally liable for torts and other civil wrongs while acting on behalf of their principal (irrespective of whether they were acting within the scope of their authority). According to the Supreme Court, therefore: "It is not obvious why directors should enjoy privileged treatment not accorded to other agents or employees of a company."

2. Company law arguments

Second, Lord Leggatt rejected the suggestion that company law provides any support for shielding directors from personal liability in tort:

"To suggest that directors cannot be personally liable for acts which are regarded in law as acts of the company fails to respect the separate personality of the company. It treats the company and the directors who manage it as … 'one and the same' rather than as separate persons. Recognising a company and its directors as separate persons entails that their liabilities are distinct from one another."

This, he said, means that there is "nothing inconsistent or incongruous in a situation where a company and a director are each legally liable to a claimant injured by a wrongful act."

As to the suggestion that accessory liability would cut across the concept of limited liability, Lord Leggatt noted that such protection only applies to a company's members, not its directors. If directors are also shareholders, they will benefit from limitations to their liability (ie to contribute to the assets of the company) in their capacity as shareholders. But directors do not have and do not need such limited liability: they have no relevant liability to protect because holding the office of director does not make that person liable to contribute to the company's assets.

3. The rule in Said v Butt

Lord Leggatt also rejected an argument that the well-established rule in Said v Butt [1920] 3 KB 497 should extend to procuring a tort. The rule provides that an agent or employee (including a director) who acts bona fide within the scope of their authority will not be liable for procuring the breach of a contract between their employer and a third party.

Lord Leggatt said that there is a good reason to distinguish between an agent who procures a breach of contract by the principal and one who procures the commission of a tort. Companies can act only through agents, and so where a company breaches a contract one or more agents must have caused the breach. However, there is a general norm or understanding that, where an agent makes a contract for a principal, only the principal assumes liability – and similarly, where an agent causes the principal to break the contract, only the principal incurs liability.

The same is not true in tort, at least outside particular cases such as negligent misstatement where liability depends on an assumption of responsibility which creates a special relationship between claimant and defendant (see eg Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169, considered here). The Supreme Court confirmed, therefore, that the rule in Said v Butt does not apply to civil wrongs which (like trademark infringement) do not depend on any contract or voluntary arrangement between the parties and where liability arises even if they are complete strangers to one another.

(2) To what extent does the mental element required for accessory liability mirror that required for primary liability?

In Lord Leggatt's view, there is no logical reason to assume that, just because strict liability applies to the relevant primary liability, it should also apply to liability as an accessory.

In this context, Lord Leggatt posited the example of an employee who commits trespass as a result of obeying the instructions of a director, when neither of them knows that the act of the employee will amount to trespass. He explained:

"I do not regard it as unjust that the director, who has committed no trespass himself and was unaware that his order would have that result, should 'escape scot free.' What would be unjust is leaving the innocent employee who has obeyed the director's instructions to bear the loss. That injustice is not removed by inflicting liability on another innocent individual as well. That merely compounds the injustice."

The solution to the apparent injustice is, instead, that the innocent employee who obeyed the director's instructions is entitled to an indemnity from the employer, as an implied term of the employment contract.

After considering the various authorities in this area, Lord Leggatt outlined the following principles in respect of accessory liability:

1. There is a general principle of the common law that a person who knowingly procures another person to commit an actionable wrong will be jointly liable with that other person – the liability of the procurer is accessory liability.
2. Where the primary wrong is a breach of contract, this accessory liability takes the form of a distinct tort (ie inducing the breach of contract). However, where the primary wrong is a tort, there is no need to posit a separate tort of procuring another person to commit a tort – the procurer is made jointly liable for the tort committed by the primary wrongdoer.
3. There is a further distinct principle of accessory liability where a person is jointly liable for a tort as a result of assisting another to commit that tort, provided that the assistance is more than trivial and is given pursuant to a common design between the parties.
4. In both of the above types of accessory liability, knowledge of the essential features of the tort is necessary to justify imposing liability on the person who has not actually committed the tort. To be clear, it is not knowledge of the law which must be established, but rather the defendant must know the essential facts which make the act unlawful.

In the absence of any evidence or finding of the relevant knowledge on the part of either Mr or Ms Ahmed, they could not be liable as accessories for Hornby Street's infringement of Lifestyle's intellectual property rights.

(3) Account of profits

As noted in Lord Leggatt's judgment, an account of profits is a well-established remedy for infringement of intellectual property. It is standard practice in such cases to permit the claimant to elect between seeking damages or an account of profits. In this case, Lifestyle had sought the latter. As an equitable remedy, the court has a discretion whether to grant it, but that discretion must be exercised in accordance with clear principles.

Absence of unconscionability or bad faith

An initial question before the Supreme Court was whether it was appropriate for the lower courts to order an account of profits against the Ahmeds where there had been no finding that they had acted unconscionably or in bad faith.

In assessing this question, the court considered the rationale for the remedy of account of profits in intellectual property cases. One on view, Lord Leggatt observed, it might be said that the remedy aims to deter deliberate or cynical infringement of another's rights. This is because, if the only available remedy were damages, "a person motivated by the prospect of gain might make a deliberate decision to exploit rights without the owner's consent reckoning that the profits made from the infringement will exceed any loss which the infringer might be required to compensate." The availability of the remedy to account therefore removes this incentive.

On the other hand, Lord Leggatt noted, if this were the correct justification, it would apply to all forms of consciously committed torts or other civil wrongs. Indeed, some who favour the deterrence argument see this as a reason to expand the remedy to any dishonestly committed tort. Yet, if the only rationale were deterrence, it would not justify granting this remedy in the case of innocent infringement.

In Lord Leggatt's view, there is another "more cogent" rationale. A central purpose of intellectual property rights, he explained, is to "encourage and reward creativity and innovation by enabling the owner of the right to enjoy the fruits of its exploitation." That purpose is promoted by allocating to the owner profits made from exploiting the right, including where the right is infringed by commercial use made without the owner's consent. It does not matter in this case whether the infringement was deliberate or innocent:

"The reason for redirecting the profits to the owner of the right is not to punish or deter wrongdoing. It is to achieve the goals which the right exists to further."

Seen from this perspective it is easier, he noted, to justify ordering an account of profits against an innocent infringer than awarding compensatory damages: whereas the latter could make the innocent infringer worse off than if the infringement had not occurred, an account of profits simply puts the infringer back into the same position. In Lord Leggatt's view, just as lack of knowledge is no defence to a claim for damages for trademark infringement, nor should it defeat a claim for an account of profits.

In view of the court's conclusion that the Ahmeds did not infringe Lifestyle's trademarks, and that they could not be liable as accessories due to their lack of knowledge, the court considered the remaining issues relating to liability for an account of profits on the hypothesis that the Ahmeds had personally infringed the trademarks.

Whose profits?

The Supreme Court agreed with the Court of Appeal that it follows from the nature of the remedy of an account of profits that only the profits which they have made are relevant for these purposes, and not those of any third party (including the company): "A person ordered to account for someone else's profits would not be giving up a gain but paying a penalty or a fine."

What if any profits did the Ahmeds make?

The Supreme Court also agreed with the Court of Appeal that the judge was wrong to treat the loan from Hornby Street to Mr Ahmed as profit: "A person does not make a profit just by borrowing a sum of money." (Lord Leggatt did note that a loan at a rate of interest lower than a commercial rate, or interest free, might be said to generate a profit on the part of the borrower. However, Lifestyle had not advanced a case to this effect.)

The Supreme Court, however, disagreed with the lower courts' treatment of the Ahmeds' salaries as profit. While payments made ostensibly as remuneration may in reality be a means of extracting profits from a company, there was no allegation, evidence or finding to this effect. As Lord Leggatt observed: "an employee who receives in return for their services a sum no greater than the fair market value of those services does not make a profit." There had been no suggestion that the Ahmeds were paid more for their services to Hornby Street than those services were worth.

Notably, although the point was not taken by the Ahmeds at trial, Lord Leggatt commented that "the profit for which a trader who sells infringing goods is liable to account is not necessarily the difference between the proceeds of sale of such goods and the costs attributable to those sales." Rather, as has been observed in previous authorities, it is the profit made from selling the goods under the trademark. Therefore, in estimating the profits for which Hornby Street was liable to account, the relevant inquiry should have been whether any, and if so what proportion, of its sales bearing the offending signs would still have been made had the signs not been used. At first instance, this had not been considered.