Tortious liability: Supreme Court brings relief for directors

The Supreme Court has handed down its judgment in Lifestyle Equities CV and another v Ahmed and another, unanimously reversing the decision of the Court of Appeal and providing clarity on the law of accessory liability ([2024] UKSC 17). It is now clear that, in order to be liable as an accessory for a tort committed by a primary wrongdoer, a person must have knowledge of the essential facts that make the act done wrongful.

The Supreme Court has handed down its judgment in Lifestyle Equities CV and another v Ahmed and another, unanimously reversing the decision of the Court of Appeal and providing clarity on the law of accessory liability ([2024] UKSC 17). From Lord Leggatt’s judgment, with which the other justices agreed, it is now clear that, in order to be liable as an accessory for a tort committed by a primary wrongdoer, a person must have knowledge of the essential facts that make the act done wrongful. That is the case even if the tort is one of strict liability, which itself does not require such knowledge.

Background and issues before the court

The appeal and cross-appeal related to a trade mark dispute where a group of 16 defendants were found to have infringed Lifestyle Equities CV’s registered trademarks for BEVERLY HILLS POLO CLUB. At a separate trial concerning the accessory liability of two of the individual defendants, Mr Ahmed and his sister Ms Ahmed, who were directors of one of the defendant companies, Hornby Street Ltd, Mr and Ms Ahmed were each found to be liable and ordered to pay money to Lifestyle to account for profits made from the tort, comprising a loan Mr and Ms Ahmed had received from Hornby Street and part of their salaries ([2020] EWHC 688 (Ch)). Both parties appealed to the Court of Appeal, where Lifestyle’s appeal was dismissed but Mr and Ms Ahmed’s appeal was allowed in part ([2021] EWCA Civ 675).

The issues before the Supreme Court did not focus on the issues of trade mark infringement, but included whether:

• Mr Ahmed and Ms Ahmed were jointly and severally liable for the acts of infringement by Hornby Street, as its directors, in the absence of any finding that they knew, or ought to have known, that Hornby Street’s activities constituted trade mark infringement.
• If Mr and Ms Ahmed were jointly liable, it was appropriate for an account of profits to be awarded against them when there was no finding that they had acted unconscionably or in bad faith and, if so, whether Mr and Ms Ahmed should have been ordered to account for profits made by Hornby Street.

Liability of directors

Trade mark infringement is a strict liability tort: there is no need to prove knowledge or fault, only that the person concerned committed the infringing act without the consent of the trade mark owner. Nor is it a defence that the person concerned acted in good faith and without any improper motive.

The facts established that Mr and Ms Ahmed carried out the infringing acts on behalf of Hornby Street and that these were therefore the company’s acts, and there was no direct infringement of the trade marks by Mr and Ms Ahmed. The court made clear that, had there been direct infringement by Mr and Ms Ahmed, in their capacity as directors, there is no general principle of English law that would exempt them from the ordinary principles of tort liability because they did so in discharging their duties as directors.  Neither the principle of separate corporate personality nor the principle of limited liability justifies allowing directors to escape personal liability for their tortious acts.

However, the court noted that it is unjust that anyone, whether or not a company director, whose act causes another person to commit a tort should be held jointly liable for the tort as an accessory if the individual was acting in good faith and without knowledge of the facts that made the act of the other person tortious.

Considering the scope of accessory liability, that is, the principle by which a person may be held liable as an accessory for a tort committed by another person, the court noted that procuring a tort and assisting another to commit a tort under a common design are two distinct bases for imposing accessory liability. They can apply separately or both principles can be engaged, depending on the facts.

The court carried out a detailed analysis of the case law and concluded that the relevant test for liability as an accessory for procuring a tort, for both bases of accessory liability, is that a person must know the essential facts that make the act wrongful. It is irrelevant whether or not the tort itself requires that knowledge. Contrary to the Court of Appeal, the court did not accept that there is any logical inference that the knowledge required for liability as an accessory should mirror that required for primary liability.

Applying these principles, the court held that the lower courts had been wrong to hold Mr and Ms Ahmed jointly liable with Hornby Street for infringement of Lifestyle’s trade marks.  While it was established that Mr and Ms Ahmed procured acts attributable to Hornby Street to be carried out, which amounted to trade mark infringements, neither of them had the knowledge required to make them jointly liable on either principle of accessory liability.

Account of profits

An account of profits is a well-established equitable remedy in intellectual property (IP) infringement proceedings, which is awarded at the discretion of the court and following election by the claimant in place of damages. The effect of the remedy is to put the infringer in the same position financially as if the infringement had not taken place.

The court held that the rationale for the account of profits remedy is to continue the purpose of IP rights of enabling the owner of the right to enjoy the fruits of its exploitation. When an account of profits is ordered, the infringer is treated as if they have conducted the infringing business on behalf of the claimant (Hollister Inc v Medik Ostomy Supplies Ltd [2012] EWCA Civ 1419).

The court considered whether it was appropriate for an account of profits to be awarded against Mr and Ms Ahmed when there was no finding that they had acted unconscionably or in bad faith. In light of its conclusion that liability as an accessory for infringements committed by another person requires knowledge of the claimant’s rights, the court concluded that the possibility of ordering an innocent accessory to account for profits does not arise.

The court also held that, even if Mr and Ms Ahmed had been personally liable for infringements of Lifestyle’s trade marks, they could only have been liable to account for profits that they personally made from the infringements and not the wider profits of Hornby Street.

The court agreed with the Court of Appeal that it was wrong in principle to treat a loan as profit without some evidence that the loan was not really a loan at all but instead a disguised dividend, for instance. This principle continues to apply if, as a result of supervening events (in this case, the dissolution of the lender, Hornby Street), a loan is forgiven or ceases to be repayable.  It does not alter its character as a loan.

However, the court did not agree with the Court of Appeal’s decision that part of the salaries paid to Mr and Ms Ahmed could be treated as profits. There was no allegation or finding that the salaries paid were anything but ordinary remuneration for services rendered; these did not constitute profit.

Protection for directors

Lifestyle Equities will be well received by directors. Directors are now protected from a finding of accessory liability for the acts of their companies, provided that they do not have actual knowledge of the wrongful act that has been committed, even where that wrongful act forms the basis of a strict liability tort. However, directors of companies that are habitual infringers may have more of an uphill struggle to establish the requisite lack of knowledge.

This article was originally published to Practial Law on 30 May 2024.