Tortious Liability of Companies

By Sahil Kumar 14 Minutes Read

Introduction

• The law of torts is a crucial element of Common Law, grounded in the principle that a remedy must be available where an injury occurs. In essence, a tort represents a civil wrong, which, while less severe than a criminal offense, still warrants redress.
• Tortious liability is defined as arising from the breach of a duty established by law, which must be owed to individuals in general and is subject to redress through claims for unliquidated damages.
• Regarding companies, which are artificial legal entities, they possess specific rights and liabilities.
• Companies face two primary types of liabilities: criminal and civil, with tortious liability falling under civil liability.
• Key characteristics of a company include its separate legal personality and its common seal. A company operates independently from its directors, and all transactions are conducted in the company’s name and under its seal.
• Consequently, the company is liable for the actions of its members. However, if a member acts beyond their authority, they are personally accountable for those actions.

Liability of companies

The civil liability of a company under Section 35 of the Companies Act, 2013 arises from misstatements in the company’s prospectus. Section 35 says that if an individual subscribes to a company’s securities based on a misleading prospectus, resulting in financial loss or damage, the company and several key individuals are liable for compensation. This includes:

• Current directors at the time of the prospectus issue.
• Individuals named or agreeing to be named as directors in the prospectus.
• Company promoters.
• Those who authorized the prospectus’s issuance.
• Experts mentioned in section 26(5).
• This liability is in addition to any penalties under section 36.

This section stipulates that if a prospectus contains intentionally false statements that mislead the public into purchasing shares or other securities, those responsible—including directors, promoters, and other specified individuals—must compensate individuals who incur losses as a result.

In Ritika Awasty v. Hassad Netherlands^[1], the Delhi High Court found the promoter (the appellant) liable for defrauding the respondent into buying company shares. The Court upheld the Arbitral Tribunal’s decision requiring the appellant to pay damages to the respondent.

Types of Liabilities

Tortious liability arises in cases involving civil wrongs. As a juristic entity, a company is subject to both civil and criminal liabilities, with tortious liability being a specific form of civil liability. Directors and promoters can be held liable as principals for wrongs committed by the company’s agents or employees during their employment.

1. Absolute Liability

• In M.C. Mehta v. Union of India^[2], the principle of absolute liability was established in response to an oleum gas leak that harmed many people.
• The Court eliminated the exceptions to strict liability outlined in Rylands v. Fletcher^[3], mandating that companies handling hazardous substances bear full responsibility and cannot shift blame to third parties.
• A recent application of this principle occurred in Poisonous Gas Leakage in Visakhapatnam v. State of Andhra Pradesh^[4], where the Court issued strict orders against company directors, including restricting their international travel and seizing the company’s properties.

2. Vicarious Liability

• Although a company is not a natural person, it is accountable for the wrongs committed by its employees. The principle of vicarious liability holds that a company, acting as a principal, is liable for the actions of its agents.
• This is based on the maxim Qui facit per alium facit per se, meaning “He who acts through another acts through himself.” Therefore, when a master-servant or principal-agent relationship is established, the employer or principal is vicariously liable for the employee’s actions, provided these actions occur within the scope of employment and with the company’s authorization.
• Over time, the principle of vicarious liability has evolved and been interpreted by the courts to expand its scope. A recurring debate concerns whether a company’s malicious intent should affect its vicarious liability.
• In Stevens v. Midland Counties Railway Company^[5], Justice Baron observed that a corporation lacks its own mind and thus cannot be held liable for malice in civil actions.
• Similarly, in Abrath v. North-Eastern Railway Company^[6], Lord Bram argued that a corporation, as a mere legal fiction, cannot possess malice.
• However, this view was later challenged by Lord Lindley in Citizen’s Life Assurance Company v. Brown^[7], where he held that a company could be liable for defamation under the principle of agency. Since the tort in question was committed during employment, the company could not claim immunity.
• Nonetheless, if an employee’s or agent’s actions are outside the scope of authority defined by the company’s Memorandum or Articles of Association (i.e., ultra vires), the company may not be held responsible.
• In Poulton v. London & S.W. Railway Company^[8], it was determined that the company’s arrest of the plaintiff was ultra vires, and thus, the company was not liable. The plaintiff could only seek redress from the individual defendant.

3. Negligence

• Companies can be held liable for negligence if they fail to exercise the level of care that a reasonable entity in their position would exercise, resulting in harm or damage to others.
• This form of liability arises when a company’s actions or omissions fall below the standard of care expected under the circumstances.
• For example, if a manufacturing company fails to implement proper safety measures in its factory, leading to an employee injury, the company may be held liable for negligence.
• Similarly, if a company’s failure to maintain safe premises leads to customer injury, it can be found negligent.
• The key elements in proving negligence include establishing that a duty of care was owed, the duty was breached, the breach caused harm, and the harm resulted in damages.

4. Product Liability

Companies are liable for injuries caused by defective products that they manufacture, distribute, or sell. Product liability encompasses several types of defects:

• Design Defects: Design Defects Occur when a product is inherently dangerous due to its design, even if it is manufactured correctly.
• Manufacturing Defects: Manufacturing defects Arise from errors or flaws in the manufacturing process that make a product unsafe.
• Failure to Warn: Failure to warn Involves a company’s omission of necessary warnings or instructions regarding the safe use of a product, leading to user harm. For instance, if a company sells a consumer product without proper safety warnings, and the lack of such warnings leads to injury, the company may be held liable. The goal of product liability laws is to ensure that companies are accountable for ensuring their products are safe for consumer use.

5. Nuisance

• Companies can be held liable for creating a nuisance, which refers to activities or conditions that significantly interfere with another person’s use and enjoyment of their property.
• This can include environmental pollution, excessive noise, or other disruptive activities.
• For example, if a factory emits excessive smoke or pollutants that affect the air quality in neighboring residential areas, it may be liable for causing a nuisance.
• The focus in nuisance claims is on whether the interference is unreasonable and if it substantially affects the complainant’s property rights.

6. Trespass

• Companies may be held liable for trespass if they unlawfully enter or use someone else’s property without permission, causing harm or damage.
• Trespass involves any unauthorized intrusion onto someone else’s land or property.
• This can occur in various scenarios, such as a company’s employees accidentally or deliberately entering private property without consent, or when a company’s operations extend beyond its property boundaries and encroach on adjacent land.
• Liability for trespass is based on the unauthorized nature of the intrusion and the resultant harm or damage caused to the property owner.

Liability of Directors

• The company and its directors are distinct entities, meaning the company’s property is not considered the personal property of its directors. This separation is maintained by the corporate veil, which protects directors from personal liability for the company’s debts or losses.
• Directors act as agents of the company, trustees of its assets, and employees, making the company vicariously liable for their actions. However, this vicarious liability is negated if a director acts ultra vires.
• In such instances, the corporate veil may be lifted, holding the director or other members personally liable, particularly when duties under Sections 166 and 188 of the Companies Act, 2013 are breached, or in cases of fraud, misrepresentation, or negligence.
• In Francis T. v. Village Green Owners Association^[9], members were held individually accountable for negligence related to a criminal break-in and assault.
• Conversely, in Iridium India Telecom Ltd. v. Motorola^[10], the company was found liable for misrepresenting warranties.
• In Sunil Bharti Mittal v. CBI^[11], the court ruled that a director cannot be personally liable for the company’s criminal acts.

Conclusion

A company is a legal entity distinct from its natural directors, who function as its operational core. Although the company mimics certain attributes of a natural person by conducting business and owning assets, these assets belong to the company itself, not the directors. The company, having the capacity to sue and be sued, is liable for its actions, with directors serving as its agents. Consequently, the company holds vicarious liability for the actions of its directors and other members, provided these actions occur within the scope of employment and are sanctioned by the company.

However, this vicarious liability does not apply if the actions are ultra vires or outside the director’s authorized scope. In such cases, the corporate veil may be lifted to hold the actual wrongdoer personally accountable for damages. The principles of strict liability and absolute liability further extend to companies. In India, absolute liability is imposed to ensure that larger corporations cannot evade responsibility by attributing fault to third parties. These principles uphold the jurisprudential values of justice, equity, and good faith, reinforcing the integrity of corporate law. Indian corporate laws and judicial decisions consistently support these principles.

^[1] 2016 SCC ONLINE DEL 5007.

^[2] (1987) 1 SCC 395.

^[3] All ER Rep 1: (1868) 3 HL 330.

^[4] SCC OnLine AP 137.

^[5](1877) 95 U.S. 655.

^[6] (1886) 11AC 247.

^[7] 1904 AC 423.

^[8] (1867) L. R. 2 Q.B. 53.

^[9] 42 Cal. 3d 490 (1986).

^[10] AIR 2011 SC 20.

^[11] AIR 2015 SC 923.

Sahil Kumar