Re City Equitable Fire Insurance Co

Last updated

Re City Equitable Fire Insurance Co
Coat of Arms of the United Kingdom (1837-1952).svg
Court Court of Appeal of England and Wales
Citation(s)[1925] Ch 407, 94 LJ Ch 445, [1925] B & CR 109, [1924] All ER Rep 485, 133 LT 520, 40 TLR 853
Case history
Prior action(s)Romer J (in the High Court)
Court membership
Judge(s) sittingLord Pollock MR Warrington LJ and Sargant LJ
Keywords
Duty of care

Re City Equitable Fire Insurance Co [1925] Ch 407 is a UK company law case concerning directors' duties, and in particular the duty of care. It is no longer good law, as it stipulated that a "subjective" standard of competence applied. Now under Companies Act 2006 section 174, and given the development of the common law in Re D'Jan of London Ltd , directors owe an objective standard of care based on what should reasonably be expected from someone in their position.

Contents

Facts

The company lost £1,200,000 in failure of investments and the large scale fraud of the chairman, Gerard Lee Bevan, ‘a daring and unprincipled scoundrel’. The liquidator sued the other directors for negligence. The auditors were sued too, but the Court of Appeal held they were honest and exonerated by provisions in the company’s articles.

Judgment

High Court

Romer J held that some of the directors did breach their duty of care. But they were not liable to reimburse, because an exclusion clause for negligence was valid. And even in absence of exclusion clauses, in his view, ‘for a director acting honestly himself to be held legally liable for negligence, in trusting the officers under him not to conceal from him what they ought to report to him appears to us to be laying too heavy a burden on honest businessmen.’ Though he felt ‘some difficulty’ with the distinction, negligence would need to be ‘gross’ to visit liability. The principles he set out as follows. [1]

There are, in addition, one or two other general propositions that seem to be warranted by the reported cases: (1.) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life insurance company, for instance, does not guarantee that he has the skill of an actuary or of a physician. In the words of Lindley M.R.: "If directors act within their powers, *429 if they act with such care as is reasonably to be expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company": see Lagunas Nitrate Co. v. Lagunas Syndicate . [2] It is perhaps only another way of stating the same proposition to say that directors are not liable for mere errors of judgment. (2.) A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. (3.) In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. In the judgment of the Court of Appeal in In re National Bank of Wales, Ld , [3] the following passage occurs in relation to a director who had been deceived by the manager, and managing director, as to matters within their own particular sphere of activity: "Was it his duty to test the accuracy or completeness of what he was told by the general manager and the managing director? This is a question on which opinions may differ, but we are not prepared to say that he failed in his legal duty. Business cannot be carried on upon principles of distrust. Men in responsible positions must be trusted by those above them, as well as by those below them, until there is reason to distrust them. We agree that care and prudence do not involve distrust; but for a director acting honestly himself to be held legally liable for negligence, in trusting the officers under him not to conceal from him what they ought to report to him, appears to us to be laying too heavy a burden on honest business men." That case went to the House of Lords, and is reported there under the name of Dovey v Cory [4] Lord Davey, in the course of his speech to the House, made the following observations:

"I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information and advice, of the chairman and general manager, as to whose integrity, skill and competence he had no reason for suspicion. I agree with what was said by Sir George Jessel in Hallmark's Case , [5] and by Chitty J. in In re Denham & Co. 84, that directors are not bound to examine entries in the company's books. It was the duty of the general manager and (possibly) of the chairman to go carefully through the returns from the branches, and to bring before the board any matter requiring their consideration; but the respondent was not, in my opinion, guilty of negligence in not examining them for himself, notwithstanding that they were laid on the table of the board for reference."

These are the general principles that I shall endeavour to apply in considering the question whether the directors of this company have been guilty of negligence.

Court of Appeal

Pollock MR Warrington LJ and Sargant LJ upheld Romer J's decision.

See also

Notes

  1. ↑ [1925] Ch 407, 428-430
  2. ↑ [1899] 2 Ch. 392, 435.
  3. ↑ [1899] 2 Ch. 629, 673.
  4. ↑ [1901] A. C. 477.
  5. ↑ (1878) 9 Ch. D. 329

Related Research Articles

Negligence is a failure to exercise appropriate and/or ethical ruled care expected to be exercised amongst specified circumstances. The area of tort law known as negligence involves harm caused by failing to act as a form of carelessness possibly with extenuating circumstances. The core concept of negligence is that people should exercise reasonable care in their actions, by taking account of the potential harm that they might foreseeably cause to other people or property.

The business judgment rule is a case-law-derived doctrine in corporations law that courts defer to the business judgment of corporate executives. It is rooted in the principle that the "directors of a corporation... are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge". The rule exists in some form in most common law countries, including the United States, Canada, England and Wales, and Australia.

<i>Hedley Byrne & Co Ltd v Heller & Partners Ltd</i>

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 is an English tort law case on economic loss in English tort law resulting from a negligent misstatement. Prior to the decision, the notion that a party may owe another a duty of care for statements made in reliance had been rejected, with the only remedy for such losses being in contract law. The House of Lords overruled the previous position, in recognising liability for pure economic loss not arising from a contractual relationship, applying to commercial negligence the principle of "assumption of responsibility".

In tort law, the standard of care is the only degree of prudence and caution required of an individual who is under a duty of care.

<i>Dorset Yacht Co Ltd v Home Office</i>

Home Office v Dorset Yacht Co Ltd[1970] UKHL 2, [1970] AC 1004 is a leading case in English tort law. It is a House of Lords decision on negligence and marked the start of a rapid expansion in the scope of negligence in the United Kingdom by widening the circumstances in which a court was likely to find a duty of care. The case also addressed the liability of government bodies, a person's liability for the acts of third parties that he has facilitated, and liability for omissions.

<i>Caparo Industries plc v Dickman</i>

Caparo Industries PLC v Dickman[1990] UKHL 2 is a leading English tort law case on the test for a duty of care. The House of Lords, following the Court of Appeal, set out a "three-fold test". In order for a duty of care to arise in negligence:

In the English law of tort, professional negligence is a subset of the general rules on negligence to cover the situation in which the defendant has represented him or herself as having more than average skills and abilities. The usual rules rely on establishing that a duty of care is owed by the defendant to the claimant, and that the defendant is in breach of that duty. The standard test of breach is whether the defendant has matched the abilities of a reasonable person. But, by virtue of the services they offer and supply, professional people hold themselves out as having more than average abilities. This specialised set of rules determines the standards against which to measure the legal quality of the services actually delivered by those who claim to be among the best in their fields of expertise.

<i>Bartlett v Barclays Bank Trust Co Ltd</i> Trusts law case

Bartlett v Barclays Bank Trust Co Ltd [1980] 1 Ch 515 in an English trusts law case. In it Brightman J gave a comprehensive discussion of the duties of trustees in connection with companies whose shares are part of the trust property. Although it is common to hear lawyers refer to "the rule in Bartlett v Barclays Bank", the case only restated law that had been accepted since Speight v Gaunt.

<i>In re Caremark International Inc. Derivative Litigation</i> Legal case and corporate law precedent

In re Caremark International Inc. Derivative Litigation, 698 A.2d 959, is a civil action that came before the Delaware Court of Chancery. It is an important case in United States corporate law and discusses a director's duty of care in the oversight context. It raised the question regarding compliance, "what is the board's responsibility with respect to the organization and monitoring of the enterprise to assure that the corporation functions within the law to achieve its purposes?" Chancellor Allen wrote the opinion.

Re D’Jan of London Ltd [1994] 1 BCLC 561 is a leading English company law case concerning a director's duty of care and skill, whose main precedent is now codified under Section 174 of the Companies Act 2006. The case was decided under the older Companies Act 1985.

<i>Armitage v Nurse</i>

Armitage v Nurse [1997] EWCA Civ 1279 is the leading decision in English trusts law concerning the validity of exemption clauses. The Court of Appeal held that in English law trustee exemption clauses can validly exempt trustees from liability for all breaches of trust except fraud. Millet LJ gave the leading judgment.

Re Cardiff Savings Bank [1892] 2 Ch 100, often called the Marquess of Bute's case is a UK company law case concerning the duty of care owed by members of the board. It is old law but is still often mentioned as an extreme example of to what extent a "subjective" duty of care allowed directors to escape consequences of their negligence.

<i>Candler v Crane, Christmas & Co</i>

Candler v Crane, Christmas & Co [1951] 2 KB 164 is an English tort law case on negligent misstatement.

<i>Learoyd v Whiteley</i>

Learoyd v Whiteley[1887] UKHL 1 is an English trusts law case, concerning the duty of care owed by a trustee when exercising the power of investment.

<i>Speight v Gaunt</i>

Speight v Gaunt [1883] UKHL 1 is an English trusts law case, concerning the extent of the duty of care owed by a fiduciary.

<i>Oldham v Kyrris</i>

Oldham v Kyrris[2003] EWCA Civ 1506 is a UK insolvency law case concerning the administration procedure when a company is unable to repay its debts.

<i>Re Charnley Davies Ltd (No 2)</i>

Re Charnley Davies Ltd [1990] BCLC 760 is a UK insolvency law case concerning the administration procedure when a company is unable to repay its debts. It held that an administrator would only breach a duty of care if an ordinary, skilled practitioner would have acted differently.

<i>Downsview Nominees Ltd v First City Corp Ltd</i>

Downsview Nominees Ltd v First City Corp Ltd [1992] UKPC 34 is a New Zealand insolvency law case decided by the Judicial Committee of the Privy Council concerning the nature and extent of the liability of a mortgagee, or a receiver and manager, to a mortgagor or a subsequent debenture holder for his actions.

<i>Cuckmere Brick Co Ltd v Mutual Finance Ltd</i> 1971 English tort law case

Cuckmere Brick Co v Mutual Finance[1971] EWCA Civ 9 is an English tort law case, establishing the lender must publish/promote the materially beneficial key, intrinsic facts as to land in mortgage repossession sales. As it affects the duty of mortgagees, to that extent it can be considered within the periphery of English land law also.

<i>Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd</i>

Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258 is a leading United Kingdom company law case relating to directors' liability. The case is the principal authority for the proposition that a company cannot make any claim against a director for breach of duty if the acts of the director have been ratified by the members of the company.

References

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.