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Vicarious Liability: Navigating Legal Frontiers in Contemporary Contexts - MMJC
Introduction.
Since the time of very origin of law, the basic concept of law is that, only the actual wrong doer should be punished and not the innocent one. However, as far as the law of torts is concerned, there can be found an exception to this basic principle of law. In general parlance, torts refers to A wrongful act or omission for which damages can be obtained in a civil court by the person who is injured or affected by such tort. Whereas, the exception that the law of torts provides to the basic principle of punishing the guilty only, is called the ‘doctrine of vicarious liability’.
The concept of vicarious liability is an exception to general law of torts. This doctrine fastens the liability of wrongdoing of one person on the other. In this article, we shall deliberate upon the multiple facets of doctrine of vicarious liability. Also we shall study this concept from the point of view of Companies Act 2013 and shall try to understand the relevance of this concept in today’s dynamic business environment.
What is vicarious liability?
As discussed above, the concept of vicarious liability is found in the law of torts. In law of torts, the intention of the wrongdoer does not have any importance. The only important factor is that if any person has violated anyone else’s legal right, then he is bound to pay damages to such other person. However, the doctrine of vicarious liability is a rare exception to law of torts, wherein the person is liable for the torts of some other person.
Vicarious liability owes its origin to two Latin phrases “Qui facit per alium facit per se” which means, “one who does acts through another one in law is considered to do it himself”. The situation of fastening vicarious liability mostly arises when the tortfeasor is acting on behalf of another person. The word ‘vicarious’ literally means “on behalf of someone”.
For example, if a servant injures a third person while performing the task assigned to him by his master, then in such a case, the master shall be responsible to the third person for the injury caused by the servant.
Even though this may appear to be unjust on the outset, it is a very logical doctrine. The master is held liable for the acts of the servant, because servant was acting on behalf of and on the authority of the master. In such a case, the master is deemed to have acted through his servant, and therefore the master is held liable for the acts of the servant. Had the servant injured any person while he was not on his duty, the master would not have been held liable.
Applicability of vicarious liability.
although vicarious liability fastens liability of wrongdoing of one person on other, it is not in every situation that doctrine of vicarious liability can be applied. The very basic condition for application of this doctrine is that, there should exist some relationship between the person who has committed the tort and the one who is held liable to pay damages. Therefore, this doctrine is applied only in cases where there exists a definite relationship which can be proved. One more criteria for applicability is that, the injury or damage should be caused in the course of duty. In other words, vicarious liability can arise only if the tortfeasor was doing the work assigned to him by the person who is held vicariously liable.
The examples of such relationships wherein there can arise a vicarious liability include, the relationships between principle and agent, master and servant and employer and employee. For example, if any employee of any company has committed any tort while on duty of the company, then such company will become vicariously liable for the acts of the employee. Whereas if the company itself creates any tort then, company being the artificial person, its alter ego, that is the persons through whom the company acts, shall be held liable.
Vicarious liability with respect to companies.
Company is an artificial person and therefore acts through its directors. therefore, it is generally held that the guilty mind behind the wrongdoing of the company is that of its directors. hence the directors of the company are held vicariously liable for the wrong doing of the company. as discussed above, there has to be some relationship between the wrongdoer and the person held liable. In this case, the relationship between the company and its directors is a fiduciary relationship, that is, directors take decision on behalf of company in their fiduciary capacity and hence are liable for its wrongdoings.
Conditions for vicarious liability of directors.
In spite of the fact that the directors are fiduciaries of the company, it is not that every time the directors can be held vicariously liable. There are certain conditions which are to be looked at before fastening vicarious liability on the directors.
(a)specific allegation.
the first amongst such conditions is that there should be a specific allegation against the directors backed with sufficient evidence to prove his involvement in wrongdoing. The only exception to this condition is with respect to managing director. Since the managing director is responsible for day-to-day management of the company, he is any way liable for company’s Acts and therefore, there is no need of specific allegations against him. In case of all other directors, there has to be specific allegation backed with evidence. Simple vague statements are not adequate to fasten vicarious liability on directors.
(b) specific legal provision
The second condition pertains to legal provision. There must exist a specific provision regarding vicarious liability in the statute under which the liability is being fastened. In absence of such legal provision, the vicarious liability cannot be fastened. For example, section 22A of minimum wages Act 1948 and section 141 of the Negotiable instruments Act 1881 clearly fasten vicarious liability on the directors of the company. Whereas there is no such express provision in the Criminal Procedure Code (CrPC). Therefore, directors can be made vicariously liable under minimum wages Act or Negotiable instrument Act, but cannot be so made under CRPC.
Supreme court of India highlighted these 2 conditions with respect to fastening of vicarious liability on directors in its judgment in the matter of Sunil Bharti Mittal vs CBI. In its judgment dated 9th January 2015, the honourable supreme court held that, “Thus, an individual who has perpetrated the commission of an offence on behalf of a company can be made accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent. Second situation in which he can be implicated is in those cases where the statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.
When the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect.”
(c) company should be a party to the petition
One more point worth noting here is with respect to company being party to litigation involving vicarious liability. In case of any petition trying to fasten vicarious liability on the directors, it is very essential that the company of which the persons are directors and who has committed the offence should be made party. If the company is not made party to such petition, then the petition is liable to be dismissed.
This condition has been affirmed by the supreme court in its judgment in the matter of DAYLE DE’SOUZA ….. APPELLANT(S) VERSUS GOVERNMENT OF INDIA THROUGH DEPUTY CHIEF LABOUR COMMISSIONER (C) AND ANOTHER ….. RESPONDENT(S). In this judgment dated 29th October 2021, the supreme court has stated that,
“Provision imposes vicarious liability by way of deeming fiction which presupposes and requires the commission of the offence of the Company itself as it is a separate juristic entity. Therefore, unless the company as a principal accused has committed the offence, the director would not be liable and cannot be prosecuted.
The liability of the persons in charge of the Company only arises when the contravention is by the Company itself.
The exception would possibly be when the company itself has ceased to exist or cannot be prosecuted due to a statutory bar. However, such exceptions are of no relevance in the present case. Thus, the present prosecution must fail for this reason as well.”
Vicarious liability under Companies Act 2013.
As far as companies and their directors are concerned, the companies Act 2013 is the basic law governing the companies and its directors. therefore, the provisions under Companies Act with respect to vicarious liability are of paramount importance. Section 166 of the Companies Act 2013states that the directors have fiduciary duty towards the company. Also, the multiple penal provisions under companies act which prescribe penalties for procedural non-compliance also hold the directors responsible for such non-compliance and impose penalties on them along with the company. Also, certain sections of the Companies Act like section 76A provide for criminal imprisonment for directors for non-compliance of law by the company. This shows that the Companies Act 2013 also has an express provision fastening vicarious liability on the directors.
Relevance of vicarious liability under current context.
As noted above, the Companies Act fastens vicarious liability on directors even in case of small procedural non-compliances and as seen in the supreme court judgment in the matter of Sunil Bharti Mittal vs CBI, if legal provision provides for vicarious liability, then it is by default fastened. However, if we study today’s professionally managed companies, there arises a question that, are the directors and especially non-executive and independent directors really liable for all the acts of the company?
If we look at the language of the penal provisions, it fastens liability on all directors without bifurcating between executive and non-executive directors. Whereas the practical situation says that the non-executive directors are not involved in day-to-day activities of the company. Even though they are involved in collective decision-making process, they are generally dependent upon the information supplied by the management in this regard. Same is the case with independent directors. The very basic charactery stick of independent director is that he is not involved in daily matters of the company. In such a situation, is it correct to treat non-executive independent directors of the company vicariously liable for procedural non-compliance of which they are not a part.
Also, with respect to managing director, it is observed in professionally managed companies that different persons are responsible for different functions and such responsible person’s information is duly provided to the regulator. For example, compliance function is looked after by the company secretary whereas, the taxation matters are taken care of by Chief finance officer. In such a case is it correct to hold the managing director responsible for procedural lapses which did not involve the managing director at all?
Conclusion.
The concept of vicarious liability is introduced under the law of torts for ensuring safety and protection to the innocent citizens. However, in case of companies and its directors, it is observed that the provision that is made for the protection of one person, is unjustly harming the other. This difficulty may be addressed by amending the provisions of law by taking a considerate view to words all possible stake holders.
This article is published in Taxmann. The link to the same is as follows: –
This article is written by Ms Rutuja Umadikar – Research Associate – RND Team – rutujaumadikar@mmjc.in