Corporate liability

In criminal law, corporate liability determines the extent to which a corporation as a legal person can be liable for the acts and omissions of the natural persons it employs. It is sometimes regarded as an aspect of criminal vicarious liability, as distinct from the situation in which the wording of a statutory offence specifically attaches liability to the corporation as the principal or joint principal with a human agent.

The concepts

The imposition of criminal liability is only one means of regulating corporations. There are also civil law remedies such as injunction and the award of damages which may include a penal element. Generally, criminal sanctions include imprisonment, fines and community service orders. A company has no physical existence, so it can only act vicariously through the agency of the human beings it employs. While it is relatively uncontroversial that human beings may commit crimes for which punishment is a just desert, the extent to which the corporation should incur liability is less clear. Obviously, a company cannot be sent to jail, and if a fine is to be paid, this diminishes both the money available to pay the wages and salaries of all the remaining employees, and the profits available to pay all the existing shareholders. Thus, the effect of the only available punishment is deflected from the wrongdoer personally and distributed among all the innocent parties who supply the labour and the capital that keep the corporation solvent.

Because, at a public policy level, the growth and prosperity of society depends on the business community, governments recognise limits on the extent to which each permitted form of business entity can be held liable (including general and limited partnerships which may also have separate legal personalities). However, limitations on corporate liability can lead to profound injustices for individuals resulting from a limited ability to be properly compensated for wrongdoing.[1]

Criminal or civil controls?

Using the criminal law

• Represents formal public disapproval and condemnation because of the failure to abide by the generally accepted social norms, codified into the criminal law. Police powers to investigate can be more effective, but the availability of relevant expertise may be limited. If successful, prosecution reinforces social values and shows the state's willingness to uphold those values in a trial likely to attract more publicity when previously respected business leaders are called to account. The judgment may also cause a loss of corporate reputation and, in turn, a loss of profitability.
• Justifies more severe penalties because it is necessary to overcome the higher burden of proof to establish criminal liability. But the high burden means that it is more difficult to secure a judgment than in the civil courts, and many corporations are cash-rich and so can pay apparently immense fines without difficulty. Further, if the corporation knows that the fine is going to be severe, it may seek bankruptcy protection before sentencing.
• The theoretical value of punishment is that the offender feels shame, guilt or remorse, emotional responses to a conviction that a fictitious person cannot feel.
• If a state turns too often to the criminal law, it discourages self-regulation and may cause friction between any regulatory agencies and businesses that they are to regulate.

Using the civil law

• With the lower burden of proof and better case management tools, civil liability is easier to prove than criminal liability, and offers more flexible remedies which can be preventative as well as punitive.
• But there is little moral condemnation and no real deterrent effect so the general management response may be to see civil actions as a routine cost of business which is tax deductible.

Criminal laws

Most jurisdictions use criminal and civil systems in parallel, making the political judgment on how infrequently to use the criminal law to maximise the publicity of those cases that are prosecuted. While others enact specific legislation covering health and safety, and product safety issues which lay down general protections for the public and for the employees. The difficulty of proving a mens rea is avoided in the less serious offences by imposing absolute, strict liability, or vicarious liability which does not require proof that the accused knew or could reasonably have known that its act was wrong, and which does not recognise any excuse of honest and reasonable mistake. But, most legislatures require some element of fault, either by way of an intention to commit the offence or recklessness resulting in the offence, or some knowledge of the relevant circumstances. Thus, companies are held liable when the acts and omissions, and the knowledge of the employees can be attributed to the corporation. This is usually filtered through an identification, directing mind or alter ego test which proves that the employee has sufficient status to be considered the company when acting.

Identification test in English law

In Tesco Supermarkets Ltd v Nattrass [1972] AC 153, Lord Reid said:

The person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company.

This approach has been criticised because it restricts corporate liability to the acts of directors and a few high-level managers. This unfairly favours larger corporations because they will escape criminal liability for the acts of all the employees who manage the day-to-day activities of the corporations. This has proved problematic as in the cases involving corporate manslaughter.

Aggregation test in the United States

By “aggregating” the acts and omissions of two or more natural persons acting as the corporation, the actus reus and mens rea can be constructed out of the conduct and knowledge of several individuals. This is termed the Doctrine of Collective Knowledge. In United States v Bank of New England (1987) 821 F2d 844 the charge of wilfully failing to file reports relating to currency transactions was proved because the bank’s knowledge was the totality of what all of the employees knew within the scope of their authority. The Court of Appeals’ confirmed a collective knowledge is appropriate because corporations would compartmentalise knowledge and subdivide duties and avoid liability. Aggregation has been applied in Australian courts, but is rejected in England.[2]

A blameworthiness test

Gobert argues that if a corporation fails to take precautions or to show due diligence to avoid committing a criminal offence, this will arise from its culture where attitudes and beliefs are demonstrated through its structures, policies, practices, and procedures. This rejects the notion that corporations should be treated in the same way as natural persons (i.e. looking for a "guilty" mind), and advocates that different legal concepts should underpin the liability of fictitious persons. This reflects the structures of modern corporations which are more often decentralised and where crime is less to do with the misconduct by or incompetence of individuals, and more to do with systems that fail to address problems of monitoring and controlling risk.

Benefit test

A benefit test has been applied in the Federal Court of Australia, the House of Lords (now the Supreme Court of England) and the Supreme Court of Canada. Put simply, the test proposes that where a company gains the benefit of an act, it is considered to be attributed with that act. The test is applied differently when an act is performed by a "mind and will", which usually prompts the use of the organic theory, as opposed to an agent which usually prompts the use of the agency theory.[2]

Specific issues

Fraud

In some instances of fraud, the court may pierce the veil of incorporation. Most fraud is also a breach of the criminal law and any evidence obtained for the purposes of a criminal trial is usually admissible in civil proceedings. But criminal prosecutions take priority, so if civil proceedings uncover evidence of criminality, the civil action may be stayed pending the outcome of any criminal investigation.

Secondary liability

Some crimes are considered inchoate because, like a conspiracy or attempt, they anticipate the commission of the actus reus (the Latin for "guilty act") of the full offence. One option for prosecution would be to treat a corporation as an accomplice or co-conspirator with the employees. In general terms, most states permit companies to incur liability for such offences in the same way as natural persons so long as there are at least two natural persons involved in the conspiracy and one other accomplice to aid the commission of the offence by a principal.

Footnotes

1. Carlson, Margaret (13 July 2011). "Hot Coffee, Cold Cash and Torts: Margaret Carlson". Bloomberg. Retrieved 9 August 2013.
2. Capuano A, 'Catching the Leprechaun: Company Liability and the Case for a Benefit Test in Organic Attribution', (2010) Vol 24 No 2 Australian Journal of Corporate Law

References

• Geraghty, Corporate Criminal Liability, (2002) Vol. 39 American Criminal Law Review, 327.
• Gobert, J. Corporate Criminality: New Crimes for the Times (1994) Criminal Law Review 722.
• Gobert, J. Corporate Criminality: Four Models of Fault (1994) 14 Legal Studies 393.
• Gobert, J & Mugnai, E. Coping with Corporate Criminality – Some Lessons from Italy” (2002) Criminal Law Review 619.
• Lederman, E. Models for imposing corporate criminal liability: from adaptation and imitation toward aggregation and the search for self-identity (2000) 4 Buffalo Criminal Law Review 641
• Leigh, L. The Criminal Liability of Corporations and Other Groups (1977) 9 Ottawa Law Review 247.
• Wells, Celia. Corporations and Criminal Responsibility (2nd edition), Oxford University Press, Oxford (2001). ISBN 0-19-826793-2
• Wells, Celia. "Corporate Criminal Liability in Europe and Beyond. New South Wales Law Society Journal, 39 (2001) 62-66.
• Wells, Celia. Corporations: Culture, Risk and Criminal Liability (1993) Criminal Law Review 551.