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Introduction to Case
This case discussed liability of directors in a company. Prior to this case, the primary means of imposing liability on a corporation was vicarious liability, but that applied only to employees of the company and excluded the directors. After the Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd, [1915] AC 705, the ‘alter ego theory’ has become the most powerful method of imposing liability on a director of a corporation. It has proved to be particularly effective for imposing criminal liability. This means that directors cannot escape liability when it is due.
Facts of the Case
A ship owned by the company Lennard’s Carrying Co. was transporting a cargo of benzine, from Novorossiysk to the Asiatic Petroleum Company. The Asiatic Petroleum Company was a joint venture of the Shell and Royal Dutch Oil Companies. This cargo on the ship was lost. This was due to a fire caused by the poor condition of the ship and its incapacity to travel long distances in sea. The plaintiff filed a suit against the company, claiming damages due to negligence. It was alleged that the director of the Company i.e. Mr. Lennard was aware of the poor condition of the ship and did not do anything about it. However, Mr. Lennard claimed that under the Section 502 of the Merchant Shipping Act, 1894 (hereinafter referred as ‘the Act’) , the shipowner bore no liability in cases where a loss happened without any actual fault of anyone.
Issues in the Case
Whether the guilty conduct of the directors in concealing the vital information regarding the seaworthiness of the ship before sailing could be imposed on the company itself?
Held
The House of Lords held that the liability for acts of a company could be imposed on both- the directors and the corporation. The directors are assumed to be the minds and body of the company, since it is with their hands and actions, the company can act as a person, and they are responsible for the management of the affairs of the company. Keeping this in mind, the House of Lords arrived at the conclusion that indeed the acts of the directors can have the liability imposed upon the corporate entity as well. The judges concluded that though Lennard may have been solely deputed by the company and by the other directors with the freedom to act as he wishes, but this did not mean that the rest of the directors were free from their obligations since they did not bother to discharge their duties .
Analysis
The court considered that the company accepted the defect in the steamship. It therefore concluded that the defect caused was loss of cargo and consequent economic losses to the company. The Respondent Company’s director was aware of the defect and jeopardized the transport by not disclosing the defect. The other directors did nothing to intervene and therefore, the Court extended the liability to the directors of the company. The directors were the minds and the hands through which the company acted.
Conclusion
The Court in case approved the contentions of the aggrieved parties, and dismissed the suit by awarding the compensation to the Asiatic Petroleum Co. Ltd. The company and directors were responsible for the negligence that caused economic losses to the claimants due to loss of their cargo.
