Dr. Ikramul Haq
The House of Lords on November 6, 2002 passed a historic order in Standard Chartered Bank (respondents) v. Pakistan National Shipping Corporation (appellants) and Standard chartered Bank (appellants) v. Pakistan National Shipping Corporation and others and another (respondents) and others  UKHL 43] involving Pakistan National Shipping Corporation, Standard Chartered Bank, London and others reaffirming the age-old dictum that no one can escape liability for his fraud by saying “I wish to make it clear that I am committing this fraud on behalf of someone else and I am not to be personally liable.”
This case has special significance vis-à-vis corporate governance and fixation of responsibility for criminal acts committed by persons employed by the companies. In Pakistan corporate frauds are being committed frequently by directors using the names of their employees in making transactions with banks and parties. Once the banks and parties sue the companies and directors they take the plea that these are individual acts of the employees and they have nothing to do with company. This case has a special significance for Pakistani scenario.
It is also an illuminating judgement that confirms how dispensation of justice takes place in a civilized society. Our corporate sector, SECP, courts and professionals can learn a lot from this verdict, which I am presenting in a concise form herein under.
The brief facts of the case are:
Mr Mehra was the managing director of Oakprime Ltd, the beneficiary under a letter of credit which had been issued by Incombank, a Vietnamese bank, and confirmed by Standard Chartered Bank, London (“SCB”). The credit was issued in connection with a CIF sale of Iranian bitumen by Oakprime to Vietranscimex, a Vietnamese organisation. A condition of the credit was “Shipment must be effected not later than 25 October 1993”. The last date for negotiation was 10 November 1993.
Loading was delayed and Oakprime was unable to ship the goods before 25 October 1993. But the shipping agents and shipowners (Pakistan National Shipping Corporation (“PNSC”)) agreed with Mr Mehra to issue bills of lading dated 25 October 1993 and did so on 8 November 1993, before the goods had been shipped. On 9 November 1993 Oakprime presented the bill of lading and other documents to SCB under cover of a letter signed by Mr Mehra stating that (with one omission) the documents were all those required by the credit. This statement was false to the knowledge of Mr Mehra because he had himself arranged for the backdating of the bill of lading. The false statement was made to obtain payment under the letter of credit and it is agreed that if there had been no bill of lading or SCB had known that it was falsely dated, payment would not have been made. The omitted document was presented a few days later and certain other documents which had shown discrepancies from the terms of the credit were resubmitted after the final date for negotiation of the credit had passed. Notwithstanding that SCB knew that these documents had been presented late, it decided to waive late presentation. It authorised payment of US$1,155,772.77 on 15 November 1993.
SCB then sought reimbursement from Incombank. It sent a standard form letter that included a statement that the documents had been presented before the expiry date. This statement was known by a relevant employee of SCB to be false. Incombank, although unaware of both Mr Mehra’s false dating of the bill of lading and SCB’s false dating of the presentation of the documents, rejected the documents on account of other discrepancies which SCB had not noticed. Despite further requests, SCB was unable to obtain reimbursement.
SCB then sued the shipowners (PNSC), the shipping agents, Oakprime and Mr Mehra for deceit. They had all joined in issuing a false bill of lading intending it to be used to obtain payment from SCB under the credit. Cresswell J held that they were all liable for damages to be assessed:  1 Lloyd’s Rep 684.
PNSC appealed on the ground that the loss suffered by SCB had been partly the result of its own “fault” within the meaning of section 1(1) of the Law Reform (Contributory Negligence) Act 1945 and that its damages should therefore be reduced to such extent as the court thought just and equitable. Sir Anthony Evans would have accepted this argument and reduced the damages by 25%. But the majority of the court (Aldous and Ward LJJ) ( QB 167) held that SCB’s conduct was not “fault” as defined in the Act because it was not at common law a defence to an action in deceit: see the definition in section 4 of the Act.
Mr Mehra appealed on the ground that he had made the fraudulent representation on behalf of Oakprime and not personally. The court unanimously upheld this ground of appeal. It ordered SCB to pay Mr Mehra’s costs before that court and three-quarters of his costs at trial:  1 Lloyd’s Rep 218.
PNSC appealed to your Lordships’ House against the decision that the damages could not be reduced and SCB appealed against the decision that Mr Mehra was not personally liable. Shortly before the hearing, PNSC agreed to pay SCB US$1.7m in full and final settlement of its claims to damages, interest and costs. There was no apportionment between these heads of claim and the settlement agreement expressly preserved SCB’s claims against other parties. Your Lordships have allowed the petition of PNSC for leave to withdraw its appeal.
Mr. Mehra’s counsel plea before the House of Lords was that the settlement gave SCB the whole of any damages to which it could be entitled against PNSC and Mr. Mehra as joint tortfeasors. It would therefore be an abuse of the process of the court to pursue the appeal against Mr Mehra. The appeal should be stayed. He did not however propose that any change should be made to the Court of Appeal’s order for costs in favour of Mr. Mehra. Mr. Mehra’s argued that not only was he not liable at all, for the reasons given by the Court of Appeal, but that if he was liable, the damages should be reduced on account of the contributory negligence of SCB.
The defence of contributory negligence taken by Mr. Mehra was based on the relevant provisions of the 1945 Act that are sections 1(1) and the definition of “fault” in section 4:
“1(1)Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage … “
4. …’fault’ means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to a defence of contributory negligence.”
Lord Hoffman observed that the definition of “fault” is divided into two limbs, one of which is applicable to defendants and the other to plaintiffs. In the case of a defendant, fault means “negligence, breach of statutory duty or other act or omission” which gives rise to a liability in tort. In the case of a plaintiff, it means “negligence, breach of statutory duty or other act or omission” which gives rise (at common law) to a defence of contributory negligence. The authorities in support of this construction are discussed by Lord Hope of Craighead in Reeves v Commissioner of Police of the Metropolis  1 AC 360, 382. It was also the view of Professor Glanville Williams in Joint Torts and Contributory Negligence (1951) at p 318.
The real question involved in this case is whether the conduct of SCB would at common law be a defence to a claim in deceit. SCB should not have paid even if they could not have discovered that the representation about the bill of lading was untrue. In Edgington v Fitzmaurice (1885) 29 Ch D 459 the plaintiff invested £1,500 in debentures issued by a company formed to run a provision market in Regent Street. Five months later the company was wound up and he lost nearly all his money. He sued the directors who had issued the prospectus, alleging that they had fraudulently or recklessly represented that the debenture issue was to raise money for the expansion of the company’s business (“develop the arrangements…for the direct supply of cheap fish from the coast”) when in fact it was to pay off pressing liabilities. The judge found the allegation proved and that the representation played a part in inducing the plaintiff to take the debentures. But another reason for his taking the debentures was that he thought, without any reasonable grounds, that the debentures were secured upon the company’s land. Cotton LJ said, at p 481, that this did not matter:
“It is true that if he had not supposed he would have a charge he would not have taken the debentures; but if he also relied on the misstatement in the prospectus, his loss nonetheless resulted from that misstatement. It is not necessary to shew that the misstatement was the sole cause of his acting as he did. If he acted on that misstatement, though he was also influenced by an erroneous supposition, the defendants will still be liable.”
The rule in Redgrave v Hurd 20 Ch D 1 applies to both innocent and fraudulent misrepresentations. The wider rule in Edgington v Fitzmaurice probably applies only to fraudulent misrepresentations. In Gran Gelato Ltd v Richcliff (Group) Ltd  Ch 560 Sir Donald Nicholls V-C said that, in principle, a defence of contributory negligence should be available in a claim for damages under section 2(1) of the Misrepresentation Act 1967. But since the alleged contributory negligence was that the plaintiff could with reasonable care have discovered that the representation was untrue, the rule in Redgrave v Hurd prevented the conduct of the plaintiff from being treated as partly responsible for the loss. This left open the possibility that, in a case of innocent representation, some other kind of negligent causative conduct might be taken into account.
For example, in Nationwide Building Society v Richard Grosse & Co  Lloyd’s Rep PN 348 Blackburn J said that if contributory negligence had been a defence, he would have held that the plaintiff building society was two-thirds to blame and in Nationwide Building Society v Balmer Radmore  Lloyd’s Rep PN 558 he would have said that it was three-quarters to blame. It is easy to see that a rule based upon moral disapproval of fraud is less attractive when the fraudster is not the person paying the damages. But the answer, in my opinion, is not to improve the position of fraudsters but to amend the terms upon which public indemnifiers like the fund are liable: compare paragraph 13(d) of the Criminal Injuries Compensation Scheme 2001.
The House of Lords held that: “Mr. Mehra says, and the Court of Appeal accepted, that he committed no deceit because he made the representation on behalf of Oakprime and it was relied upon as a representation by Oakprime. That is true but seems to me irrelevant. Mr. Mehra made a fraudulent misrepresentation intending SCB to rely upon it and SCB did rely upon it. The fact that by virtue of the law of agency his representation and the knowledge with which he made it would also be attributed to Oakprime would be of interest in an action against Oakprime. But that cannot detract from the fact that they were his representation and his knowledge. He was the only human being involved in making the representation to SCB (apart from administrative assistance like someone to type the letter and carry the papers round to the bank). It is true that SCB relied upon Mr. Mehra’s representation being attributable to Oakprime because it was the beneficiary under the credit. But they also relied upon it being Mr. Mehra’s representation, because otherwise there could have been no representation and no attribution”.
Lord Hoffman on behalf of the the House of Lords in response to this plea has made the following historic remarks:
“This reasoning cannot in my opinion apply to liability for fraud. No one can escape liability for his fraud by saying “I wish to make it clear that I am committing this fraud on behalf of someone else and I am not to be personally liable.” Sir Anthony Evans framed the question ( 1 Lloyd’s Rep 218, 230) as being “whether the director may be held liable for the company’s tort.” But Mr Mehra was not being sued for the company’s tort. He was being sued for his own tort and all the elements of that tort were proved against him. Having put the question in the way he did, Sir Anthony answered it by saying that the fact that Mr Mehra was a director did not in itself make him liable. That of course is true. He is liable not because he was a director but because he committed a fraud”.
Thus an employee of a company cannot take a plea that since he is not director, he cannot be sued for fraud committed by him on behalf of the company. if Mr. Mehra had been acting as manager for the owner of the business who lived in the south of France and had made a fraudulent representation within the scope of his employment, he could escape personal liability by saying that it must have been perfectly clear that he was not being fraudulent on his own behalf but exclusively on behalf of his employer. House of Lords allowed the appeal against Mr. Mehra and restored the order made against him by the lower court.
The incorporation of companies is vitally important for commerce since it allows transactions to be entered into and carried out, property to be held and actions to be raised by, or against, a body which continues in existence despite changes in the individuals who conduct or invest in the business. The company is a separate entity, distinct from the directors, employees and shareholders. The law has rightly insisted that the distinction should be duly observed: Lee v Lee’s Air Farming Ltd  AC 12. In particular the company does not act as the agent of the directors and, in general, they do not incur personal liability for the acts of the company or its employees: Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd  2 AC 465, 488 per Lord Parmoor. Directors may, however, be personally liable if they directed or procured the commission of a wrongful act. The exact scope of this type of liability has been discussed in a line of cases. Performing Right Society Ltd v Ciryl Theatrical Syndicate Ltd  1 KB 1, 14 per Atkin LJ and C Evans & Sons Ltd v Spritebrand Ltd  1 WLR 317 may serve as examples.
A hallmark of modern companies is that the liability of the shareholders is limited. This is not a necessary characteristic of a commercial corporation. Indeed even for some time after the Limited Liability Act 1855 there were major trading entities which had been incorporated but the investors in which were exposed to unlimited liability for the corporation’s debts. This could, and not infrequently did, result in the investors’ ruin. By reducing and defining the potential risk to investors, limited liability opens the way for modern companies to raise the necessary capital for their business, either privately or on the stock market. For this reason, only in exceptional circumstances does the law allow a creditor of the company to pierce the veil of incorporation and fix the shareholders with personal liability: Salomon v A Salomon & Co Ltd  AC 22.
Although Aldous LJ referred to lifting the corporate veil, the question of the limited liability of shareholders is irrelevant to the present issue since Standard Chartered do not seek to make Mr Mehra liable as a shareholder in Oakprime. Nor does Standard Chartered seek to make Mr Mehra liable, by virtue of his position as a director, for the deceitful acts of Oakprime or its employees or other agents. Rather, they seek to do no more than hold him liable for deceitful acts that he himself performed. So no question arises as to whether he directed or procured the doing of tortious acts by others and the C Evans & Sons Ltd v Spritebrand Ltd line of cases is not in point.
At the heart of the decision by House of Lords is the view that, because Mr Mehra was a director of Oakprime and acted as such when cheating Standard Chartered, his acts must be regarded solely as the acts of Oakprime and he should have no personal civil liability for them. As Mr Cherryman QC acknowledged, no man could escape the clutches of the criminal law by the simple device of showing that he had carried out his frauds in his capacity as a director of a company and in circumstances where his acts were to be attributed to the company (Meridian Global Funds Management Asia Ltd v. Securities Commission  2 AC 500). In R v ICR Haulage Ltd  KB 551, 559, for example, both the managing director and, through him, the haulage company were convicted of conspiracy to defraud. His acts “were the acts of the company and the fraud of that person was the fraud of the company”. In the world of tort, however, all was said to be more happily arranged for the fraudster. He could use the device of acting as a director to escape any liability to his victims: they were to be regarded not as his victims but just as the victims of the company’s fraud. His fraud might be the fraud of the company but, somehow or other, it was not his own fraud.
The maxim culpa tenet suos auctores may not be the end, but it is the beginning of wisdom in these matters. Where someone commits a tortious act, he at least will be liable for the consequences; whether others are liable also depends on the circumstances. Here, as the facts make plain and as Cresswell J specifically found, “all the ingredients of the tort of deceit are made out against Mr Mehra (and Oakprime).” In other words Standard Chartered have proved all that is required to make Mr Mehra – and through him Oakprime – liable in deceit. That being so, there is no conceivable basis upon which Mr Mehra should not indeed be held liable for the loss that Standard Chartered suffered as a result of his deceit. If he had been a mere employee of Oakprime and had done the same things and written the same letters on behalf of the company in that capacity, it could never have been suggested that Mr Mehra was not personally liable for his fraudulent acts. His status as a director when he executed the fraud cannot invest him with immunity.
The same things happen in Pakistan daily where employees of companies write letters to banks for obtaining loans and later on when their directors fled away with money, the banks find it difficult in courts of law to establish deceit and fraud committed by the companies and their worthy directors, who have connection with politicians and have enough money to bribe the law-enforcement agencies.
In the present case since the plaintiffs had failed to show a special relationship with the director himself, the House held that he was not liable. Lord Steyn was dealing with the tort of negligence where a claimant must establish that the defendant owed him a duty of care. There is no such requirement in the case of deceit. Liability for deceit is so self-evident that we do not consider it as resulting from a breach of duty (Tony Weir, Tort Law (2002), p 30). Mr Mehra set out by his fraudulent acts to make Standard Chartered pay under the letter of credit. He succeeded. He is accordingly personally liable for the loss which he thereby caused them.
The history of emergence of such a law in the sub-continent and elsewhere is quite interesting. In 1882 Sir Frederick Pollock drafted a Civil Wrongs Bill for the Government of India, the aim being to set out a codified, if slightly simplified, version of English tort law. To Pollock’s lasting disappointment the Bill was never enacted. Pollock dealt with contributory negligence in clause 64 which, significantly, was drafted in such a way that it would operate as a defence only in the case of negligence by the defendant or someone for whose negligence he was answerable. Similarly, five years later in his Law of Torts (1887) Pollock treated contributory negligence in the chapter on negligence and indicated that the defence would not apply in the case of an intentional harm. He remained of this view more than forty years later in the last edition to come from his pen: Law of Torts 13th ed (1929), pp 615 and 675 – 676.
Similarly, in an authoritative essay on “Contributory Negligence” in American law, written in 1908 and reprinted in his Studies in the Law of Torts (1926), pp 528 – 529, Bohlen stated:
“If the defendant’s wrong be intentional, only consent, express or necessarily implied from the circumstances, will bar recovery … the unanimous current of decision is that when the defendant’s wrong is something more than mere negligence – when it involves an intent to cause harm – contributory negligence is no defense.”
In Murphy v Culhane  QB 94, an interlocutory decision, Lord Denning MR said that a widow’s claim for damages for the death of her husband might fall to be reduced under the 1945 Act because it had resulted from a criminal affray in which he had participated. That would appear to conflict with the view that contributory negligence had never been a defence open to a defendant who had intended to harm the plaintiff.
This judgement is important in many respects. It confirms beyond doubt that the corporate world all over the world is full of deceit and fraud. The courts have a limited role to play to stop such malpractices as they only interpret the law when suits are filed. It is primary the responsibility of the State to have a strict regulatory controls over corporate and non corporate bodies to safeguard the citizens from fraud and deceit. The Pakistan experience in this regards is utterly disappointing. Many a big shots committed frauds of billions of rupees by fleecing the banks and public at larger and are enjoying life outside Pakistan in comfort and luxury. Our law enforcement agencies are busy harassing the opponents of the government rather than bringing these criminals back and try them in courts of law. It is time that NGOs and other public spirited bodies start filing suits of damages against the law enforcement officials for their “contributory negligence’.