Directors of all companies face new rules governing their liability, as part of the new Civil Code taking effect on 15 March 2014.
The changes, which codify an increasingly strict judicial attitude towards directors over the past few years, are likely to make issues of liability more complex and onerous for directors and to increase the importance of corporate governance for companies.
Part of the added complexity stems from the fact that, under the new code, there is to be separate civil law regulation of contractual and non-contractual liability.
Liability to the company
The new code makes directors liable to the company for any damage they cause in the course of conducting management activity, subject to the new code rules on general contractual liability.
Under the present rules directors can be exempt from liability if they prove that they have acted with the standard of care generally to be expected from a director putting the company’s interests first (ie the damage is not their fault).
Under the new rules, directors will only be exempt from liability if the company’s loss arises due to unforeseen circumstances beyond the director’s control where he could not reasonably be expected to avoid either the circumstances or the loss. This stricter rule will only apply to directors performing duties for remuneration under a mandate agreement or employment contract; more lenient rules will apply where the director’s duties are performed free of charge.
It is uncertain how the new rules will be applied until they are tested in the courts. In our view the company and the director can agree to limit the director’s liability (by defining the scope of the director’s competence or capping his liability at a specific sum).
Non-contractual liability to third parties
The new general civil law rules governing non-contractual liability will apply to non-contractual damages caused to third parties by anyone acting in their capacity as a director. This could include damages for breach of environmental or competition regulations although, in our view in practice, there may not be many situations in which this form of liability will arise.
Under current rules, actions of a director acting on behalf of the company are ‘attributable’ to the company, making it and not the director liable for any loss caused to third parties by the director’s actions. The company then has the right to recover such losses from the director.
Under the new code, third parties can bring claims jointly against the company and any director whose actions caused the loss. The director can still be exempted from liability if he acted in a reasonable manner generally to be expected of a person in his position so that the loss is not attributable to his actions.
Contractual liability to third parties
Although it is not expressly codified, we are of the view that under the new code, a company remains liable to a third party for breach of contract due to the actions of a director on the company’s behalf. The terms of the company’s relationship with the director may still entitle it to recover damages from the director.