REUTERS | Ricardo Moraes

Another fine mess you’ve got me into: can you pass on a criminal fine in a contract?

There is a legal textbook which illustrates the varying tests of responsibility in relation to a glass of water falling off a table.

  • Deliberate act – a man hits the glass with a baseball bat and it falls to the ground and smashes.
  • Recklessness – the man is dancing wildly around the room and knocks the glass off the table with a high kick.
  • Negligence – the man is sitting at the table having an animated conversation and knocks the glass over with his elbow.
  • Strict liability – the man is lying on the floor asleep at one end of the room. The glass is on a table at the other end of the room and it falls off for no apparent reason.

I suppose that the more imaginative amongst you might argue that the last example may well qualify as force majeure, but let’s not overcomplicate this…

…in fact some might say that a more useful example for the last category would be another man coming into the room and knocking the glass off the table.

And the next question, which follows from my revised scenario, would be what happens if it is not water on a carpet but a spill of polluting chemicals, where the first man is the employer and the second man is a contractor…

If the employer gets fined for a strict liability offence can he claim the fine back from the contractor?

The question of whether it is ever possible (regardless of what is written into a contract) to recover criminal fines from a contractor who puts the employer into the position of being fined has been troubling the law for many years:

  • One problem is the ex turpi causa rule, which provides that a claim cannot be founded upon the claimant’s wrongful or criminal act.
  • It is also suggested that a contract under which one person agrees to indemnify another if the other is prosecuted and fined for a criminal offence is an illegal contract and therefore void. (Some contract drafters write into such an indemnity that it is only effective “to the extent permitted by law” to mitigate this risk.)
  • There is a third issue – public policy…

Public policy

The public policy issue was most recently considered by the House of Lords in July 2009 in Moore Stephens (a firm) v Stone Rolls Limited. It was said in that case that the Claimants:

“…are not seeking to enforce an illegal agreement. They are seeking compensation for the adverse consequences of having engaged in unlawful conduct… [In] a claim for compensation for the adverse consequences of wrong-doing, ex turpi causa applies where the wrongdoing is personal, or primary, but not where it is vicarious.”

(For more information, see PLC Dispute Resolution’s update on the case.)

Fines cannot be “laid off”

The approach taken by the courts is quite a strict one. They say that statutory fines are there to punish the person responsible and that, if the fines can be “laid off”, that would defeat the intention of the statute.

For example, in R v Northumbrian Water [1998] the Judge said:

“I am quite satisfied that it would be impossible to obtain an indemnity against a criminal prosecution. Mr Pannick put before me Osman v. J. Ralph Moss Limited [1970]. That was a case where a motorist had been prosecuted and fined for having no insurance in circumstances where the Court of Appeal took the view that there was no moral blame whatever. It was the fault of the defendants, who were, I think, insurance brokers, that the plaintiff had unknowingly, and without any negligence on his part, found himself to be uninsured. In those circumstances the Court of Appeal was prepared to allow him to recover the fine from the defendants, notwithstanding the general proposition, which is set out clearly by Denning J. in Askey v. Golden Wine Company Limited and Others [1948], that it is against public policy to receive an indemnity against a fine or costs incurred in and about criminal prosecutions. It seems to me that the decision in Osman is clearly limited to cases where there is true absolute liability and no conceivable fault (for want of a better word)… That would not be the position here because a prosecution under section 70 is defeated by showing all due diligence and, in any event, no prosecution could conceivably be brought unless something had gone wrong…”

Does true strict liability make a difference?

So I suppose the next question would be whether the fact that the first man was sleeping is relevant. If he had been awake, watching over the glass, and it had fallen anyway and he could plead a “due diligence” defence, you might say that the offence is not really one of strict liability.

Following Moore Stephens and Northumbrian Water, the law seems to be that if it can actually be said that there was no conceivable fault on the part of the employer (and that is quite a strict test) then maybe, just maybe, the fines can be recovered.

An example of a situation where it may well be possible for an employer to prove that it had no responsibility at all might be a series of small jobs (perhaps maintenance at a remote site) undertaken by a skilled and experienced contractor, where the employer would not be expected to attend and where the contract sets out the actions that must be taken to avoid committing the offence in the clearest possible terms.

With the right contract terms and helpful facts, could that employer then lay off a criminal “no fault” fine to the contractor?

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