Paget-Brown v Omni Secs Ltd

• Jurisdiction: Cayman Islands
• Judge: (Zacca, P., Kerr and Collett, JJ.A.)
• Judgment Date: 01 January 1999
• Court: Court of Appeal (Cayman Islands)
• Date: 01 January 1999

Court of Appeal

(Zacca, P., Kerr and Collett, JJ.A.)

PAGET-BROWN AND COMPANY LIMITED

and

OMNI SECURITIES LIMITED

R. Potts, Q.C., R.D. Alberga, Q.C. and R.L. Nelson for the appellant;

A. Turner for the respondent.

Case cited:

(1) Kuwait Asia Bank E.C. v. National Mutual Life Nominees Ltd., [1991] 1 A.C. 187; [1990] 3 All E.R. 404, followed.

Companies-management company-liability to client company-in absence of fraud or bad faith, management company providing company director not liable to client company for losses caused by director”s negligence or breach of fiduciary duty-no duty of care in tort to monitor employee”s performance as director-director is client company”s agent and obliged to ignore employer”s interests

The respondent brought an action for damages against the appellant in the Grand Court for breach of contract and negligence.

The appellant, a Cayman company offering services to overseas companies, entered a contract with the respondent, a local subsidiary of the Omni group, under which it agreed to provide a registered office, to act as company secretary and to provide a person to act as a company director. Its employee was duly appointed as a director by the respondent”s board and subsequently re-elected by its shareholders.

Following the winding up of the respondent, its liquidators issued proceedings in respect of transactions which had taken place prior to the director”s resignation. The writ claimed damages from the appellant as vicariously liable for the director”s negligence or breach of fiduciary duty. The statement of claim later alleged that the appellant had been negligent in failing to exercise reasonable skill and care in monitoring the performance of its employee”s duties. It also sought to add another claim based on an alleged contractual obligation to monitor the director”s actions.

The Grand Court (Harre, C.J.) dismissed the appellant”s application to strike out the respondent”s claims as disclosing no reasonable cause of action, and later gave the respondent leave to re-amend its writ. The appellant appealed against the dismissal of its application and sought leave to appeal against the amendment, the application being dealt with as the substantive appeal.

The appellant submitted that (a) since the director had not acted in his capacity as an employee of the appellant but as an agent of the respondent, the appellant owed no duty to the company to ensure that he performed his job competently, and was neither directly nor vicariously liable to the respondent for losses arising from his conduct of the company”s business; (b) there was no express or implied term of the contract which could give rise to a duty to monitor the director”s

performance as alleged by the respondent; and (c) accordingly, the respondent had no reasonable cause of action and should not have been permitted to amend its writ.

The respondent submitted in reply that (a) since the director had been employed by the appellant and acted in the course of his employment, the appellant was vicariously liable for his actions and, by the nature of its business, also owed a duty to the respondent and its creditors to ensure the proper conduct of its nominees as company officers; (b) it had been an express term of the contract governing the director”s appointment that the appellant would monitor his performance; and (c) accordingly, the Grand Court had properly dismissed the appellant”s application to strike out the statement of claim, and given leave to amend the writ.

Held, allowing the appeal:

(1) The respondent had alleged no facts from which could be inferred an express or implied contractual term obliging the appellant to monitor the director”s performance. The appellant had had no power to interfere with the carrying out of the director”s duties and had been paid only a small fee by the respondent for nominating him to act. Accordingly, the statement of claim disclosed no reasonable cause of action in contract, and the Grand Court had erred on this point (page 188, lines 20–38).

(2) In the absence of fraud or bad faith on its part, the appellant did not, as the person nominating the director for appointment, owe a duty of care to the respondent and its creditors to ensure that he performed his functions diligently and competently. The appellant could not be vicariously or directly liable to the respondent for the director”s negligence or breaches of fiduciary duty, since the director had not acted in his capacity as employee of the appellant, and received no instruction from it. On the contrary, as an agent of the respondent company itself, he was answerable to it and its shareholders, who had appointed him, and was obliged to ignore the interests of his employer. The Grand Court should therefore have struck out the respondent”s statement of claim, and the court would now do so (page 189, lines 16–33; page 193, line 21 – page 194, line 9).

ZACCA, P.: This is an appeal by Paget-Brown & Co. Ltd. from a
judgment of the Grand Court whereby that court, on May 20th, 1998,
dismissed its application that the action against it should be struck out for
45	disclosing no reasonable cause of action. We also heard an application for

leave to appeal against a decision by the Grand Court whereby the court
granted an application by the respondent for leave to re-amend its writ.
The respondent is a wholly-owned subsidiary of Omni Holdings A.G.
and is a Cayman company, incorporated and registered on December
5	22nd, 1986. It was placed in voluntary liquidation on November 7th,
1991. The appellant is a Cayman company offering services to companies
wishing to establish themselves in the Cayman Islands.
The second defendant in the proceedings brought by the respondent is
Mr. Coleman, a director and employee of the appellant company. In its
10	claim, the respondent alleged that there was an agreement with the
appellant for that company to provide a registered office, to act as a
company secretary and to make available Mr. Coleman to be appointed as
one of the respondent”s directors. For these services the appellant was
paid $1,800 per annum. On August 10th, 1988, Mr. Coleman was elected
15	as a director of the respondent company by its board.
He was re-elected by the shareholders at the Annual General Meeting
of the respondent on August 21st, 1989 and again re-elected at a
subsequent AGM on May 22nd, 1990. Prior to the next AGM, Mr.
Coleman resigned as a director on March 12th, 1991. The writ was issued
20	on February 13th, 1996 and amended and re-dated April 13th, 1996. It
claimed damages in respect of transactions of the respondent alleged to
have occurred between February 16th, 1990 and March 1991. It alleged a
breach of duty on the part of Mr. Coleman. As against the appellant (the
third defendant), para. 2 of the writ claimed-
25	‘(a) damages for the breach of the second defendant”s duty of
care and/or fiduciary duty committed in the course of the second
defendant”s employment with the third defendant or, in the
alternative, that the third defendant was negligent in so appointing
the second defendant to fulfil its contractual obligations to the
30	plaintiff; and
(b) damages for breach of its duty of care and/or fiduciary duty as
company secretary to the plaintiff.’
It was the respondent”s case that the appellant was vicariously liable for
Mr. Coleman”s alleged breaches of duty to it. Also in para. 2(a) was a
35	claim that the appellant had acted in breach of its alleged contract with
the respondent in nominating Mr. Coleman in the first place to act as a
director of the respondent. It was, however, conceded by the respondent
at the hearing of the application to strike out that this alternative claim
was statute-barred. The claim in para. 2(b) of the writ was also
40	abandoned.
When the statement of claim was issued on November 26th, 1996, it
purported to add against the appellant additional causes of action not
contained in the writ. The causes of action, which continued to exist at the
hearing of the application, may be summarized as follows:
45	1. A cause of action in contract based on an alleged obligation to

monitor, on a regular basis, the performance by Mr. Coleman of his duties

as a director of the plaintiff, in order to ensure that he was properly

performing his duties.

2. A cause of action in tort for negligently failing to exercise

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