Twigger Happy

In January 2017, Rolls-Royce Plc hit the headlines when it agreed the third ever Deferred Prosecution Agreement (DPA) with the Serious Fraud Office (SFO).

By far the largest DPA so far, involving payments of over £500m, the Rolls-Royce agreement concerned proceedings relating to bribery of foreign public officials. Then, in April, the High Court approved a DPA providing that Tesco Stores Limited will not be prosecuted regarding historic false accounting practices in return for, amongst other things, a payment of £129m.

A DPA, described by the SFO as “conceptually somewhere between a guilty plea and a civil recovery”, is an agreement between an organisation and a public prosecutor which results in criminal proceedings being suspended (and subsequently discontinued) on condition that the organisation complies with the agreed terms. Following the approval of the Rolls Royce DPA, the SFO’s Ben Morgan described DPAs as the “new normal” (whilst acknowledging the remaining threat of prosecution for “obdurate” companies), and commented that DPAs “will become increasingly common”.

An increase in DPAs would be significant for liability insurers. A question that arises straightaway is whether a company which has civil liability insurance could ever make a claim to cover the financial settlement under a DPA. The right answer is surely that it could not and, of course, all such policies exclude claims for criminal fines. There may, however, be a need to confirm whether the wording is broad enough to exclude a settlement payment where, by definition, the company is never prosecuted. That said, even if the wording technically allowed a claim, it’s questionable whether it could be enforced given public policy considerations. A corporation entering into a DPA is unlikely to be allowed to enforce a claim which has the effect of absolving it from the consequences of the relevant conduct, for fear of incentivising criminality.

From the perspective of director and officer (D&O) insurance, it’s significant that, whilst a DPA results in the discontinuance of proceedings against the company, it will not prevent further investigations into the conduct of relevant individuals such as the company’s directors. Indeed, a DPA may include terms requiring ongoing cooperation from the company in the prosecution of individuals. This is likely to trigger D&O insurance claims, at the very least, for defence or investigation costs.

Moreover, on the assumption that a company could not itself make an insurance claim, it might attempt to recover some or all of the financial settlement by making a civil claim for breach of duty against the directors (or, more likely, former directors) whose conduct gave rise to the corporate activity which is the subject of the DPA. Current case law (in particular, the Court of Appeal’s judgment in Safeway Stores Ltd v Twigger1 ) suggests this is difficult.  Where the company is, strictly, itself the offender (as the Court of Appeal decided was the case for the cartel offence in Safeway), public policy demands that it cannot recover against other parties to mitigate the impact of its criminality (the so-called ex turpi causa rule). As the law currently stands, this is true even where the potential claim is against the very directors who caused the company to act as it did. Similar considerations are likely to apply in the case of a DPA.

But sentiments may be changing. In Jetivia v Bilta2, at least three Supreme Court Justices appeared sympathetic to the suggestion that Safeway was wrongly decided and the door appears open to further consideration by the courts. It is not clear that public policy is well served by preventing a company - which has no state of mind independent of its directors – from pursuing those directors. The increasing prevalence of high value DPAs may provide a suitable test case.

Should directors ever be held liable for a breach of duty in such circumstances, a key question would be whether they could claim under their D&O policies to recover the damages due. “Loss” in D&O policies typically excludes criminal fines or penalties but, in this instance, the loss of the directors (as opposed to the company) would be civil damages. Policy exclusions relating to improper conduct typically prevent a claim where the director has made a personal gain or committed a deliberately fraudulent or dishonest act. However, directors are unlikely to have made a direct personal gain as a result of the relevant corporate conduct and, whilst insurers may simply seek to exclude on the basis of dishonesty, there may be room for debate on current wordings. The dishonesty is likely to have occurred solely in the director’s capacity acting as the "mind" of the company rather than in a personal capacity.

Where the policy wording does not prevent a claim, public policy considerations again come to the fore. The overall objective of not incentivising corporate criminal behaviour suggests a claim by directors in these circumstances ought not to be enforced, even though the directors themselves would be facing civil claims and are unlikely to attract personal criminality for their actions.

As a result, if Safeway is relaxed on public policy grounds to allow a company to sue its directors, it may find that it will not ultimately be able to access the directors’ D&O insurance to meet the claim – potentially on public policy grounds. This may significantly diminish the motivation for bringing the claim in the first place. Realistically, a company would only be likely to recover from directors where the penalty is small or directors have deep pockets.

The threat of personal liability without the backup of D&O cover should, it is to be hoped, be enough to keep directors on the straight and narrow. But, should a DPA nevertheless arise, from the company’s perspective the potential public policy arguments may amount to giving with one hand and taking with the other.

1 Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472
2 Jetivia SA v Bilta (UK) Ltd (in liquidation) [2015] UKSC 23