The Company Director’s Duty of Care and Skill: The Case for an Onerous but Subjective Standard
| Author | C.A. Riley |
| DOI | http://doi.org/10.1111/1468-2230.00232 |
| Published date | 01 September 1999 |
| Date | 01 September 1999 |
The Company Director’s Duty of Care and Skill: The
Case for an Onerous but Subjective Standard
C.A. Riley*
Recent years have witnessed an intense interest in questions of corporate
governance1– the mechanisms by which companies are managed and regulated.
Much of this interest has concentrated on issues of efficiency and competitiveness,
and on ensuring that those charged with corporate management display appropriate
levels of effort and expertise.2As the breadth of the governance debate amply
testifies, there are very many strategies which might be employed to secure these
managerial qualities. Lawyers, however, have unsurprisingly tended to focus upon
the various legal duties, and in particular the duty of care and skill, to which
directors are subject,3a focus that seems set fair to continue following the recent
publication of the Law Commission’s Consultation Paper on company directors.4
That duty, however, seems to be held in remarkably low esteem, with many
critics but few friends. Those critics point out how little the duty has, at least in its
ßThe Modern Law Review Limited 1999 (MLR 62:5, September). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 697
*Newcastle Law School.
I am grateful for generous and helpful comments to Colin Baxter, Brian Cheffins, Paul Davies, Ian
Dawson, Simon Deakin, Vanessa Finch, John Lowry and the MLR’s anonymous referees. The usual
disclaimer applies.
1 The literature is too voluminous to cite in full but see, for example, the following: K.J. Hopt and G.
Teubner (eds), Corporate Governance and Directors’ Liabilities (Berlin: de Gruyter, 1985); The
Committee on the Financial Aspects of Corporate Governance, Report and Code of Best Practice (the
‘Cadbury Report’) (London: Gee & Co, 1992); J.E. Parkinson, Corporate Power and Responsibility
(Oxford: Clarendon Press, 1993); D.D. Prentice and P.R.J. Holland (eds), Contemporary Issues in
Corporate Governance (Oxford: Clarendon Press, 1993); J. Charkham, Keeping Good Company
(Oxford: Clarendon Press, 1994); N. Dimsdale and M. Prevezer (eds), Capital Markets and Corporate
Governance (Oxford: Clarendon Press, 1994); S. Sheikh and W. Rees (eds), Corporate Governance
and Corporate Control (London: Cavendish Publishing, 1995); K. Keasey, S. Thompson and M.
Wright (eds), Corporate Governance: Economic, Management, and Financial Issues (Oxford: Oxford
University Press, 1997) and the Symposium Issue of the Journal of Law and Society (1997) 24 (1) 1–
176. See now also the Department of Trade and Industry’s recently commenced review of company
law, the details of which are set out in, first, its Consultation Paper, Modern Company Law For a
Competitive Economy (London: DTI, 1998), and, second, the Consultation Document, The Strategic
Framework (London: DTI, 1999) issued by the Company Law Review Steering Group appointed to
manage the review.
2 For a blunt statement to this effect, see the Cadbury Report, n 1 above, para 1.1: ‘The country’s
economy depends on the drive and efficiency of its companies. Thus the effectiveness with which
their boards discharge their responsibilities determines Britain’s competitive position’.
3 See, for example, V. Finch, ‘Company Directors: Who Cares about Skill and Care?’ (1992) 55 MLR
179, 200–204; Parkinson, n 1 above, ch 4; A.J. Boyle, ‘Draft Fifth Directive: Implications for
Directors’ Duties, Board Structure and Employee Participation’ (1992) 13 The Co Lawyer 6; A.S.
Sievers, ‘Farewell to the Sleeping Director – The Modern Approach to Directors’ Duties of Care,
Skill and Diligence’ (1993) 21 Australian Business Law Review 111; L. Griggs and J. Lowry,
‘Finding the Optimum Balance for the Duty of Care Owed by the Non-Executive Director’ and S.
Worthington, ‘The Duty to Monitor: A Modern View of the Director’s Duty of Care’ both in F.
Patfield (ed), Perspectives on Company Law: 2 (London: Kluwer Law International, 1997); the Rt
Hon Lord Hoffman, ‘The Fourth Annual Leonard Sainer Lecture’ (1997) 18 The Co Lawyer 194.
4 The Law Commission, Company Directors: Regulating Conflicts of Interests and Formulating A
Statement of Duties (London: The Stationery Office, 1998), Law Commission Consultation Paper No
153, Scottish Law Commission Consultation Paper No 105, chs 12, 14 and 15.
traditional formulation,5demanded of directors,6who were required to demonstrate
neither continuous attention to company affairs7nor any reasonable, objective
level of competence.8These lax standards, it is argued, have offered too little
protection for companies and their shareholders. Worse still, they have failed to
keep pace with the changing practice and expectations of the commercial
community.9Much of the case law here, critics note, dates from the nineteenth or
early twentieth century, when the director was seen as little more than a local
worthy or an impressive title.10 There has, it is true, been some recent tightening of
the standard of behaviour expected of directors,11 both by statute12 and by some
modern UK case law,13 a trend commended by the Law Commission.14 Yet whilst
these various developments add to the topicality of this area of company law, the
precise scope and effect of these recent doctrinal developments remain unclear, a
further ground for criticism.15
As Finch observes, however, ‘[a] dominant view on how to develop such duties
has nevertheless yet to emerge’.16 One obvious difficulty is that the criticisms just
described do not provide an easy basis for reform. To whatever extent the current
law remains ‘lenient’ towards directors, it does not necessarily follow that we
should condemn such leniency. To be sure, if we were concerned only to maximise
the protection afforded to shareholders, creditors, or whoever, then we might
accordingly view the duty in purely strategic terms, working out that formulation
of the duty most likely to maximise their protection. But this would hardly provide
any explanation of why the law should be employed in such a partisan way, or of
how we might justify to the director the imposition of such a duty. Similarly,
5 For a useful account of the historical development of the duty of care, see Worthington, n 3 above,
183–188.
6 See, for example, Finch, n 3 above, 200–204; Parkinson, n 1 above, ch 4; A.J. Boyle, ‘Draft Fifth
Directive: Implications for Directors’ Duties, Board Structure and Employee Participation’ (1992) 13
The Co Lawyer 6; Sievers, n 3 above, 145.
7 For an argument that directors are under a separate duty positively to exercise their discretion, which
duty will itself impose limits on directors’ ability to remain passive, see R. Gregory, Directors’ Duty
to Exercise Discretion (Bicester, Oxfordshire: CCH Editions, 1998) (part of the CCH British
Company Law Library Service).
8Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. For arguments that Re City Equitable is
often misinterpreted, and is itself more demanding of directors, see Worthington, n 3 above, 188 and
A. Hicks, ‘Directors’ Liability for Management Errors’ (1994) 110 LQR 390.
9 See, for example, Finch, n 3 above, 202; Parkinson, n 1 above, 106–107; Worthington, n 3 above,
189. This complaint is, however, hardly a new one; see, for example, M.J. Trebilcock, ‘The Liability
of Company Directors for Negligence’ (1969) 32 MLR 499, 509.
10 See generally Parkinson, n 1 above, 101–113; P.L. Davies, Gower’s Principles of Modern Company
Law (London: Sweet and Maxwell, 6th ed, 1997) 640–644.
11 Similar moves have been seen in some other jurisdictions. In relation to Australia, see Daniels v
Anderson (1995) 16 ACSR 607 (NSWCA) and, for comments thereon, see R. Nolan, ‘Care and Skill
in Australia – Daniels v Anderson’ (1996) 17 The Co Lawyer 89; Griggs and Lowry, n 3 above. In
relation to America, see the American Law Institute, Principles of Corporate Governance: Analysis
and Recommendations (St Paul, Minn: ALI, 1994) esp vol I, Part IV. And for an account of the
German position, see Law Commission, n 4 above, paras 12.26–12.32.
firm) [1991] BCLC 1028; Re D’Jan of London Ltd; Copp vD’Jan [1994] 1 BCLC 561.
14 n 4 above, esp para 15.21. The Law Commission stops short of formally recommending the proper
content of the duty of care, but clearly prefers what it terms a ‘dual test’ option. On that, see n 57
below.
15 This lack of clarity provides one argument in favour of its statutory codification. The Law
Commission, n 4 above, paras 14.4–14.7, assumes that company directors themselves probably do
find the current legal position hard to understand, but proposes further empirical research to ascertain
the full extent of the problem.
16 n 3 above, 179.
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