>, Ondernemingsrecht, Vennootschapsrecht>Can directors be employees? (Corporate Finance Lab)

Can directors be employees? (Corporate Finance Lab)

Author: Michiel Poesen (Corporate Finance Lab)

Publication date: 07/02/2019

Can directors be employees? An array of answers are possible. A director may accept to perform the duties resulting from company law and the statutes of association by entering into eg a management contract, an agency agreement, or an employment contract. The diversity of plausible answers also impacts on EU private international law, as the applicability of the protective rules on jurisdiction in matters relating to employment contracts, contained in Art 18 et seq of the Brussels I Regulation Recast, depends on whether a relationship can be characterised as a ‘matter relating to an individual contract of employment’. At stake are among other things (1) the option of the director to sue the company in the courts of the place where he is domiciled, and (2) whether the company is restricted to pursue its actions against the director in the courts of the director’s domicile.

In his Opinion in C-603/17 EU:C:2019:65 Bosworth ea v Arcadia Petroleum ea, AG Saugmandsgaard Øe clarified the position of directors of a company in respect of the rules of jurisdiction applicable to employment contracts.

Background

The facts of the case were the following. Multiple companies within the Farahead group, including the Farahead holding company, commenced proceedings against Bosworth and Hurley, former CEO and CFO of the Farahead holding, as well as directors of three subsidiaries: Arcadia London, Arcadia Switzerland, and Arcadia Singapore. Each one had had concluded a contract of employment with one more of these companies, and acted as de facto directors for the companies with which they had not formally concluded a contract. The contracts were drawn up by Bosworth and Hurley themselves.

Farahead and the three Arcadia companies (together ‘Arcadia’) started proceedings in England against Bosworth and Hurley for alleged fraud that consisted in diverting profits from fraudulent transactions involving the Arcadia companies. Arcadia based its claim on (1) the tort of unlawful means conspiracy, (2) breach of fiduciary duty, and (3) breach of express and/or implied contractual duties.

The question arose as to whether the claims against Bosworth and Hurley are ‘matters relating to individual contracts of employment’ (Art 18 et seq 2007 Lugano Convention; a similar provision features in Art 20 et seq Brussels I Regulation Recast; these rules, contained in Section 5 of the Convention and the Regulation, are colloquially referred to as the ‘employment section’), or in the alternative as ‘matters relating to tort, delict or quasi-delict’ (Art 5(3) 2007 Lugano Convention; the identical provision features in Art 7(2) Brussels I Regulation Recast). At stake is the jurisdiction of the English courts. If the claims brought by Arcadia are ‘matters relating to an individual contract of employment’, the courts of Bosworth’s and Hurley’s domicile (in Switzerland) would be competent over the English courts. If the claims are tortious, the English courts may have jurisdiction because England may be considered the place where the harmful event occurred. The Supreme Court referred an array of question to the European Court of Justice (‘ECJ’). The specific issues and the AG’s take on them will be discussed in what follows (also see Professor Geert Van Calster’s review on GAVC Law).

A link of subordination

The AG first considered whether Bosworth and Hurley can be considered to be employees. In this regard, the AG clarified that the notion of individual contract of employment also encompasses de facto employment relationships, ie an employment relationship that has not be formalised in a contract. The employment section of the 2007 Lugano Convention/Brussels I Regulation Recast does not require the conclusion of a contract. The absence of a formal contract of employment can hence not preclude the applicability of the Convention’s/Regulation’s head of jurisdiction in matters relating to individual contracts of employment.

Furthermore, an employment relationship requires a link of subordination, in that the employee performs a certain service under the direction of another person in return for a remuneration. The AG concluded that a link of subordination cannot exist if a director has ‘complete autonomy’ and ‘complete control’ over the performance of their managerial duties (which excludes Bosworth and Hurley being qualified as employees, as they drafted the employment contracts themselves). The fact that a director’s mandate can be revoked unilaterally by the shareholders is immaterial in this context, as it cannot in itself demonstrate the existence of a relationship of subordination. The AG found support for this conclusion in the Rome I Regulation on the law applicable to contractual obligations. Art 1(2)(f) of the Rome I Regulation provides that ‘question governed by the law of companies’, comprising the ‘internal organisation’ of companies are excluded from the subject matter of the Regulation and hence the protective conflict of laws rules in employment matters contained in Article 8 of the Regulation. Note is that another classification may prevail under national employment law, notwithstanding that the regime for employment contracts of EU private international law is not applicable. Moreover, the AG rejects an interpretation by analogy with the case law regarding the concept ‘worker’ in Directive 92/85/EEC (para 48).

The relation between claim and contract

The AG nevertheless considered whether the claims against Bosworth and Hurley should be characterised as matters relating to an employment contract, should the ECJ not concur with the AG’s finding regarding the lack of a link of subordination. The difficulty lies in the tortious/fiduciary basis of the duties on which the claims against Bosworth and Hurley are based. Despite the extra-contractual or equitable nature of those duties in English law, can they be considered to be ‘matters relating to individual contracts of employment’ for the purpose of private international law? The starting point of the analysis is the social aim of the employment section of the Lugano Convention/Brussels I Regulation Recast, which consists in according a special jurisdiction protection to employees as they are the weaker party in the employment relationship. Taking into account this observation, the AG concluded that the employment section is applicable when there is a ‘material link’ between a claim and an employment contract. That is the case when ‘the claim relates to a dispute arising in the employment relationship, whether or not the claimant bases his claim on the ‘contract’, and whether or not it is necessary to establish the content of the contractual obligations to decide on its merits.’ (Opinion in Bosworth ea v Arcadia Petroleum ea, para 94).

With a view to refining that test in order to be applied to the claims brought by Arcadia against Bosworth and Hurley, the AG added that claims are excluded from the employment section in as far as they relate to ‘harmful conduct that is not connected by any objective circumstance pertaining to time, place, means or purpose with the duties performed by the employee’. This approach does not seem to depart from the EWCA ruling ([2016] EWCA Civ 818) in the case, against which an appeal had been brought before the referring court (see Pippa Rogerson, ‘Autonomous characterisation under the Brussels I Regulation Recast’ [2017] The Cambridge Law Journal 22, 24-25 for a criticism of this approach: the concept ‘contract’ is essentially a legal construct, the content of which should not depend on a purely factual exercise of characterisation).

Of note is that the AG also restated the relevant case law concerning the head of jurisdiction in matters relating to a contract other than a protected contract (employment, as well as B2C or insurance contracts), contained in Art 5(1) of the 2007 Lugano Convention/Article 7(1) of the Brussels I Regulation Recast. This part is relevant in as far as one would conclude that the relationship between Bosworth/Hurley and Arcadia is not an employment relationship. The AG essentially preferred a characterisation that depends on the nature of the cause of action on which the plaintiff relies (see Case 189/87 EU:C:1988:459 Kalfelis v Bankhaus Schröder ea, and Case 9/87 EU:C:1988:127 Arcado v Haviland). If the plaintiff bases its claim on an obligation freely assumed, that claim is a matter relating to a contract. That this approach would allow a certain amount of forum shopping, since the plaintiff can chose the legal basis and hence frame its claim in contract or tort, is not problematic in the view of the AG; choice of multiple competent fora is a policy that is inherent to EU private international law. However, recent rulings of the ECJ proposed a characterisation based on the facts, in that the facts should be able to be considered to be a breach of contract (Case C‑548/12 EU:C:2014:148 Brogsitter v Fabrication de Montres Normandes ea, and Case C-47/14 EU:C:2015:574 Holterman Ferho Exploitatie ea v Spies von Büllesheim). This approach indeed raises more questions than it answers (Opinion in Bosworth ea v Arcadia Petroleum ea, para 88). The AG concluded by inviting the ECJ to bring clarity in this very confused and ambiguous area of the case law (see Andrew Dickinson, ‘Towards an agreement on the concept of “contract” in EU private international law?’ [2016] Lloyd’s Maritime and Commercial Law Quarterly 466). Further elaboration in this respect would be unnecessary for now; it can be hoped that the ECJ will pick up on the AG’s invitation sooner rather than later.

Employees within a group of companies

Then, the AG cleared a final issue relating to employers within a group of companies. A group entity may have an economic interest in the employment of an employee with which it has not directly concluded an employment contract. Does the lack of a direct contractual relationship entail that the employment section of the 2007 Lugano Convention/Brussels I Regulation Recast does not apply to claims brought by or against the group entity in relation to the employee? The AG concluded that the objective of protection requires that group entities should also be subjected to the jurisdictional restrictions contained in the employment section. If that were not the case, it would suffice to unravel the content of an employment contract and confine certain aspects to contracts with group entities in order to frustrate the employment section’s protective aim. Additionally, this approach is best fit to avoid concurrence of multiple courts that have jurisdiction, as jurisdiction over claims regarding the same employment relationship will generally be confined to the same courts (the EWCA held similarly in Samengo-Turner ea v J & H Marsh & McLennan ea [2007] EWCA Civ 723. The case law of the German courts seems to be stricter: Bundesarbeitsgericht, judgment of 25.06.2013 – 3 AZR 138/11, nr. 23).

Conclusion

AG Saugmandsgaard Øe’s Opinion sheds light on some aspects of the status of directors in private international law, and in particular the characterisation of director-company relationships as employment contracts. As the ECJ will not have to consider all the issues that are addressed by the AG in order to respond to the preliminary reference, the Opinion will be a most useful tool of reference for future cases.

Read the original article here

2019-02-07T12:54:22+00:00 11 februari 2019|Categories: Arbeidsrecht - Ondernemingsrecht - Vennootschapsrecht|Tags: |