The Civil Code of Lithuania (the Civil Code) lays down in Article 6.264 vicarious liability, according to which an employer is liable to pay compensation for the damage caused through the fault of his employee in the course of their employment. However, in its recent judgment of 26 October 2015 (case No. 3K-7-328-248/2015), the Supreme Court of Lithuania (the Supreme Court) has extended the liability by shifting it directly to the Manager in the case when the company has been liquidated because of bankruptcy and the damage has not been compensated fully and the fault of the Manager is stated by the judgment in criminal proceedings.
The employee (the Claimant) in pursuing his work duties (construction work) fell and injured himself resulting in a serious impairment of health, in which his work capacity was reduced by 80 percent. By the judgment of conviction rendered by a judge in the relevant criminal case, the Manager of the company was found guilty of the violation of the requirements of health and safety protection at work. In the criminal proceedings the employee was awarded pecuniary (€4,093.25) and non-pecuniary (€72,405) damages. However, the company went into the bankruptcy and was liquidated. The part of the awarded amounts of damage to the employee was not compensated fully. The employee, therefore, brought a claim for non-pecuniary damage of €72,405 before the civil proceedings against the Manager, based on the principle of full compensation (restitutio in integrum). The Claimant argued that the company had been liquidated and he was not in a position to claim for damages against the company. The Manager, who had been found guilty in criminal proceedings, shall be held liable because namely the actions of the Manager, as the head of the legal entity, violated his duties to work thoughtfully and competently, causing the damage to the Claimant.
The defendant (the Manager) based his defence on vicarious liability (Art. 6.264 of the Civil Code). This provision determines that an employer (but not the Manager directly) shall be liable for compensation for any damage caused by the fault of his employees in the performance of their service (official) duties.
The court of the first instance agreed with the reasoning of the Claimant and awarded damages, however not all the requested sum but €48,279.66 (requested had been €72,405). The defendant (the Manager) disagreed with the judgment of the court of the first instance and lodged an appeal. The Court of Appeal, notwithstanding, came to the same conclusion as the lower court and left the first instance court’s decision unaltered. The defendant (the Manager) challenged the Court of Appeal’s decision and brought the cassation case before the Supreme Court.
The essential issue with which the Supreme Court dealt with in the discussed case was whether the defendant (the Manager) can be directly liable for the damage to the employee.
The Supreme Court began by referring to the provisions of vicarious liability. The Court emphasized that according to Article 6.264 of the Civil Code, the employer is held vicariously liable for his employee for the damage caused to his employee. The Court also affirmed its previous precedents that, if in the event of an occupational accident in which the employer (the company) is under bankruptcy proceedings, the aggrieved person shall have the right to bring the claim into the bankruptcy litigation against the company.
Further, the Court underlined in its ruling that the principle of full compensation (restitutio in integrum) is a Constitutional principle. The aim of the law of damage is full compensation of the damage suffered both in respect of pecuniary loss and non-pecuniary loss. In the discussed case the Claimant requires the compensation of non-pecuniary damage which has been occasioned through the committing of a crime. Article 6.250 (2) of the Civil Code provides that non-pecuniary damage shall be compensated in all cases where it is incurred due to a crime, health impairment or deprivation of life, as well as in other cases provided for by law.
Having set out these general rules of law, the Supreme Court turned to the case at issue. The Court highlighted the need to explicate existing case law in applying the vicarious liability, namely, when the employer (the company) is already liquidated because of bankruptcy. On this point the Court ruled that – if pursuant to Article 6.264 of the Civil Code the company is held liable for damage but goes bankrupt and becomes dissolved without compensating for it, the rule of the employer’s liability for damage caused by reasons attributable to the employee should be construed to imply giving some additional guarantees to the injured party rather than extinguishing (whether by acts or omissions) the liability of the injuring party. By strengthening this argument the Court referred to the Principles of European Tort Law, i.e. Art. 6:102, the Liability for Auxiliaries, which states that a person is liable for damage caused by his auxiliaries acting within the scope of their functions provided that they violated the required standard of conduct.
Furthermore, the Court referred to the Labour Code of Lithuania by pointing out that if the damage results from a criminal act of the employee, determined according to the procedure laid down in the Criminal Code, the employee must compensate all damage. In the present case, this means that the Manager’s liability cannot be limited because fault has been established by criminal verdict.
Taking into consideration the above-mentioned circumstances, the Supreme Court has comes to a conclusion by the establishing of a new precedent, in that – if damage is caused by the employee’s criminal acts which are qualified as such pursuant to the Code of Criminal Procedure, but the company (employer) liable for such damage ceases to exist before compensating for it, the employee causing damage may become directly civilly liable (i.e. a direct debtor) in non-contractual (tort) claims.
In view of the foregoing, the Supreme Court upheld the reasoning of the lower courts but again took a close look at the awarded amount of non-pecuniary damage to the Claimant and reduced it approximately twofold (from €48,279.66 to €21,721.50).
The above-mentioned judgment seems to have significantly extended the liability of Managers. Thus for Managers to mitigate the risks and exposures of running the company, i.e. liability for mismanagement, the advice might be to require the shareholders to ensure management liability insurance, so as to cover these risks. Indeed, in view of Lithuania, management liability insurance is rather an exception than the normal run of things. The discussed new precedent, however, may stir the market and consequently there will be an opening for the insurers.
*Inga Klimašauskienė is a Senior Associate at GLIMSTEDT in Vilnius, www.glimstedt.lt