Milking it: Safeway and the OFT

The Office of Fair Trading has spooked the hell out of our industry. Tens of millions of pounds in fines will have to be shelled out by more than 100 builders. The OFT isn’t interested in the knock-on effect inside the firms; it isn’t interested if the fines cause firms to fail and jobs to disappear. Nor will it be interested in what William Morrison Supermarkets has just done. It, too, is at the thick end of a fine – £16.4m (later reduced to £11m after Safeway co-operated with the investigation). And it is presently trying to have it paid by, wait for it, its own (former) managers! This is the first time a company has ever tried something like this.

Imagine how your face would drain if the letter on your doormat was a bill for £16m. Might it be, that one or two of the builders in the OFT’s firing line could do the same?

Let me tell you the story. My neighbour is a dairy farmer; he has 120 cows. The milk tanker comes twice a day. Dairy farmers have felt hard done by for years. They have put pressure on supermarkets to increase the meagre few pence they are paid per pint. Seemingly, Safeway decided to help them out by “engaging in the repeated direct and indirect exchange of commercially sensitive retail pricing intentions with other supermarkets and processors”. This resulted in an increase of 2p on a pint of milk, and the uplift was passed back to the farmers.

The OFT got wind of all this, and the result was the whopping fines.

So Morrisons is suing 11 former Safeway managers, one of whom used to be the chairman. These folk are said to be in breach of their contracts of employment, or negligent, because they participated in “initiatives” that caused Safeway a loss in the form of the OFT fine. Oh, and it’s also said the defendants took part in a conspiracy to conduct anti-competitive measures.

The folk being sued regard all this as a rum do, so they went to court last week to get the action stopped. They said that if Safeway had transgressed the law, it had no right to sue them. The legal principle is that you can’t recover from others for a financial loss that is a consequence of your own unlawful act (known to lawyers as ex turpi causa). Safeway it is that did the deed, so Safeway it is that pays for it. Or rather, Morrisons it is.

Credit: Simone Lia

One side point is that this principle only bites when the unlawful act is “morally reprehensible”. Distorting competition in the UK is certainly naughty, but it is not a crime: an OFT fine is an “administrative penalty”. On the other hand, conspiring to diddle my family and me out of 2p per pint of milk is, said the judge, morally reprehensible. So the principle applies.

Unfortunately for the defendants, this wasn’t the end of the matter. Safeway, like all firms, acts through the agency of its staff. It then carries the can for what those human agents do. But it is not liable for all acts of the staff – only those of which the board or shareholders approve. That didn’t happen here.

As we’ve seen, the eight defendants argued that it was plain that Safeway was wholly liable for the price-fixing and so was prevented from “blaming” its employees. Yes, that’s true but the “morally reprehensible” act in fixing the price was organised by its employees. To what extent were the managers acting on their own account, and to what extent was Safeway acting though their agency? Well, this is the moot point.

Mr Justice Flaux said Morrisons had “a real prospect of successfully defeating at trial any defence of ex turpi causa or that their claims are contrary to the competition regime”. So, it seems the courts are willing to let the “fined” company seek to recover losses from its staff.

One final point: Safeway wanted to recover the £11m not from individual defendants, many of whom are of modest means; it wanted to recover it from the insurers that indemnified them against errors committed in the course of their job. To that, the court pays no attention formally. So if firms and staff are covered by insurance, would the danger of being sued personally deter staff from wrongdoing? And if that insurance idea works for Safeway, is that also the way to stop our industry losing tens of millions of pounds and jobs?