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The law of defamation
The first task will firstly identify the law of defamation and then proceed to apply the law to the given facts of Medusa plc. The law that is applicable here is the law of defamation of character which involves libel. There are three essential legal elements to prove in order to succeed in an action: firstly there must be a defamatory statement which must be about the claimant and thirdly which must be published. (Bermingham and Brennan (2010): 260-265). In considering each of these elements, the first stage is to assess how the courts determine whether a statement can be classified as defamatory. As defamation originates in case law rather than statutes the courts have interpreted the various elements of defamation through its case law. In Parmiter v Coupland (1840) it was held that a defamatory statement is something that is calculated to injure the reputation of another by ‘exposing them to hatred, contempt or ridicule’. The test was further developed in Sim v Stretch (1936) which stated that the statement would ‘tend to lower the claimant in the estimation of right-thinking’ members of society’. In essence, McBride and Bagshaw (2008) state that in order for a statement to be considered defamatory it must led an ‘ordinary’ reasonable person to:
(1) think less well of the individual or company less well.
(2) think that the person lacked the ability to do the job well.
(3) shun or avoid the person referred to, or,
(4) treat the person referred to as a figure of fun or an object for ridicule. (McBride and Bagshaw (2008): 275-279).
Additionally, it has been found that statements which indirectly criticise a claimant can amount to an ‘innuendo’ which can be actionable under defamation. (Tolley v JS Fry & Sons (1937)). The second element for defamation is that the statement must refer to the claimant. The claimant must show that the reasonable reader would take the statements as referring to the company or individual concerned. (Newstead v London Express Newspaper Ltd (1940)). This element is usually the easiest to prove as most articles will expressly mention the claimant or will clearly be identifiable from the article. The third stage is that the statement must be published and in law a statement is considered published when the defendant communicates it to anyone other than the claimant, or technically the defendant’s husband or wife. (Elliott and Quinn (2009): 232). The essential ingredient for publication is the fact that the statement is communicated to a third entity. Further when an article is published in the print form, it is not just the writer who may be liable other parties including booksellers, publishers and lending libraries have all been held to have published libels contained in books, newspapers and magazines. (Ibid). Additionally, if the statement is published in an ‘on-line’ format on the internet, the internet service providers may be held liable for publication when their activities in maintaining the internet is in part comparable to a bookseller’s role or a newspaper publisher’s role. (Godfrey v Demon Internet (1999)). For an internet service provider to be held liable for publication they must ‘host’ the website where the defamatory statement is made. (Bunt v Tilley (2006)).
It is also important to note that in a libel action, the commission of the tort is sufficient, it is not necessary for the claimant to prove damage. In applying the three stage test for defamation on the fact of Medusa plc it appears that the ‘Higher Education Supplement of Mudock Thunderer’ has printed three comments which may amount to libel. The first stage is to consider whether these statements are defamatory and the key question is whether an ‘ordinary’ reasonable person would think less of the company after reading the three statements. As Medusa plc is relatively new in the UK and is attempting to create a good image of their ability to conduct private education it may be likely that as a result of the three assertions that a court may conclude that the statements were defamatory. In particular, the first statement which is suggesting by innuendo that the educational establishment is a ‘sham’ only seeking to drain applicant’s money illegitimately by adopting a proscribed method for obtaining their English language qualification. The second statement follows the tone of the first statement by suggesting that one of the directors has obtained funds from the company in an illegal way. The third statement may be the most defamatory which suggests that the company is altering their records to ensure a high success rate of the course and student completion numbers. Taking all three statements together it would be likely that the reasonable person would conclude a low opinion of Medusa plc as an educational establishment questioning its ultimately ability to deliver education.
It appears that the second element of defamation is also satisfied on the facts, as the article appears to expressly mention the company and its director which would lead any individual who read the article to the identity of the claimant. The third legal element of defamation also appears to be satisfied as the publications of these statements are contained within an educational supplement publically distributed to third parties at large. It is important to note here that the defamation also makes other liable for the publication of defamatory statements. In particular to Medusa plc booksellers, libraries or distributors and if the journal has an online presence then the internet service provider who hosts the website with the defamatory statements may also be liable.
The final aspect of considering the law of defamation is to consider available defences that may be available on the facts. In general there are six defences which a defendant may assert to an action in defamation: Justification, Fair Comment, Absolute Privilege, Qualified Privilege, Offer to Amends and Innocent Dissemination. The most relevant defences on the facts are ‘Fair Comment’ and ‘Justification’. The defence of ‘Fair Comment’ applies when the comment or statements are true upon the facts. In essence, for the defence to succeed the defendant has to prove that the authors and publishers genuinely believed or had evidence to believe that the statements were based on true facts and it was in the public interest to publish them. (Reynolds v Times Newspapers (2001)). In the case of Medusa plc it is unknown whether the comments and statements are true and what evidence the Higher Educational Supplement may be able to provide. The success of the ‘Fair Comment’ defence would be contingent upon the statements being true or if the defendants could put forward sufficient evidence to show they genuinely believed the statements to be true.
The alternative defence of ‘Justification’ is where the statements are known to be true and if they are true then they will not be considered defamatory. It is important to note that section 5 of the Defamation Act 1952 will provide a defence for justification even though there may be some inaccuracies within the statements. If the claimant can succeed in establishing the claim and defend any potential defences there are two primary remedies available under defamation. Firstly damages which are aimed at compensating the claimant for the damage caused to their reputation. Although it may be extremely difficult to quantify the damages, it could be argued that subsequent publication of advertisements will be required by the claimants to counter-act the damage caused by the publication. (John v Mirror Group Newspapers (1997)). Secondly the claimant may be able to obtain an injunction preventing the further publication of statements both in the Higher Educational Supplement and in any other publication. It is important to finally point out that it may be likely that if Medusa plc do attempt to sue the additional companies involved in the distribution and selling of the article it would be likely that they may have the defence of ‘Innocent Dissemination’ if they were unaware of the content of the article.
The three main issues raised on the facts centre upon firstly the role of Medusa’s director Joe Fassenbender in the English language ‘validating’ company, secondly the apparent loan of £10 million taken by Director Joe Fassenbender and thirdly the reporting of activities by the Dean of Vauxhall Viaduct College of Higher Education. In specifically addressing the requirements of the Companies Act 2006 and the 2010 UK Corporate Governance Code 2010 this part will deal with each of the issues above in relation to the respective legislation and code. Firstly in dealing with director duties, the starting point is that director’s duties are always owed to the company. (Companies Act 2006 (CA): s170(1)). These duties can be enforced by the company or by anyone who is authorised to act on behalf of the company. The substance of the director’s duty is that of ‘skill, care and diligence’ in carrying out their duties to the company. Historically, case law subdivided these duties into firstly duties of loyalty and secondly duties of care. (Davies (2008): 488). However, the Companies Act 2006 introduces into statute the core duties of a director of a company. In particular sections 170-180 of the CA 2006 create specific general duties which are the equitable principles that apply due to the fiduciary relationship the director has with the company. (Alcock et al (2008): 177-180). The general duties owed by director consist of seven principles which originated in common law but have been placed on a statutory footing with the enactment of the CA 2006. The seven principles include:
(1) The duty to act within powers: section 171 states that director must only exercise the power given to them within the company and must only exercise them for the purposes which they are given.
(2) The duty to promote the success of the company: although historically company directors were required to act in the bona fide benefit of the company, section 172 outlines that the director must promote the success of the business.
(3) The duty to exercise independent judgement: section 173 codifies the common law principle which requires that the directors must always remain independent to protect the interest of the company. It can be consider this duty is there to require that the directors always act in ‘good faith’.
(4) The duty to exercise reasonable care, skill and diligence: section 174 codifies the common position requiring that directors display the care, skill and diligence that would be expected from a reasonably diligent person.
(5) The duty to avoid conflicts of interest: section 175 sets out the previous common position which is amplified further in section 175(7) which draws specific attention to the fact that directors are prohibited from exploiting any opportunity which they would not normally have been able to exploit but for the fact of their directorship.
(6) The duty not to accept benefits from third parties: section 176 similar to previous sections seeks to codify the previous common law which prohibits directors from taking benefits from third parties without declaring it to the company.
(7) The duty to declare an interest in prosed transactions or arrangements: section 177 prohibits directors from taking advantage of a third party interest, transaction or arrangement without the declaring that interest, transaction or arrangement to the company.
The seven duties above form together to encompass the ‘general duties’ a director owes its company. In specific to the facts presented by Medusa plc it appears that a number of the general duties may be breached by the actions of director Joe Fassenbender. In particular the facts suggest that Fassenbender has set an alternative company for validating English language students which he maintains a financial interest. If he has not informed the company about his interest within ‘Fassenbender’s Company Entry Ltd’ then the following general directors duties may be in breach or compromised: section 173 his ability to exercise independent judgement, section 175 the duty to avoid conflicts of interest and in particular it appears that he is receiving a benefit as a direct result of his directorship and thirdly the duty to declare an interest in an arrangement with his own separate company to validate English language students. Additionally, as Fassenbender has granted himself a loan it would appear to be contrary to section 172 in failing to promote the success of the company. Although Fassenbender appears to have resigned now, if this is correct he may have resolved the conflict with the general duties required of a director. However, this will not deal with the issues left over by his actions whilst he was a director including the loan outstanding and secondly the profits made from the alternative English language validation company.
The biggest issue for Medusa plc is the fact that it appears that Fassenbender has given himself a loan of £10 million for his own personal use. The most pertinent issue is the fact that although it appears that money which moved from Medusa plc to Fassenbender is couched as a loan, it appears more a gift in nature due to the terms and conditions attached to the loan. Loans to company directors have long been the subject of regulation due to the wide powers given to directors. In particular section 197 of the CA 2006 stipulates that loans to directors require shareholder approval. In the case of Medusa plc it appears that Fassenbender has approved his own loan which is contrary to the CA 2006. Although Fassenbender appears to have resigned the loan outstanding still remains a significant problem for the company due to the way it was approved and secondly its size. Civil remedies are provided under section 213 of the CA 2006 against directors in breach of their duties to the company which may allow Medusa plc to recover the money outstanding and to recover any profits or benefits received by Fassenbender under Fassenbender’s alternative English language company.
One example of a company failure in this area is the case of Neville v Krikorian (2007). Mr Krikorian was the director in a company called Unireg Ltd who opened a loan account in favour of Mr Krikorian in 1998 which was disclosed in the annual accounts. When the company went into administration the administrator was able to pursue both Mr Krikorian and the other directors for the value of the loan as the loan had been granted without shareholder approval. The additional directors were also liable because they were deemed to have constructive notice through its inclusion in the company accounts. In this particular case the courts allowed the claim against the other directors for the full recovery of the value of the loan. In considering this example it is important to note for Medusa plc that the loan outstanding to Fassenbender may also be liable for the loan depending on whether the other directors had knowledge of its existence which can be actual or constructive. The real danger posed to Medusa is whether Fassenbender will be able to repay the money and secondly it shows a lack of corporate governance within the company if other directors have not noticed the existence of the loan.
In order for Medusa plc to increase its corporate governance legitimacy it is important that it adopts strict auditing procedures which monitors all key activities in the company which are reported back to the shareholders. In the future to avoid such acts the company should ensure that Trust Partners are given full auditing powers to enable director decisions to be scrutinised by the shareholders. The Privy Council in considering whether to grant degree awarding powers will strictly examine the company’s corporate governance and it will require that the company will have stricter procedures in place for director decision making. If the company can implement a strict approach for director decision making with a strong ‘Articles of Association’ setting out key duties with strict auditing procedures it may go somewhat to rectifying the situation left open by Fassenbender. The company should also issue proceedings against Fassenbender to recoup the loan and any profits it may be entitled to recover from his English language validation company.
In drafting the terms and conditions for Medusa plc for a contract with advertising and marketing firms a number of key points need to be considered first. The facts indicate a number of preliminary issues which need to be addressed in any potential contract with advertising and marketing firms:
(1) Time is going to be of the essence; in particular the agency will have to ensure that they will be able to deliver the objectives set out by Medusa plc as they are planning their expansion over the next few months.
(2) Medusa plc will require specialist advertisers and marketers in the education environment which requires the skill set to be able to target the educational market effectively.
(3) To ensure there is consistency with the establishment of a new educational college the same team of advertisers and a team leaders should remain in charge of the campaign for at least the first two years. This will ensure that the message campaign will remain consistent and constant.
(4) The company appear to want the use of focus groups to test the public opinion in the areas where the college will be built with effective media campaigns put in place to deal with any identified negative feedback.
Sample terms and conditions for the contract between Medusa plc and a marketing and advertising firm:
“Agency" this refers to the advertising and marketing firm appointed by Medusa plc.
“Company" this refers to Medusa plc.
“Time period", “Timelines" and “Timescales" this refers to the amount of time Medusa plc will require their media campaign to be researched, delivered and executed.
“Care manager" this refers to an individual who will be appointed by the agency to work in Medusa plc for at least two years at a time to manage all transactions and activities between the agency and Medusa plc.
“Focus groups" are small groups of no less than eight people formed of mixed gender and mixed backgrounds relevant to the topic for the target audience. The focus group members must be formed of people relevant to the company’s target audience.
This is a contact between Medusa plc and _______________________.
It shall be effective from ____________ and shall not expire until _________________.
It is intended to be a legally binding contract and at all times the law of England and Wales shall prevail.
By signing this contract at the end, _______________ is agreeing to all the terms and conditions set out in this contract and shall be bound by them in law without exception.
Terms and Conditions:
1.0 The agency will ensure that, at all times, it will represent the best interests of the company and shall not engage in any activity which would jeopardise the business operated by the company.
1.1 The agency shall keep all correspondence and all information between the agency and the company in absolute secret and confidentiality. This agreement will give rise to a duty of confidence between the agency and the company. At no point will the agency deluge any information of any description to any third party without the express written permission of the Board of Directors. All information shall be treated with the strictest of confidence and all staff involved in delivering this contract shall be bound by the same terms and conditions found in this contract.
1.2 The agency will ensure that any campaign strategy adopted will meet with the approval of the board of directors prior to publication.
1.3 The agency will undertake all of the research, planning and execution of all advertising and marketing campaigns on behalf of the company. The agency will use their reasonable care and skill in ensuring the advertising and marketing campaigns are of the highest quality and meet with the satisfaction of the company’s Board of Directors.
1.4 All campaigns will be delivered within the timeline and timescales required by the company. All advertising and media campaigns will be fully accurate and reflect the values of the company at all times.
1.5 The agency will not undertake the obligations set out in this contract unless it can guarantee the delivery of the required media campaign within the period of time required by the company. If the agency fail to deliver the media campaign within the time period they will be liable to compensate the company for any losses and any damage caused as a result.
1.6 The agency will ensure that all employees engaged in the performance and delivery of this contract is specialist within the higher education field. The agency will ensure that all employees have at least 12 months experience dealing with the advertising and marketing of higher educational colleges. Further the agency will ensure that at least one employee leading the project will have at least five years’ experience in advertising and marketing private higher educational colleges.
1.7 The agency will ensure that a ‘care manager’ is seconded to company for at least two years at a time. The care manager will oversee all the correspondence between the agency and the company which will ensure the smooth delivery of the contract. The ‘care manager’ must meet the written approval of the company. Any expense of the ‘care manager’ including salary, national insurance etc will be met at the cost of the agency. At no point will the care manager become an employee of the company.
1.8 The agency will ensure that focus groups are used to test public opinion in the areas where the colleges will be built. Further the agency will ensure that appropriate media strategies are put in place to counteract any negativity. The agency will ensure that at least four focus groups per intended site will be used by the agency to test public opinion. The cost of running these focus groups will be entirely met by the agency and under no circumstances will be met by the company.
1.9 The company reserve the right to amend the terms and conditions of the contract at any time. Any changes in the terms and conditions will be given with at least four weeks written notice by the company.
2.0 The performance of this contract is the full and absolute responsibility of the agency.