Defamation Act 2013: The value of corporate reputation – Peter Coe

22 01 2014

PCoe_t175In a paper published in December’s edition of Communications Law, Peter Coe explored the impact that proving serious harm by demonstrating serious financial loss, pursuant to s1(1) and (2) of the Defamation Act 2013, may have on corporate claimants’ right to reputation. This abridged version of the 10,000 word paper briefly outlines the analysis of issues with causation.

On 31 December 2013 the government released a press statement stating that: “The Defamation Act 2013 reverses the chilling effect on freedom of expression current libel law has allowed, and the prevention of legitimate debate we have seen in the past”.

But what of corporate reputation?

The application of serious harm and serious financial loss is considered through the lens of two concepts that provide a vehicle through which defamation claims can be brought by corporate claimants: reputation as property and reputation as honour. Both concepts legitimise the protection of corporate reputation as a valuable asset that, in the case of reputation as honour, does not always manifest in financial gain or loss to a company.

In order to adjust the inequality of arms between corporate claimants and non-corporate defendants, as identified by the Ministry of Justice in its Draft Defamation Bill Consultation Paper, the Ministry recommended the introduction of a ‘substantial harm’ requirement into the Draft Defamation Bill, in that the statement complained of is not defamatory, unless it caused substantial harm to the claimant’s reputation. However, it did not approve of the introduction of a requirement that, in order to demonstrate ‘substantial harm’, corporations have to prove financial loss. Despite this, rather than substantial harm, the 2013 Act, which received Royal Assent on 25 April 2013,  includes a serious harm requirement. On 24 April 2013 the government introduced a qualification for this requirement, in that, to meet the serious harm threshold, corporations trading-for-profit need to demonstrate serious financial loss. Although included late, this qualification was enshrined within the Act.

The mechanism provided in the Act for measuring the seriousness of harm, or likely harm, caused to a corporation is the extent of the financial loss incurred, or likely to be incurred. However, serious harm and serious financial loss are not defined or explained explicitly. For the sake of an individual claimant, there is no guidance on the mechanism for measuring serious harm. For the corporate claimant, there is the same dearth of guidance for serious financial loss.

According to the Lord Chancellor, the term ‘substantial harm’, recommended by the Ministry of Justice in its consultation paper, reflected the requirements under the common law regime. The new test of serious harm ‘nudges up’ this threshold by a “modest extent” and is drafted to allow the court to consider all the relevant circumstances of the case. However, this is the extent of the limited guidance provided. Ultimately, what actually amounts to serious harm must be determined by the courts on an individual case basis.

The Lord Chancellor’s opinion is vague and cursory: for example, could actual or likely serious harm derive from a decline in a company’s share price? This method is subject to conflicting schools of thought, as illustrated by the Public Bill Committee’s Parliamentary Debate on the Defamation Bill. Jonathan Djanogly was of the opinion that a fall in share price could demonstrate serious harm, a view supported by Holroyd Pearce LJ’s judgment in Lewis v Daily Telegraph Limited [1962] 3 WLR 50 at 376. Rose LJ’s judgment in McCarthy Stone plc and others v The Daily Telegraph ((unrep) 11th November 1993) also supports Djanogly’s assertion. His Lordship accepted that evidence of a decline in share price, for the purpose of inferring causation, may be relevant to goodwill and special damages.

To the contrary, during the debate, Paul Farrelly argued that loss of reputation can only be derived from a company’s profit and loss and sales, not fluctuations in share price. Farrelly’s argument reflects Dillon LJ’s judgment in Lonrho v Fayed (No.5) ([1994] 1 All ER 188), in which, according to Tugendhat J in Collins Stewart Limited v The Financial Times Limited (No.1) [2005] EMLR 5 his Lordship answered the following question in the negative: “do fluctuations in the share price of a company reflect its goodwill and reputation?” Indeed, in Collins Stewart the Financial Times argued successfully that using an alleged decline in share price as evidence of financial loss lacked certainty and precision.

Reputation as property (an issue of causation Part I)

Demonstrating serious financial loss due to damage caused to reputation is subject to two particular issues which, in some instances, may prove impossible to overcome.

Firstly, the claimant will need to establish causation by demonstrating that the defamatory statement caused or is likely to cause the loss. This would not be an issue where, for example, there is one statement clearly linked to an immediate drop in revenue. However, difficulty arises where a loss has been caused by a number of statements, only one of which is defamatory. In this example, in order to establish causation, the claimant would have to prove that the single defamatory statement caused or is likely to cause ‘a’ serious financial loss. The second issue is quantifying the loss caused, or likely to be caused, from that individual defamatory statement. Thus, in this example, it may prove impossible for a company to separate what loss is linked to the defamatory statement and what is linked to other, legitimate damage, to its reputation. This acute issue with causation is illustrated by Tesla Motors Limited and another v British Broadcasting Corporation [2013] EWCA Civ 152 (a case mainly concerning malicious falsehood).

Reputation as honour (an issue of causation Part II)

Reputation as honour is as capable of being defamed as reputation as property, due, to a large extent, to an ever greater emphasis being placed by companies on Corporate Social Responsibility activities. The requirement to establish serious financial loss, whether actual or likely, will prevent companies from pursuing legitimate claims where reputation as honour has been damaged. The BBC can be used to illustrate these concerns, as it has reputation as honour. If, as suggested by Sir Edward Garnier, during the House of Common’s debate on the eve of the Act’s enactment, it were accused of being “a hotbed of or a magnet for child sex abusers” it would not necessarily be caused, or likely to be caused, serious financial loss. However, notwithstanding the application of defences, it could, potentially, be defamed, and its reputation as a place to work and visit could be damaged. Thus, despite the fact that in this example the BBC could be caused serious reputational loss, notwithstanding a claim for malicious falsehood, vindicating its reputation under the 2013 Act would prove problematic, prolonged and costly. Indeed, Moore-Bick LJ’s observation in Tesla is particularly pertinent, as any attempt to vindicate reputation may expose the claimant to further negative publicity, which could result in a further deterioration in reputation. Demonstrating actual or likely serious financial loss in these circumstances may only be achieved by, for example, establishing a link between the statement and consequent inability to recruit suitably talented employees which, in turn, results in actual or likely serious financial loss. Evidentially this would be hugely challenging, and, is akin to establishing actual or likely serious financial loss by virtue of a decline in share price. As such, it is subject to the same issues of remoteness, reliability and certainty, due to the amount of variable factors that would be involved.

Watch this space

The issues outlined above are clearly concerning, particularly where reputation as honour is concerned. Ultimately, despite the government’s statement above, the potential impact on corporate reputation, as a result of the requirement for corporate claimants to establish serious harm by demonstrating serious financial loss, and what this may mean for the wider economy, was not adequately considered. Quite simply, in many plausible instances, companies will not be able to vindicate their reputation despite having legitimate claims, as they will not be able to demonstrate actual or likely serious financial loss, or will struggle to establish a causal link between a defamatory allegation and a quantifiable loss.

Peter Coe is a Senior Lecturer in Law at Buckinghamshire New University, and a Barrister (Door Tenant) at East Anglian Chambers.

The full paper was published as ‘The value of corporate reputation and the Defamation Act 2013: a brave new world or road to ruin?’ (2013) 18.4 Communications Law 113-121.


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