Legal entities directors’ liability for breach of good faith and/or unreasonable actions

Abstract

The article applies a comparative approach to the issue of directors’ liability for breach of good faith and unreasonable actions in Russian, UK, and US legislation and case law. During the analysis of Russian case law, the inconsistency in the judicial approach to the application of the law has been established and revealed in the article. The author brings up the issue of whether and to what extent it is possible to apply the objective and subjective tests developed by English Common law judges to solve the matters of a director’s liability for breach of good faith in Russia. However, the author draws the line between the above described Common law perspective and the maxims of the law of equity and offers to restrict the latter. The other common law doctrines such as estoppel, reasonable man standard, and respondent superior are also seen in comparison with Russian law. The broader application of the principle of good faith to corporate relations has been significantly limited in the UK and the USA, the courts tend to apply fiduciary duties under a minimal scope. The directors’ liability for breach of the duty of care and duty of loyalty has been in many cases up to shareholders to decide unless the gross negligence was proven to have caused harm to the company. Generally, however, the directors are not held liable for pure economic loss and unprofitable deals. Russian courts to the contrary in many cases hold directors liable for the loss even though directors’ fault, intent or gross negligence were not proven — the mere fact that the director could not demonstrate that the best possible course of actions was taken is often regarded as a breach of good faith and unreasonable actions.

Keywords:

good faith, liability, corporation, director, reasonableness, subjective test, objective test, mitigation, unconscionability