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What is Corporate Negligence?

By M. Lupica
Updated May 16, 2024
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Corporate negligence can come in many different forms. Generally speaking, it occurs when a corporation or its representative breaches a particular duty to a third party who suffers some harm due to the breach. The acts of a member of a company’s board of directors who does not observe his or her duty of care in operating the business may commit this act if there is resulting harm to the company — and by extension, the shareholders. Additionally, anyone acting on behalf of a corporation who causes some harm to a customer may be held liable for corporate negligence. The legal concept of vicarious liability holds liable not only the person who committed the negligent act, but the company itself will also be liable if the negligent actions were conducted in the course of his or her job.

A special kind of corporate negligence occurs when negligent actions of the board of directors devalue the company. The board of directors of a corporation has a duty of care to its shareholders and the board’s members may be held liable for any harm that results from actions that fall below the appropriate standard. For instance, part of the duty of care is to seek expert advice where appropriate when conducting transactions. In the event a member of the board of directors of a company executes a contract without having it reviewed by an attorney, it may amount to a negligent act. If it turns out that the terms of the agreement cause irreparable harm to the company, the shareholders may bring an action for negligence against the directors.

Negligent actions by a company that cause harm to a consumer may also result in a claim of corporate negligence. For example, pharmaceutical companies have a duty to make sure the medication they place on the market is safe for consumption. Should they fail to ensure that a particular drug is effective and safe and it results in death of patients who are prescribed the drug, the company will be liable for its corporate negligence.

The doctrine of vicarious liability is what allows consumers to sue companies for the individual acts of corporate negligence by their employees or directors. Consider the previous example of a pharmaceutical company that markets an unsafe drug. Even if the accountability for the error may be traced directly to one person, the company may be held liable as long as that person was under direction of the company. In many circumstances, the company may recoup some or all of the resulting damages from the negligent employee.

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Discussion Comments

By Scrbblchick — On Jan 20, 2014

I wonder if the Enron fiasco would qualify as corporate negligence? And then, there's the whole Target mess with the stolen credit and debit information. Since the hacker was able to exploit an aging system that should have been updated long ago, and Target knew it should have been updated and just never did it, would this be considered corporate negligence?

If anyone ever wanted to make a case for it, I'd say the Target mess would be a great place to start. They've done pretty good damage control for their customers, but I know I'd be looking for a good attorney if my bank account got cleaned out because I bought a set of cookware on Black Friday.

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