Director responsible for company's negligence

LAW REPORT 18 January 1996

Williams and another v Natural Life Health Foods Ltd and another; Queen's Bench Division (Mr Justice Langley); 1 December 1995

A director of a company was personally liable to the plaintiffs for the loss caused by the company's negligent misstatement where, although the director had no direct contact with the plaintiffs, the company was selling his personal experience and skill and he could be taken to have assumed a personal duty to the plaintiffs.

Mr Justice Langley gave judgment for the plaintiffs against the second defendant in the sum of pounds 84,641.

The plaintiffs entered into a franchise agreement relating to the operation of a health-food shop with the first defendant company of which the second defendant was the owner and managing director. The company's brochure described its experience and expertise in establishing a viable franchise business as based on the second defendant's experience.

Financial projections were provided for the plaintiffs. The plaintiffs did not deal with the second defendant but expected the projections to have his personal stamp of approval. For the 18 months of the shop's operation as a franchise, it achieved a turnover of pounds 248,000 against the projection of pounds 430,250 and a loss of pounds 38,600 against a projected profit of pounds 30,000. The plaintiffs' net capital loss from investing in the business amounted to pounds 84,641.

The defendant company had been dissolved and the plaintiffs pursued their claim in negligence against the second defendant.

Gerard Van Tonder (Williams & Co) for the plaintiffs; Michael Bloch (Trethowans) for the second defendant.

Mr Justice Langley said that the first issue was whether the defendant company was itself liable to the plaintiffs by making negligent misstatements or giving negligent advice in the projections. The company was in a relationship with the plaintiffs in which its advice on the financial viability of the proposed franchise was a vital part of the service it offered and it knew and intended that that advice would be relied on by the plaintiffs.

The sales projections proved to be very seriously over- stated. The company was in breach of its duty of care to see that the projections given to the plaintiffs were correct or properly and reasonably prepared.

The most important issue was whether the second defendant was personally liable to the plaintiffs. It was clear from the authorities that the fact that a director was the effective controller and owner of a company was insufficient of itself to fix him with a personal liability for torts committed by the company and that what was required for such liability was that the director must have expressly directed or procured commission of the tortious act.

He was entitled not to be deprived of the benefit of limited liability when acting in the business of the company. It was personal responsibility for the tort, not the company, which was required to render a director liable.

To find the second defendant personally liable he must therefore either have directed or procured the production of the projections to the plaintiffs in circumstances where he was personally negligent in doing so, or he must have assumed a personal responsibility to the plaintiffs for their preparation with reasonable skill and care, notwithstanding that the plaintiffs were dealing with the company.

It was important that what the company had to sell was the second defendant's personal knowledge and skill.

On the totality of the evidence, with a business which was based and presented as being based on the second defendant's personal expertise and experience, the second defendant did assume, and was reasonably to have been taken to have assumed, a personal duty to the plaintiffs.

Although there was little direct contact between him and the plaintiffs, the totality of the evidence established that the second defendant had personally directed the presentation to the plaintiffs of the projections or assumed a personal responsibility to the plaintiffs for them, and he did that in the knowledge that the plaintiffs would rely on the projections and his personal knowledge and experience.