Law Report: Director personally liable for misstatements

LAW REPORT: 13 December 1996
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Williams and another v Natural Life Health Food Ltd and another; Court of Appeal (Lord Justice Hirst, Lord Justice Waite, Sir Patrick Russell) 5 December 1996

Exceptional circumstances had to exist before a company director would be held personally liable for misrepresentations made on behalf of the company, but it was not necessary that the director should have dealt personally with the misrepresentee, so long as the extent of his involvement was such as to make the case exceptional.

The Court of Appeal by a majority (Sir Patrick Russell dissenting) dismissed an appeal by the second defendant, Richard Mistlin, against the decision of Mr Justice Langley ([1996] 1 BCLC 288) awarding the plaintiffs, David Ian Williams and Christine Margaret Reed, damages and interest totalling pounds 149,854.15.

The plaintiffs had been induced to enter into a franchise agreement with the first defendant company, Natural Life Health Food Ltd, and to acquire a leasehold health food shop in Rugby, as a result of negligent misstatements made on behalf of the company for which Mr Mistlin, its managing director, was held personally liable.

Before entering into the franchise agreement, the plaintiffs were sent a brochure about the company, which contained what were described as "some examples of the different levels of sales, based on our experience in other stores and prime sites in their second and third year" and stated that detailed projections would be prepared once a suitable site had been selected. These financial projections, in their final version, forecast a turnover in year one of pounds 227,250, giving a small surplus for the year of pounds 2,500, and in year two a turnover of pounds 338,000, giving a surplus of nearly pounds 27,000.

The shop opened in October 1987 but only stayed in business for 18 months, during which it achieved a turnover of pounds 248,000 against a projection of pounds 430,250, and a loss of pounds 38,600 against a projected profit of nearly pounds 30,000.

Mr Mistlin had been involved in the health food trade since 1980 and in 1983 opened a shop in Salisbury, which was described in the brochure as "a leader in the trade and a winner of a number of awards". In fact the shop was owned by him personally and not by the company, which he formed in 1986 to franchise the concept. The judge found that by the brochure the company

held itself out as having the experience and expertise necessary to provide properly reasoned advice to potential franchisees on all matters necessary to the establishment of a viable franchise business and that this experience and expertise was to be found in the person of Mr Mistlin and his operation of the Salisbury shop.

The judge held that in the circumstances Mr Mistlin must be taken to have assumed a personal duty of care towards the plaintiffs.

Michael Bloch (Trethowans, Salisbury) for Mr Mistlin; Gerard Van Tonder (Williams & Co, Luton) for the plaintiffs.

Lord Justice Hirst said that, to fix a director with personal liability, it must be shown that he assumed personal responsibility for the negligent misstatement made on behalf of the company. Given the importance of the status of limited liability, there had to be some special circumstance setting the case apart from the ordinary. But, once such special circumstances were established, the fact of incorporation, even in the case of a one- man company, did not preclude personal liability.

His Lordship did not accept Mr Bloch's argument that there must also be some sort of personal dealings between the director and the customer. No such requirement was mentioned in the authorities on this topic.

On the facts, Mr Mistlin had a major participation behind the scenes in the negotiations leading up to the franchise agreement, even though the figures were supplied and the plaintiffs were dealt with by other members of the company. More specifically, Mr Mistlin played a very prominent part in the actual production of the projections complained of. Although his involvement was indirect, it was considerable.

The knowledge and experience relied upon in the brochure was derived not from any activity of the company but solely from Mr Mistlin's personal experience with his own shop in Salisbury, which had nothing to do with his position as director of the company.

On all the particular facts of this case, the judge was entitled to find Mr Mistlin personally liable.

Paul Magrath, Barrister