Briess v Woolley
| Jurisdiction | UK Non-devolved |
| Year | 1954 |
| Court | House of Lords |
| Date | 1954 |
Company - Shares - Sale - Fraud of director during negotiations - Sale authorized by members - Fraud preceding authorization - Tort complete when fraud acted on - Whether innocent shareholders liable vicariously to purchasers of shares. - Fraud. Vicarious liability.
Company X was licensed to manufacture and sell synthetic cream, if made in accordance with a formula approved by the Ministry of Food. R, the managing director, increased the amount manufactured by introducing water and disregarding the formula. This was not known to any other director or to any shareholder. In 1948, without authorization, he approached the directors of Company Y with a view to the sale to them of the shares of Company X, the other members of which were unaware of the negotiations. Throughout the negotiations he never disclosed that the company's accounts were based on dishonest trading. A point in negotiation was reached when he brought the matter before his fellow directors and before a general meeting of the company. The proceedings were recorded in the following minute:
“The chairman reported that the directors had received a proposition with regard to the whole of the company's shares …. The proposition … had been received from [Company Y] whereby that company would purchase from the shareholders … their preference shares for 35s. per share and their ordinary shares for 15s. per share. This matter was discussed very fully, and it was agreed that [R], who had already been in negotiation with [Company Y] should take the matter up further with that company with a view to completing the transaction on the above basis.”
The proposed transaction having been completed, the purchasers, after they discovered the fraud, brought an action for damages against a shareholder of Company Y who had no knowledge of R's fraudulent concealment:—
Held, that on the true interpretation of the minute R was appointed agent on behalf of the shareholders to negotiate the sale of their shares and that in the circumstances they were responsible for any fraudulent misrepresentation which he made in the course of the subsequent negotiations. In negotiating from the outset on the basis that the accounts represented the company's true position, he continued to make that fraudulent misrepresentation, which to his knowledge influenced the purchasers, up to the time the contract was completed, and the shareholders could not disclaim responsibility for it and were liable in damages.
Per Lord Tucker: The tort of fraudulent misrepresentation is not complete when the representation is made; it becomes complete when the representation, not having been corrected in the meantime, is acted on by the representee. If it was false when made but true when acted on there is no misrepresentation.
APPEAL from the Court of Appeal (Lord Goddard C.J., Morris and Romer L.JJ.).
This was an appeal from an order of the Court of Appeal dated February 17, 1953, reversing so much of the judgment of Barry J. as directed that judgment be entered for the appellants, the plaintiffs in the action, Hans John Briess, Robert Pintus, Hugh Spencer Strauss, Paul Fischer and Cereal Manufacturing Co. (Chelsea) Ld., against the respondents, Charles Robert Woolley, Evelyn Ernest Bath and Edith Sophia McRea (as executors of Sir Charles James Hugh McRea, deceased), the third defendants, with costs, and ordering instead thereof that judgment be entered for the respondents against the appellants with costs. The action was tried without a jury in the County of Middlesex on July 15, 16, 17, 18, 21, 30 and 31, 1952, and judgment was entered in favour of the appellants against the first defendant, Francis Edwin Rosher, and the respondents for the sum of £5,400 with costs, the action having been discontinued against the second defendant, Lord Sempill, before trial. (The fourth defendant, A. S. Harrison, was not served.)
The facts are fully set out in their Lordships' opinions.
Gerald Gardiner Q.C. and Neil Lawson for the appellants.
Cyril Salmon Q.C. and Conolly Gage for the respondents.
Their Lordships took time for consideration.
April 1. LORD OAKSEY. My Lords, this is an appeal from a judgment of the Court of Appeal (Lord Goddard C.J., Morris and Romer L.JJ.), reversing the judgment of Barry J. in an action for fraud.
The appellants, who were plaintiffs in the action, are four Czechoslovakians and a company who were engaged in the year 1947 in the food trade. In that year Mr. Fischer, on their behalf, applied to the defendant Rosher, who was the managing director of a company called Nutrifood Products Ld. (hereinafter called “the company”) with the object of acquiring the shares in the company, but Rosher at that time, since the company was then prospering, refused to enter into negotiations. In the year 1948 the company began to lose money and Rosher then approached Mr. Fischer with a view to his acquiring the shares of the company on his own behalf and on behalf of his associates, who are the plaintiffs. It is admitted by the respondents that throughout these negotiations, which culminated in the sale of all the shares in the company to the plaintiffs, the defendant Rosher never disclosed that the accounts of the company, though based upon figures which were accurate in themselves, were to his knowledge the result of fraudulent and dishonest trading. The company was engaged in the manufacture and sale of synthetic cream under licence from the Ministry of Food, and under this licence the cream had to be prepared in accordance with a formula which laid down the percentage of margarine which must be used. The company, under Rosher's management at all material times, increased the amount of synthetic cream manufactured and sold by the introduction of water and by the disregard of the formula.
Relying upon the figures in the company's accounts, the plaintiffs and Rosher had reached a point in the negotiations when Rosher determined to bring the matter before his fellow directors and before a general meeting of the company. After this meeting on October 14, 1948, a minute was drawn up in the following terms:
“The chairman reported that the directors had received a proposition with regard to the sale of the whole of the company's shares. At the present time great difficulties were being encountered owing to the restricted supplies of raw material with a consequent restriction in output resulting in losses being incurred by the company. There were no prospects in the immediate future of the allocation of raw materials being increased. The proposition referred to had been received from Economic Utilities Ld. whereby that company would purchase from the shareholders of Nutrifood Products Ld. their preference shares for 35s. per share and their ordinary shares for 15s. per share. This matter was discussed very fully and it was agreed that Mr. Rosher, who had already been in negotiation with Economic Utilities Ld., should take the matter up further with that company with a view to completing the transaction on the above basis.
“(Sgd.) F. E. Rosher. 30/11/48.”
Upon the true interpretation of this minute there has been much argument, to which I will return later.
Thereafter Rosher continued the negotiations and saw the plaintiffs, Mr. Briess, Mr. Fischer, Mr. Jedlin and Mr. Pintus, and it was ultimately agreed, on or about November 4, 1948, that the plaintiffs would purchase all the shares in the company for £12,000. Two meetings undoubtedly took place between the plaintiffs and Rosher towards the end of October, probably on October 20 and 23, and at one of these meetings Mr. Briess asked Rosher explicitly whether the company had a licence and whether they had a fat allocation, and Rosher answered in the affirmative and explained that a minimum output of 250 gallons per week was essential to a profit, whereas, according to Barry J.'s finding, the company could not produce more than 150 gallons if they had adhered to the Ministry's formula. When Rosher's fraud was discovered the plaintiffs applied, on March 1, 1950, to Sir C. J. H. McRea for redress, but liability was denied and this action was then begun, Sir C. J. H. McRea having died in the meantime.
At the trial, at the close of the case for the plaintiffs, counsel for the defendant executors elected to call no evidence and submitted that there was no case for them to answer. The trial judge overruled the submission, accepting the contentions made on behalf of the plaintiffs as to the basis of those defendants' liability, and holding: (i) that fraud had been committed by Rosher after October 14, 1948, and thus during the period when he had been authorized to act as agent on behalf, inter alios, of the deceased; (ii) that the deceased, inter alios, had accepted Rosher's negotiations effected prior to October 14, 1948, in such circumstances as to assume responsibility for Rosher's fraud so far as previously committed.
The action then proceeded, and on July 31, 1952, Barry J. held: (1) that Rosher had been guilty of fraud by misrepresentation and concealment whereby the plaintiffs had been induced to enter into the said agreement; (2) that the defendant executors as representing the deceased were liable to the plaintiffs for the fraud of Rosher on the grounds contended by the plaintiffs; (3) that by reason of the said fraud the plaintiffs had suffered loss and damage to the amount of £6,000, but that the defendants were entitled to a deduction of £600 from this sum on account of the fact that the plaintiff Cereal Manufacturing Co. (Chelsea) Ld., who had contributed £4,800 of the purchase price of £12,000...
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