Directors’‘Tortious’ Liability: Contract, Tort or Company Law?

Published date01 January 1999
DOIhttp://doi.org/10.1111/1468-2230.00196
Date01 January 1999
Directors’ ‘Tortious’ Liability: Contract, Tort or
Company Law?
Ross Grantham and Charles Rickett*
In recent years authorities in most Commonwealth jurisdictions have accepted that
the imposition of personal liability on a director for damage caused to a third party
while acting on behalf of the company is constrained by the doctrines of company
law.1As the embodiment of the company the director incurs no liability unless and
until he assumes personal responsibility. In Williams vNatural Life Health Foods
Ltd the Court of Appeal2also accepted this basic premise, though the majority’s
application of this principle was widely thought to be wrong.3Factually, there was
little evidence that the plaintiffs had relied upon the director and the Court’s
conclusion that the director must have assumed personal responsibility because the
advice he gave drew on experience gained before the company was formed was
quite inconsistent with the need, accepted in previous authority, to restrict personal
liability in the case of small and one-man companies. The House of Lords has now
reversed that decision.4However, in holding that the liability of directors under the
developing assumption of responsibility tort does not present a special case and
that the tort gives effect to a voluntary, contract-like undertaking rather than an
imposed duty of care, the implications of their Lordships’ decision extend well
beyond the facts of the case.
The case arose out of a franchise agreement under which the plaintiffs set up a
health food shop in Rugby. The franchisor was the first defendant company,
formed by Mr Mistlin who had successfully run a similar shop on his own account
in Salisbury. Central to the plaintiffs’ decision to proceed with the venture were
income projections provided by the defendant company. These projections showed
favourable income streams with substantial profits after two years. The projections,
however, proved to be inaccurate and the plaintiffs were forced to close their shop
with substantial losses after only eighteen months of operation.
The plaintiffs’ claim alleged that the projections were negligently prepared and
sought damages from the company, though this claim was not pursued after the
company was wound up. A claim was also brought against Mistlin, the founder and
managing director of the company, alleging that he owed a personal duty of care in
respect of the projections. In the High Court,5Langley J accepted that the
projections had been prepared negligently and held the company to be in breach of
The Modern Law Review Limited 1999 (MLR 62:1, January). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 133
* Department of Commercial Law, The University of Auckland.
1Sealand of the Pacific vRobert C McHaffie Ltd (1974) 51 DLR (3d) 702; Trevor Ivory Ltd v
Anderson [1992] 2 NZLR 517; Banfield vJohnson (1994) 7 NZCLC 260, 496; King vMilpurrurru
(1996) 136 ALR 327; Microsoft Corporation vAuschina Polaris Pty Ltd [1996–7] 142 ALR 111.
3 See, for example, R. Grantham, ‘Company Directors and Tortious Liability’ (1997) CLJ 259 and D.
Goddard, ‘Corporate Personality – Limited Recourse and Its Limits’ in C.E.F. Rickett and R.B.
Grantham (eds.), Corporate Personality in the 20th Century (Oxford: Hart, 1998) ch 2.
4Williams vNatural Life Health Foods Ltd [1998] 1 WLR 830.
5 [1996] 1 BCLC 288.

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