Williams and Another v Natural Life Health Foods Ltd and Another

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Steyn. For the reasons he gives I would allow the appeal, and I would make the order as to costs which he proposes.

The principal question on this appeal is whether a director of a franchisor company is personally liable to franchisees for loss which they suffered as a result of negligent advice given to them by the franchisor company. At first instance the judge answered that question in the affirmative: Williams and Another v. Natural Life Health Foods Ltd. and Another [1996] B.C.L.C. 288. By a majority the Court of Appeal upheld this conclusion and dismissed an appeal: Williams and Another v. Natural Health Foods Ltd. and Another [1997] 1 B.C.L.C. 131.

The franchising transaction

The underlying dispute arose in the context of a marketing system sometimes described as business format franchising. It involves a contractual licence under which the franchisor permits a franchisee to carry on business under a trade name belonging to the franchisor. The franchisor provides advice and assistance to the franchisee about the manner in which the franchisee does business and exercises some control over it. In return the franchisee pays stipulated fees to the franchisor.

In about 1980 Mr. Richard Mistlin, the appellant, started to work in the health food trade. In 1983 he opened a health food shop in Salisbury. In 1986 he formed Natural Life Health Foods Limited, a company incorporated with limited liability, in order to franchise the concept of retail health food shops under the name "Natural Life Health Foods." Mr. Mistlin was the managing director and principal shareholder of the company. Mr. Mistlin's wife was a nominal shareholder and she was also employed by the company. Mr. Ron Padwick and Miss Sara Shepherd were the only other employees of the company. Both had some experience of the franchising business.

In 1987, Mr. David Williams and Mrs. Christine Reid, the respondents, approached the new company with a view to obtaining a franchise for a health food shop in Rugby. The respondents asked for a brochure and Mr Padwick gave them one. The brochure described the company's system as "a proven concept." The flavour of the brochure is conveyed by the following: :

"YOUR VERY OWN HEALTH FOOD STORE UNDER THE NATURAL LIFE BANNER

offers you

Independence and Security

Substantial Income

Freedom to run your own business

Full support from an experienced company

bulk buying power

new product knowledge

on-going training"

It described the company's team in glowing terms. Dealing with Mr. Mistlin the brochure stated:

"In 1983, he opened Salisbury Health Foods, a store that has been a leader in the trade ever since and was awarded 'Retailer of the Year' in 1983. It is still a regular winner of awards and competitions within the industry and is the pilot unit for the NATURAL LIFE franchise network."

The company sent detailed financial projections to the respondents. The projections demonstrated the likely future profitability of the shop. Mr. Mistlin had played a prominent part in the production of the projections. All the material pre-contractual documents were on the company's notepaper. The respondents dealt with Mr. Padwick. They did not know Mr. Mistlin and they had no material pre-contractual dealings with him.

Encouraged by the brochure and the prospectus, the respondents entered into a franchise agreement with the company dated 1 May 1987. The respondents took a lease of the shop premises in Rugby and set up in business there. The shop opened in October 1987. The turnover proved substantially less than predicted by the company. The business traded at a loss over the next 18 months and then ceased trading.

In 1990 the respondents sued the company for damages representing the financial loss which they suffered as a result of the company's negligent advice. The cause of action was based on an assumption of responsibility by the company. In 1992 the company was wound up and in 1993 it was dissolved. In 1992 the plaintiffs joined Mr. Mistlin as a defendant. The plaintiffs action against Mr. Mistlin was based on an assumption of personal responsibility. After the dissolution of the company the action proceeded against Mr. Mistlin alone.

The judgment of Langley J.

Langley J. tried the action over a period of four days in November and December 1995. He held that the company was liable to the respondents for negligent advice. The judge came to this conclusion on the basis of principle established in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465. Having dealt with other matters, which are not now relevant, the judge turned to the question "whether Mr. Mistlin himself is personally liable to the plaintiffs on the same basis." In a detailed judgment he concluded that Mr. Mistlin was personally liable to the respondents. The recoverable damages were agreed in a sum of the order of £85,000.

The decision of the Court of Appeal

Mr. Mistlin appealed to the Court of Appeal. Only one issue was canvassed in the Court of Appeal, namely whether the judge was entitled to find that Mr. Mistlin was personally liable to the respondents on the basis of an assumption of responsibility. A majority (Hirst and Waite L.JJ.) upheld the judge's conclusion and dismissed the appeal. Hirst L.J. said, [1997] B.C.L.R. 131, 152C-D:

"… in order 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. In my judgment, having regard to the importance of the status of limited liability, a company director is only to be held personally liable for the company's negligent misstatements if the plaintiffs can establish some special circumstances setting the case apart from the ordinary; and in the case of a director of a one-man company particular vigilance is needed, lest the protection of incorporation should be virtually nullified. But once such special circumstances are established, the fact of incorporation, even in the case of a one-man company, does not preclude the establishment of personal liability. In each case the decision is one of fact and degree."

Waite L.J. said, at p. 154D-F:

"… where representations are made negligently by a company so as to attract tortious liability under the principle of Hedley Byrne, the primary liability is that of the corporate representor. In the vast majority of cases it is also the sole liability. The law does, however, recognise a category of case in which a director of the representor will be fixed with personal liability for the negligent misstatement. It is a rare category, and a severely restricted one. If that were not so, representees could set at naught the protection which limited liability is designed to confer on those who incorporate their business activities. The mesh is kept fine by the stringency of the question which the law requires to be asked: do the circumstances, when viewed as a whole, involve an assumption by the director of personal responsibility for the impugned statement?"

Sir Patrick Russell gave a dissenting judgment.

The theory of the extended Hedley Byrne principle

My Lords, a great many precedents were cited at first instance, in the Court of Appeal and in the printed cases lodged for the purpose of the present appeal. It is unnecessary to embark on a general review of the authorities. The sole purpose of the citation of precedent is, or ought to be, the identification of a legal principle or rule which covers, or may arguably cover, the issue in the case to be decided. And that is how I hope to approach the problem under consideration. In this case the identification of the applicable principles is straightforward. It is clear, and accepted by counsel on both sides, that the governing principles are stated in the leading speech of Lord Goff of Chieveley in Henderson v. Merrett Syndicates Ltd. [1995] 2 A.C. 145. First, in Henderson it was settled that the assumption of responsibility principle enunciated in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465 is not confined to statements but may apply to any assumption of responsibility for the provision of services. The extended Hedley Byrne principle is the rationalisation or technique adopted by English law to provide a remedy for the recovery of damages in respect of economic loss caused by the negligent performance of services. Secondly, it was established that once a case is identified as falling within the extended Hedley Byrne principle, there is no need to embark on any further inquiry whether it is "fair, just and reasonable" to impose liability for economic loss. Thirdly, and applying Hedley Byrne, it was made clear that "reliance upon [the assumption of responsibility] by the other party will be necessary to establish a cause of action (because otherwise the negligence will have no causative effect)." Fourthly, it was held that the existence of a contractual duty of care between the parties does not preclude the concurrence of a tort duty in the same respect.

It will be recalled that Waite L.J. took the view that in the context of directors of companies the general principle must not "set at naught" the protection of limited liability. In Trevor Ivory Ltd. v. Anderson [1992] 2 N.Z.L.R. 517, 524, Cooke P. (now Lord Cooke of Thorndon) expressed a very similar view. It is clear what they meant. What matters is not that the liability of the shareholders...