Williams v Natural Life Health Foods Ltd [1998] UKHL 17
Citation:Williams v Natural Life Health Foods Ltd [1998] UKHL 17
Rule of thumb:This case affirmed the ‘personal assumption of responsibility test’ in company law for when directors can be made liable to third parties for damages. The Court in this case held that a director would generally not have liability to any third parties in contractual actions which they have taken whilst operating as a director, including misrepresentations, unless there was a personal assumption of responsibility by the director. An example of this is when directors sign ‘personal guarantees’. What is considered to be an ‘assumption of responsibility’ by a director varies from case to case.
Background facts:
The facts of this case were that Williams was interested in healthy food and healthy living. He noticed that there Natural Life Health Foods were offering people the chance to franchise their trademark, products and business model in order to set up their own version of the shop in their area. Williams approached Natural Life Health Foods Ltd with a view to entering a franchise and they provided him with a leaflet outlining all of the business financial projections. Mislin, the Natural Health Foods director, was held out as an expert in this brochure and it was him who appeared to be making the financial projections. Williams did not deal with Mislin personally meaning that Mislin himself did not make the representations to Williams. Williams decided to enter the franchise agreement, paid a lot of money as a deposit to get started, paid a lot for use of the trademarks and the knowledge for how the business was run, but quickly discovered that all of the projections were badly wrong, and his franchise was not financially viable and it was making losses. Shortly after Williams’ franchise went bust, Natural Life Health Foods went bust as well with very few assets. Williams sued both Natural Life Health Foods and Mislin.
Judgment:
The Court held that Natural Life Health Foods were liable, but they did not have sufficient assets to pay the damages, and they held that Mislin was not personally liable for his part in the brochure created by the company to mislead people into taking out a franchise with them. These statements by Mislin the company leaflets and brochures were not deemed to count as ‘an assumption of responsibility’ by the director so as to make him liable to third parties.
This case affirmed the ‘personal assumption of responsibility test’ in company law for when directors can be made liable to third parties for damages. The Court in this case held that a director would generally not have liability to any third parties in contractual actions which they have taken whilst operating as a director, including misrepresentations, unless there was a personal assumption of responsibility by the director. An example of this is when directors sign ‘personal guarantees’. What is considered to be an ‘assumption of responsibility’ by a director varies from case to case.
Ratio-decidendi:
‘someone acting on his behalf may incur personal liability in tort as well as imposing vicarious or attributed liability upon his principal. But in order to establish personal liability under the principal of Hedley Byrne, which requires the existence of a special relationship between plaintiff and tortfeaser, it is not sufficient that there should have been a special relationship with the principal. There must have been an assumption of responsibility such as to create a special relationship with the director or employee himself... Hirst LJ summarised the point by saying that "the relevant knowledge and experience was entirely his qua Mr Mistlin, and not his qua director:" 153(h). The point will simply not bear the weight put on it. Postulate a food expert who over ten years gains experience in advising customers on his own account. Then he incorporates his business as a company and he so advises his customers. Surely, it cannot be right to say that in the new situation his earlier experience on his own account is indicative of an assumption of personal responsibility towards his customers. In the present case there were no personal dealings between Mr. Mistlin and the respondents. There were no exchanges or conduct crossing the line which could have conveyed to the respondents that Mr Mistlin was willing to assume personal responsibility to them. Contrary to the submissions of counsel for the respondents, I am also satisfied that there was not even evidence that the respondents believed that Mr Mistlin was undertaking personal responsibility to them. Certainly, there was nothing in the circumstances to show that the respondents could reasonably have looked to Mr Mistlin for indemnification of any loss. For these reasons I would reject the principal argument of counsel for the respondents’, Lord Steyn
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.