Director's personal liability for pre-contractual fraudulent misrepresentations

Summary

The Court of Appeal has recently upheld an award for damages in deceit against a company director who made false representations about her company’s ability to pay for a cargo of sunflower oil. The Claimant supplier entered into a contract on the basis of representations made by the Defendant, but the Defendant failed to pay for the delivery. The Defendant disputed the first instance judge’s factual findings, the adequacy of her judgement and the assessment of damages. The Court of Appeal was not persuaded that the judge had failed to make sufficient findings based on the evidence presented, or that her conclusions and assessments were unreasoned or incorrect, although the judgement could have been formulated and structured more clearly.

Facts

The claim was brought by a supplier following a failure by a company to pay for a cargo of sunflower oil, supplied by the Claimant in October 2012. In July 2012, prior to a contract being agreed, the Claimant had sought assurance from the Defendant director that her company would be able to pay. The Claimant relied on a number of oral representations from the Defendant that the company was in funds to pay for the large shipment of oil. A contract was agreed that the Claimant would supply sunflower oil to the Defendant’s company at a cost of c.$1,200,000, with payment due three days after delivery.

After signing the contract, the Claimant purchased the sunflower seeds, extracted the oil and delivered the cargo to the port. The Claimant subsequently received SWIFT international payment network messages, indicating the Defendant’s company had paid. These SWIFT messages were forgeries, but by the time this was discovered, the cargo had already been shipped and the Claimant had lost control of the oil. The Defendant’s company failed to pay for the oil and subsequently went into liquidation.

The Claimant sued the Defendant and her co-director, seeking damages in deceit on the basis that the representations she had made were false, and the Claimant had entered into the contract on reliance upon them. Furthermore, that the Defendant had forged the SWIFT messages. The High Court dismissed the claim against the co-director, but found the Defendant liable in damages for deceit and awarded a sum equal to the market value of the sunflower oil.

Decision

The Defendant appealed the decision on three grounds:

1. The judge’s factual findings regarding the oral pre-contractual representations were inadequate;
2. The concluding judgement was unclear and not adequately reasoned; and
3. That an incorrect measure of damages was used.

The Court of Appeal upheld the original High Court decision in full. The leading judgment was delivered by Arden LJ. The Court concluded that the first instance judge had made sufficient findings based on the evidence presented to her, and that her reasoning was adequate. For the appeal to succeed, the Defendant needed to demonstrate that the first instance judge had failed to make a finding in line with the representations pleaded, or that if she made such a finding, that her conclusions were against the weight of evidence. The judge had been entitled to treat the Defendant’s representation that the company intended to pay for the sunflower oil as a continuing representation, upon which the Claimant was entitled to rely pre-contractually and up until the conclusion of the contract. If the Defendant had known the representations were false, or had become inaccurate, she should have corrected them. The judge was also entitled to find the representations to be representations of fact, which induced the Claimant to enter into the contract, rather than a statement of intention, as was the Defendant’s case. The Defendant had failed to discharge her burden.

Turning to the original judgement itself, the judge had given sufficient reasons for her finding that the Defendant had made the false representations to the Claimant. She had expressly stated this finding in the judgment and this finding was implicit throughout and consistent with her conclusions. It was, however, accepted that the original judgment was hard to follow, and could have been structured more clearly, particularly for those unfamiliar with the case.

In respect of damages, the parties agreed that the correct measure of damages for deceit should be an award to put the Claimant in the position it would have been in, had no deceit been perpetrated. The Defendant argued that had the deceit not occurred, the Claimant would not have purchased, processed and transported the sunflower seeds and therefore should only be reimbursed for the expense of purchasing the seeds and extracting the oil, but not the market value of the oil, as it would never have gone on to extract the oil had no deceit occurred. The Claimant argued that the misrepresentations and false SWIFT messages, continued to have effect until it lost control of the cargo of oil, and therefore its loss should be assessed as the market value of the oil. Arden LJ agreed with the judge’s assessment that the Defendant’s representations were continuing, and that loss should be calculated at the point of reliance, i.e. when the Claimant failed to prevent the cargo being shipped, in reliance on the fact that it believed the payment to have been made. Therefore the correct measure of damages was the market value of the oil.

Comment

It is a well established principle that a limited liability company is a separate legal entity from its shareholders and directors who will not usually be liable for the company’s debts and obligations. As illustrated by this case, there are however exceptions to that general rule. The decision provides a useful reminder of the potential personal liability of directors in tort for representations they may make on a company’s behalf and on the ongoing responsibility on all parties to ensure the accuracy of any continuing representations made, upon which another may rely.

Further reading: Inter Export LLC v Townley [2018] EWCA Civ 2068