United Kingdom House of Lords Decisions

Williams & Anor v Natural Life Health Foods Ltd & Anor [1998] UKHL 17; [1998] 2 All ER 577 (30 April 1998)

LORD GOFF OF CHIEVELEY

My Lords,

      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.

LORD STEYN

My Lords,

      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: :

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] AC 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 AC 145. First, in Henderson it was settled that the assumption of responsibility principle enunciated in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] AC 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 of a company is limited but that a company is a separate entity, distinct from its directors, servants or other agents. The trader who incorporates a company to which he transfers his business creates a legal person on whose behalf he may afterwards act as director. For present purposes, his position is the same as if he had sold his business to another individual and agreed to act on his behalf. Thus the issue in this case is not peculiar to companies. Whether the principal is a company or a natural person, 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.

The practical application of the extended Hedley Byrne principle

      Not surprisingly, opposing counsel approached the application of the principle of assumption of risk from different perspectives. Counsel for the respondents (the plaintiffs) concentrated in his argument on the pivotal role of Mr. Mistlin in the affairs of the company. Counsel for Mr. Mistlin (the defendant) concentrated on the absence of direct dealings between the respondents and Mr. Mistlin. The practical application of the extended Hedley Byrne principle was not agreed. Before I turn to the facts of the present case it is therefore necessary to explore this aspect. Two matters require consideration. First, there is the approach to be adopted as to what may in law amount to an assumption of risk. This point was elucidated in Henderson by Lord Goff of Chieveley. He observed, at p. 181B-C:

 ". . . especially in a context concerned with a liability which may arise under a contract or in a situation 'equivalent to contract,' it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff:" 

The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff. Obviously, the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff. Sometimes such an issue arises in a simple bilateral relationship. In the present case a triangular position is under consideration: the prospective franchisees, the franchisor company, and the director. In such a case where the personal liability of the director is in question the internal arrangements between a director and his company cannot be the foundation of a director's personal liability in tort. The enquiry must be whether the director, or anybody on his behalf, conveyed directly or indirectly to the prospective franchisees that the director assumed personal responsibility towards the prospective franchisees. An example of such a case being established is Fairline Shipping Corp. v. Adamson [1975] Q.B. 180. The plaintiffs sued the defendant, a director of a warehousing company, for the negligent storage of perishable goods. The contract was between the plaintiff and the company. But Kerr J. (later Kerr L.J.) held that the director was personally liable. That conclusion was possible because the director wrote to the customer, and rendered an invoice, creating the clear impression that he was personally answerable for the services. If he had chosen to write on company notepaper, and rendered an invoice on behalf of the company, the necessary factual foundation for finding an assumption of risk would have been absent. A case on the other side of the line is Trevor Ivory Ltd. v. Anderson. This case concerned negligent advice given by a one-man company to a commercial fruit grower. Despite proper application of the spray it killed the grower's fruit crop. The company was found liable in contract and tort. The question was whether the beneficial owner and director of the company was personally liable. The plaintiff had undoubtedly relied on the expertise of the director in contracting with the company. The New Zealand Court of Appeal unanimously concluded that the defendant was not personally liable. McGechan J., who analysed the evidence in detail, said, at p. 532, that there was merely "routine involvement" by a director for and through his company. He said that there "was no singular feature which would justify belief that Mr. Ivory was accepting a personal commitment, as opposed to the known company obligation." That was the basis of the decision of the Court of Appeal. In his 1997 Hamlyn Lecture Lord Cooke of Thorndon commented that if the plaintiff in Trevor Ivory Ltd. v. Anderson "had reasonably thought that it was dealing with an individual, the result might have been different:" see Taking Salomon Further, Turning Points of the Common Law, p. 18, note 50. Such a finding would have required evidence of statements or conduct crossing the line which conveyed to the plaintiff that the defendant was assuming personal liability.

      That brings me to reliance by the plaintiff upon the assumption of personal responsibility. If reliance is not proved, it is not established that the assumption of personal responsibility had causative effect. In his Hamlyn Lecture Lord Cooke of Thorndon referred to two judgments of La Forest J. in the Canadian Supreme Court on the element of reliance. In London Drugs Ltd. v. Kuehne & Nagel International Limited 97 D.L.R. (4th) 261, La Forest J. emphasised in the context of an issue of personal liability of a company's employee the distinction between "mere reliance in fact and reasonable reliance on the employee's pocket-book." The second case is Edgeworth Construction Ltd. v. M. D. Lea & Associates Ltd. [1993] 3 S.C.R. 206. The plaintiff company had made a successful bid for a road building contract with a province. The plaintiffs allegedly lost money as a result of errors in the specifications and drawings prepared for the province by an engineering company. The Supreme Court held that the plaintiffs had a prima facie cause of action against the engineering company for negligent misrepresentation. I do not pause to consider that part of the decision. But the Supreme Court unanimously held that by affixing their seals to the drawing the individual engineers did not assume personal responsibility to the plaintiffs. La Forest J. said, at p. 212:

 "The situation of the individual engineers is quite different. While they may, in one sense, have expected that persons in the position of the appellant would rely on their work, they would expect that the appellant would place reliance on their firm's pocketbook and not theirs for indemnification; see London Drugs, supra, at pp. 386-87. Looked at the other way, the appellant could not reasonably rely for indemnification on the individual engineers. It would have to show that it was relying on the particular expertise of an individual engineer without regard to the corporate character of the engineering firm. It would seem quite unrealistic, as my colleague observes, to hold that the mere presence of an individual engineer's seal was sufficient indication of personal reliance (or for that matter voluntary assumption of risk)."

This reasoning is instructive. The test is not simply reliance in fact. The test is whether the plaintiff could reasonably rely on an assumption of personal responsibility by the individual who performed the services on behalf of the company. To that extent I regard what La Forest J. said in Edgeworth as consistent with English law.

Academic criticism of the principle of assumption of risk

      Distinguished academic writers have criticized the principle of assumption of responsibility as often resting on a fiction used to justify a conclusion that a duty of care exists: see Barker Unreliable Assumptions in the Modern Law of Negligence [1993] 109 L.Q.R. 461; Hepple, The Search for Coherence (1997) Current Legal Problems, Vol. 50, 67, at 88; Cane, Tort Law and Economic Interests 2nd ed., 177 and 200. For this criticism two cases which were decided on special facts are cited: Smith v. Eric S. Bush [1990] 1 AC 831; White v. Jones [1995] 2 AC 207. In my view the general criticism is overstated. Coherence must sometimes yield to practical justice. In any event, the restricted conception of contract in English law, resulting from the combined effect of the principles of consideration and privity of contract, was the backcloth against which Hedley Byrne was decided and the principle developed in Henderson. In The Pioneer Container [1994] 2 AC 324, 335, Lord Goff of Chieveley (giving the judgment of the Privy Council in a Hong Kong appeal) said that it was open to question how long the principles of consideration and privity of contract will continue to be maintained. It may become necessary for the House of Lords to re-examine the principles of consideration and privity of contract. But while the present structure of English contract law remains intact the law of tort, as the general law, has to fulfil an essential gap-filling role. In these circumstances there was, and is, no better rationalisation for the relevant head of tort liability than assumption of responsibility. Returning to the particular question before the House it is important to make clear that a director of a contracting company may only be held liable where it is established by evidence that he assumed personal liability and that there was the necessary reliance. There is nothing fictional about this species of liability in tort.

Applying the principle to the facts

      Mr. Mistlin owned and controlled the company. The company held itself out as having the expertise to provide reliable advice to franchisees. The brochure made clear that this expertise derived from Mr. Mistlin's experience in the operation of the Salisbury shop. In my view these circumstances were insufficient to make Mr. Mistlin personally liable to the respondents. Stripped to essentials the reasons of Langley J., the reasons of the majority in the Court of Appeal and the arguments of counsel for the respondents can be considered under two headings. First, it is said that the terms of the brochure, and in particular its description of the role of Mr. Mistlin, are sufficient to amount to an assumption of responsibility by Mr. Mistlin. In his dissenting judgment Sir Patrick Russell rightly pointed out that in a small one-man company "the managing director will almost inevitably be the one possessed of qualities essential to the functioning of the company": 156(a). By itself this factor does not convey that the managing director is willing to be personally answerable to the customers of the company. Secondly, great emphasis was placed on the fact that it was made clear to the franchisees that Mr. Mislin's expertise derived from his experience in running the Salisbury shop for his own account. Hirst L.J. 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.

The joint tortfeasor point

      Counsel for the respondents tried to support the judgment of the Court of Appeal on the alternative ground that Mr. Mistlin had played a prominent part in the production of the negligent projections and had directed that the projections be supplied to the respondents. Accordingly, he submitted, Mr. Mistlin was a joint tortfeasor with the company, the latter being liable to the respondents on the extended Hedley Byrne principle.

      I am satisfied that this case was never pleaded as an independent cause of action. Like Hirst L.J. in the Court of Appeal (with whom Waite L.J. agreed) I am satisfied reading Langley J.'s judgment as a whole (and see in particular at p. 303(c)) that he never intended to find that Mr. Mistlin was liable to the respondents as a joint tortfeasor. The possibility of such a cause of action was raised in the Court of Appeal but expressly abandoned. And it was not included in the Agreed Statement of Facts and Issues before the Appellate Committee. In these circumstances the point is not open to the respondents. In any event, the argument is unsustainable. A moment's reflection will show that, if the argument were to be accepted in the present case, it would expose directors, officers and employees of companies carrying on business as providers of services to a plethora of new tort claims. The fallacy in the argument is clear. In the present case liability of the company is dependent on a special relationship with the respondents giving raise to an assumption of responsibility. Mr. Mistlin was a stranger to that particular relationship. He cannot therefore be liable as a joint tortfeasor with the company. If he is to be held liable to the respondents, it could only be on the basis of a special relationship between himself and the respondents. There was none. I would therefore reject this alternative argument.

Conclusion

      My Lords, I would allow the appeal. The respondents were legally aided at all stages of this litigation. I would therefore order that the costs of the appellant in the Court of Appeal and in this house be paid out of the Legal Aid Fund in accordance with section 18 of the Legal Aid Act 1988, such order to be suspended for four weeks to allow the Legal Aid Board to object if they wish.

LORD HOFFMANN

My Lords,

      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.

LORD CLYDE

My Lords,

      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.

LORD HUTTON

My Lords,

      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 in respect of costs which he proposes.