Williams & Anor v Natural Life Health Foods Ltd & Anor

The House of Lords held that a director of a franchisor company is not personally liable to franchisees for negligent advice given by the company unless the director personally assumed responsibility to the claimants and the claimants reasonably relied on that personal assumption. The extended Hedley Byrne principle (assumption of responsibility for negligent performance of services) governs claims for pure economic loss from negligent advice; its application requires objective proof of an assumption of personal responsibility and reasonable reliance by the representee.

The court emphasised the separate legal personality of the company and the need to protect limited liability: general prominence or involvement of a director in producing company materials (for example a brochure or financial projections) or the fact that the director has personal experience is insufficient, without direct or indirect exchanges crossing the line, to establish that the director assumed personal liability. The House also held that a claim that a director was a joint tortfeasor with the company had not been pleaded and, in any event, was unsustainable on these facts.

This appeal concerned whether a franchisor's managing director could be held personally liable for losses suffered by franchisees as a result of negligent advice given by the franchisor company. The respondents (franchisees) entered a franchise agreement after receiving a promotional brochure and detailed financial projections prepared by the franchisor company. The company was found liable at first instance for negligent misstatement under the Hedley Byrne principle; the managing director was also held personally liable by Langley J. The Court of Appeal by majority upheld the personal liability finding. The managing director appealed to the House of Lords.

(i) Nature of the claim: The respondents sought damages for pure economic loss on the basis of negligent misstatement/assumption of responsibility by the company and, as to the individual defendant, on the basis that he had assumed personal responsibility (or alternatively was a joint tortfeasor).

(ii) Issues framed by the court:

• Whether the extended Hedley Byrne principle could render the director personally liable for negligent advice given by the company;
• What constitutes an objective assumption of personal responsibility by a director and whether the respondents reasonably relied on any such assumption;
• Whether the director could be liable as a joint tortfeasor.

(iii) Reasoning and conclusions: The House applied the extended Hedley Byrne principle as explained in Henderson v Merrett Syndicates Ltd and emphasised an objective test: personal liability requires proof that the director, or someone on his behalf, conveyed directly or indirectly to the claimants an assumption of personal responsibility. Reliance must be reasonable, not merely factual. The court rejected the argument that the brochure, the director's prominence in company materials, or the director's prior personal experience were sufficient to demonstrate an assumption of personal responsibility. There were no personal dealings or communications crossing the line between the director and the respondents that would have justified the conclusion of personal assumption and reasonable reliance. The joint tortfeasor argument had not been pleaded and, if argued, would be unsustainable because the special relationship giving rise to company liability did not extend to the director personally. The appeal was allowed.

The House reiterated that findings of personal liability in such contexts are exceptional and that protection of limited liability requires careful application of the assumption of responsibility test.

Appeal allowed. The House held that personal liability of a company director for negligent advice requires objective proof that the director personally assumed responsibility to the claimant and that the claimant reasonably relied on that personal assumption. On the facts there was no evidence that the director assumed personal responsibility or that the claimants reasonably relied on him, and the alternative joint tortfeasor argument was not pleaded and was unsustainable.

First instance: judgment of Langley J. finding company and director liable (reported as Williams and Another v Natural Life Health Foods Ltd and Another [1996] B.C.L.C. 288). Court of Appeal: majority upheld personal liability and dismissed the director's appeal (reported as Williams and Another v Natural Life Health Foods Ltd and Another [1997] 1 B.C.L.C. 131). Appeal to the House of Lords allowed: [1998] UKHL 17.