Robert Lawrence & Anor v Jonathan Cowell & Ors

Fraudulent misrepresentations that induce a contract remain actionable despite an entire-agreement or non-reliance clause unless the contract uses clear words addressing fraudulent misrepresentation. Reliance on a material representation is ordinarily inferred, and the inference is particularly strong where the misrepresentation is fraudulent.

A director’s commercial judgment is not ordinarily second-guessed by the court. However, directors remain liable where company property is applied for their personal benefit without proper justification. The claimant must prove, for each transaction, that the loss resulted from a breach of duty.

Robert Lawrence sold 60% of his shares in Keyguard U.K. Limited to Armatus Risks Holdings Limited under a share purchase agreement. The defendants guaranteed Armatus’s payment obligations. After Armatus stopped paying, Lawrence sought to enforce the guarantees.

The defendants alleged that Lawrence had fraudulently misrepresented Keyguard’s financial position by failing to disclose widespread ghosting, and that the agreement had been rescinded. Keyguard also claimed against Jonathan Cowell and Geoffrey Warren for alleged breaches of statutory and fiduciary duties arising from payments made from Keyguard’s accounts.

The central issues were whether the financial information contained actionable fraudulent misrepresentations, whether clause 20 excluded reliance or rescission, and whether the individual payments constituted breaches causing loss.

1. Claim 1 dismissed. The financial information supplied to the defendants contained express representations as to turnover and profit, together with an implied representation that the accounts gave a true and fair view of Keyguard’s financial position. The implication arose both from the circumstances in which the information was supplied and, for audited accounts, from Companies Act 2006, section 393 [95].
2. The court accepted that ghosting was an established and significant feature of Keyguard’s business before the agreement. It materially inflated recorded turnover and profits and understated liabilities to customers. The representations were therefore false [117]-[128]. Lawrence knew, or turned a blind eye to the fact, that the accounts were substantially misstated [129]-[137].
3. Armatus relied on the representations. A causal link was required, but the representations need not have been the sole cause of entering the agreement. Reliance on material information is ordinarily inferred, and the inference is particularly strong in cases of fraudulent misrepresentation [138]-[141].
4. Clause 20 did not prevent rescission. Public policy prevents a party excluding liability for its own fraud in inducing a contract. Clear words are required to acknowledge non-reliance on fraudulent misrepresentations; clause 20 contained no such words [142]-[147]. Armatus had therefore validly rescinded the agreement [148].
5. Claim 2 substantially dismissed. The claimant had to prove, in relation to each head, that the loss resulted from a breach of duty. The duties under sections 171, 172 and 177 of the Companies Act 2006 were not established merely by showing that payments were made or that a different commercial decision might have been preferable [149]-[153].
6. The claims concerning Mr Warren’s expenses (£890.18) and the Mercedes and Aston Martin leases (£18,332.79) succeeded. The cars were leased for the directors’ personal use rather than Keyguard’s benefit, contrary to sections 173 and 177 of the Act. All other heads of Claim 2 were dismissed [206]-[210], [235]-[236].

First-instance judgment. No prior appellate decision is stated in the judgment.