Williams and Another v Natural Life Health Foods Ltd and Mistlin (1998)

Hedley Byrne v Heller (1964) allows recovery of pure economic loss caused by negligent advice where the adviser assumed responsibility to the person who relied on it. When the adviser is a company, a further question arises: can the claimant also sue the individual director behind the company — especially in a small, one-man company where the director is the company's expertise?

The House of Lords said no, unless the director personally assumed responsibility to the claimant and the claimant reasonably relied on that personal assumption. Being the owner, the controller and the source of the company's know-how is not enough. The case refines Hedley Byrne in two ways every student should know: the test of assumption of responsibility is objective, and the reliance required is reasonable reliance on the individual, not mere reliance in fact.

It is a foreign decision and not binding in India, but it is regularly used to explain the limits of the Hedley Byrne principle.

Mr. Richard Mistlin had run a health food shop in Salisbury since 1983. In 1986 he formed Natural Life Health Foods Ltd, a limited company, to franchise retail health food shops. He was its managing director and principal shareholder; there were only two other employees besides his wife.

In 1987 Mr. Williams and Mrs. Reid approached the company for a franchise for a shop in Rugby. They dealt with an employee, Mr. Padwick, who gave them a brochure describing the company's system as "a proven concept" and praising Mr. Mistlin's success with the Salisbury shop. The company sent them detailed financial projections; Mr. Mistlin had played a prominent part in producing them. All the pre-contract documents were on company notepaper. The franchisees "did not know Mr. Mistlin and they had no material pre-contractual dealings with him."

They took a franchise on 1 May 1987 and opened the shop in October 1987. Turnover was substantially below the projections; the shop traded at a loss for 18 months and closed. They sued the company for negligent advice. The company was wound up in 1992 and dissolved in 1993; they joined Mr. Mistlin as a defendant, and the action continued against him alone.

Langley J held both the company and Mr. Mistlin personally liable; damages were agreed at about £85,000. The Court of Appeal (Hirst and Waite LJJ; Sir Patrick Russell dissenting) upheld Mr. Mistlin's personal liability. He appealed to the House of Lords.

1. When is a director of a company personally liable, under the extended Hedley Byrne principle, for negligent advice given by the company?
2. On these facts, did Mr. Mistlin assume personal responsibility to the franchisees, and did they reasonably rely on it?
3. Alternatively, was Mr. Mistlin liable as a joint tortfeasor with the company?

The appeal was allowed unanimously. Mr. Mistlin was not personally liable.

The governing principles

Lord Steyn took the principles from Lord Goff's speech in Henderson v Merrett Syndicates (1995): the Hedley Byrne principle "is not confined to statements but may apply to any assumption of responsibility for the provision of services"; once a case falls within it, there is no further inquiry whether it is "fair, just and reasonable" to impose liability; reliance on the assumption of responsibility is necessary; and a contractual duty does not exclude a concurrent duty in tort.

The company is a separate person

The concern is not limited liability as such: "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." A person acting for a principal may incur personal liability in tort, but a special relationship with the company is not enough: "There must have been an assumption of responsibility such as to create a special relationship with the director or employee himself."

An objective test, focused on dealings with the claimant

"The touchstone of liability is not the state of mind of the defendant." The focus is on "exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff." Where a director's personal liability is in issue, "the internal arrangements between a director and his company cannot be the foundation of a director's personal liability in tort." The question is "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."

Lord Steyn contrasted Fairline Shipping v Adamson (1975), where a director was liable because he wrote to the customer and invoiced in a way that made him appear personally answerable, with Trevor Ivory v Anderson (New Zealand, 1992), where a director's "routine involvement" for his one-man company did not make him personally liable.

Reasonable reliance, not reliance in fact

Drawing on Canadian authority (Edgeworth Construction v M.D. Lea), Lord Steyn held: "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."

Answer to the academic criticism

Lord Steyn rejected the criticism that assumption of responsibility is a fiction: "In my view the general criticism is overstated. Coherence must sometimes yield to practical justice." Because of the doctrines of consideration and privity, tort has a gap-filling role, and "there was, and is, no better rationalisation for the relevant head of tort liability than assumption of responsibility." He added 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."

Applied to Mr. Mistlin

Ownership, control, and the brochure's reliance on his Salisbury experience were "insufficient to make Mr. Mistlin personally liable to the respondents." In a small company the managing director will almost always be the source of the company's essential qualities; that alone does not convey a willingness to be personally answerable. Experience gained on one's own account before incorporation is no different. Decisively: "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." Nor was there evidence that the franchisees believed he was taking personal responsibility, or that they "could reasonably have looked to Mr. Mistlin for indemnification of any loss."

The joint tortfeasor argument

This had never been pleaded and was abandoned in the Court of Appeal, so it was not open. In any event it failed: accepting it would expose company directors, officers and employees in service businesses to "a plethora of new tort claims." The company's liability rested on its special relationship with the franchisees; "Mr. Mistlin was a stranger to that particular relationship. He cannot therefore be liable as a joint tortfeasor with the company."

A director (or employee) of a company is not personally liable for the company's negligent advice under the extended Hedley Byrne principle merely because he owns or controls the company or is the source of its expertise. He is liable only if, judged objectively by statements or conduct crossing the line between him and the claimant, he assumed personal responsibility to the claimant, and the claimant reasonably relied on that personal assumption. Internal arrangements between the director and the company cannot found such liability, and a director who is a stranger to the company's special relationship with the claimant is not a joint tortfeasor with it.

• Direct question: Explain the principle of assumption of responsibility in Hedley Byrne v Heller and its later development. Use Williams for the objective test, "exchanges which cross the line", and reasonable reliance on the individual.
• Problem question: a customer receives negligent investment advice from a small company; the company is insolvent and the customer sues its founder-director. Apply Williams: were there personal dealings or conduct signalling personal responsibility? Could the customer reasonably look to the director personally? If not, the director is not liable.
• Short note: Personal liability of directors for negligent misstatement — contrast Fairline Shipping v Adamson (liable) with Trevor Ivory v Anderson and Williams (not liable).
• Remember to say it is a House of Lords decision — persuasive, not binding, in India.