The Court of Appeal has ruled on a decision by Sir Michael Burton GBE that a company was liable to claimants for negligently marketing holiday-let apartments in Cyprus, but that the second defendant, a company director who was the “driving force behind the marketing plan”, was under no personal liability for doing so.
Alex Lerner and Mary Read review the court’s decision in Barclay-Watt v Alpha Panareti Public Ltd  EWCA Civ 1169, which concerned the circumstances in which a director of a company could be personally liable as an accessory to a company’s negligent acts. Although the court did not formulate a generalised set of principles, the decision nevertheless offers valuable insight for those seeking to evaluate the merits of prospective claims against directors.
The claim concerned the marketing of holiday-let apartments in Cyprus to purchasers based in the UK between 2005 and 2007 by Alpha Panareti Public Limited (“Alpha”), a property developer.
Alpha contracted with agents to market the properties. In turn, the agents recruited individual sales personnel in the UK, mainly independent financial advisers. The sales personnel identified potential purchasers from their book of existing clients, thereby allowing Alpha to piggy-back on a pre-existing relationship of trust when marketing the holiday-let apartments.
The sales pitch to potential purchasers was that the holiday-let apartments could be funded by taking out a low-cost mortgage denominated in Swiss francs. Rent receipts from the holiday-let apartments could then be used to cover the mortgage costs.
Regrettably, the 2008 financial crisis delayed construction work on the holiday-let apartments, and none of the purchasers ultimately received completed properties. Further, the exchange rate moved sharply against the purchasers. A fall in the value of sterling and the Cyprus pound against the Swiss franc caused the mortgage repayment amounts to increase significantly.
The first instance decision
The claimants brought claims for misrepresentation and the giving of negligent advice against Alpha and its managing (but not sole) director, Andreas Ioannou.
The claimants made various allegations but only succeeded in respect of one. This was that the low-cost mortgage, denominated in Swiss francs, was a key part of the sales pitch. Currency risk was, therefore, an obvious risk for potential purchasers. The judge held that Alpha owed a duty of care to warn the claimants of the currency risks but failed to do so. However, Mr Ioannou did not owe the purchasers a like duty. He had not assumed personal responsibility to the purchasers and was not therefore personally liable either as the primary wrongdoer or as an accessory to Alpha’s negligence.
The issues on appeal
Alpha appealed the finding of liability against it, and the purchasers cross-appealed, arguing that the judge had erred in concluding that Mr Ioannou was not personally liable to them as an accessory to Alpha’s negligence.
Both appeals were dismissed. However, this note focuses on the claimants’ cross-appeal, which concerned the circumstances in which a director or senior manager should be held personally liable as an accessory to a company’s negligence. (For the avoidance of doubt, the purchasers did not pursue the argument that Mr Ioannou was personally liable as the primary wrongdoer on appeal.)
The claimants submitted that the three conditions necessary for establishing accessory liability were satisfied because:
- Mr Ioannou assisted in the commission of an act by Alpha, and his assistance was substantial and not merely trivial,
- he did so pursuant to a common design with Alpha to sell as many properties as possible by marketing them through the network of salesmen who were directed to promote the merits of taking a mortgage in Swiss francs, and
- the way in which the properties were marketed constituted a negligent act committed by Alpha against the purchasers because of the failure to warn them about the currency risks.
The decision on appeal
Lord Justice Males gave the only reasoned speech on behalf of the Court of Appeal. He began his analysis by recognising that the question of accessory liability is fact sensitive, elusive and requires a balancing of competing principles. He said previous decisions on the point had to be understood in the context in which they were made (ie the nature of the tort concerned in a given case).
The competing principles that Lord Justice Males sought to balance were:
- that wrongdoers should not escape liability for their wrongful acts simply due to their being company directors, and
- that individuals are entitled to limit their liability by using corporate structures such as a limited company to carry on their business.
On the facts, the marketing structure had meant that Mr Ioannou had not had any personal dealings with the claimants, and it had been held at first instance that it would not have occurred to any of them that he had assumed any responsibility towards them. Even though Mr Ioannou had been the “driving force behind the marketing plan”, the business of developing and marketing the properties was the business of Alpha, not Mr Ioannou. Further, he had not given any personal commitments under contracts relevant to the claims (such as the contracts by which Alpha sold the holiday-let properties to the claimants). Lord Justice Males also noted that because the claimants did not pursue the argument that Mr Ioannou was personally liable as the primary wrongdoer on appeal, they did not advance any allegation that Mr Ioannou had himself been negligent.
Accordingly, Lord Justice Males concluded that it would be problematic if the court were to find, on the facts of this case, that Mr Ioannou was personally liable as an accessory to Alpha’s negligence. This is because many directors and senior managers who are heavily involved in the marketing of investments by the companies for which they work would find themselves incurring personal liability for negligent but non-fraudulent failures by those companies. That being so, the principle that a person should be liable for his own wrongful acts would not be offended. To find otherwise in circumstances where there had been no direct contact with the claimants, no assumption of responsibility to the claimants and no negligence alleged to have been committed by Mr Ioannou personally “would drive a coach and horses through the concept of a limited liability company”.
Lord Justice Males also gave short shrift to the claimants’ argument that there had been a common design between Alpha and Mr Ioannou. The act or omission which made Alpha’s conduct negligent was its failure to warn purchasers about currency risk, but there was no conscious decision not to include such a warning. Further, even if it could be said that Alpha’s and Mr Ioannou’s common design was to market the holiday-let properties in the way that they were marketed, which did not include a warning about currency risks, to find that Mr Ioannou was personally liable in such circumstances would be to adopt an unduly wide approach. The possibility for Alpha and Mr Ioannou to apportion liability in contribution proceedings could mitigate this risk but would not extinguish the risk altogether (particularly where a company is insolvent).
Although it does not contain a generalised set of principles, the decision nevertheless provides helpful insight for practitioners seeking to assess the merits of a potential claim against a director as an accessory to a company’s negligence.
Principally, it offers guidance on how to approach the existing authorities regarding piercing the corporate veil and the principles a court will weigh when approaching such cases:
- The question of whether a director should be personally liable as an accessory to a company’s negligence is a fact-sensitive question.
- Lord Justice Males noted the dangers for judges in attempting to formulate prescriptive principles of general application and emphasised the importance of context when analysing such statements in existing authorities. For instance, statements of principle in cases involving strict liability torts are not necessarily directly applicable when determining claims in negligence.
- When deciding such cases, a court will seek to strike a balance between the doctrine of corporate personality and the need to hold individuals to account for their wrongful actions. In doing so, a court is also likely to keep a keen eye on the need to keep accessory liability within reasonable bounds.
The case is also a helpful worked example of the application of those principles in a mis-selling context. Without wishing in any way to elevate the case to a generalised set of principles, Lord Justice Males’ approach to the issue of the assumption of responsibility and treatment of the common design in this context is certainly notable.
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