Assuming responsibility for torts

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Assuming responsibility for torts, L.Q.R. 2003, 119(Apr), 199-204

For educational use only

Assuming responsibility for torts
STEPHEN TODD. *

Table of Contents

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Case Comment

Law Quarterly Review

L.Q.R. 2003, 119(Apr), 199-204

Subject
Banking and finance

Other related subjects

Shipping; Torts; Trusts

Keywords
Bills of lading; Deceit; Directors; Fraudulent misrepresentation; Letters of credit; Trust corporations

Cases cited
Standard Chartered Bank v Pakistan National Shipping Corp (No.2) [2002] UKHL 43; [2003] 1 A.C. 959; [2002]
11 WLUK 155 (HL)
Williams v Natural Life Health Foods Ltd [1998] 1 W.L.R. 830; [1998] 4 WLUK 482 (HL)

*L.Q.R. 199 IN Trevor Ivory Ltd v Anderson [1992] 2 N.Z.L.R. 517 the New Zealand Court of Appeal decided
that a director owed no duty to a client of the director's company to take care unless the director had assumed
responsibility for his or her conduct. Cooke P. maintained that the courts should avoid imposing on the owner
of a one-man company a personal duty of care which would erode the protection of limited liability. A similar
question arose in Williams v Natural Life Health Foods Ltd [1998] 1 W.L.R. 830, and here the House of Lords
gave a broader justification. Lord Steyn thought the question in issue was not confined to directors acting for
limited liability companies. He said that 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. Whether the
principal is a company or a natural person, someone acting on his behalf may incur personal liability in tort as
well as impose vicarious or attributed liability upon his principal. But in order to establish personal *L.Q.R. 200
liability under the principle of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465, which requires
the existence of a special relationship between plaintiff and tortfeasor, 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.

Lord Steyn did not discuss whether a director must be shown to have assumed responsibility for an intentional
tort. In Standard Chartered Bank v Pakistan National Shipping Corp [2002] 3 W.L.R. 1547, one of the questions
at issue was the personal liability of a director of a company for fraudulent misrepresentations made by him on

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Assuming responsibility for torts, L.Q.R. 2003, 119(Apr), 199-204

behalf of the company in obtaining payment under a false ante-dated letter of credit. In the Court of Appeal,
[2000] 1 Lloyd's Rep 218 (Watts (2000) 116 L.Q.R. 525, McKendrick and Edelman (2002) 118 L.Q.R. 4), it was
held that the director should not be held personally responsible for activities carried out by him in his capacity as
director. Aldous L.J., applying Williams, was satisfied that the director never led the plaintiffs to believe that he
was assuming personal responsibility for the misrepresentations: the plaintiffs believed that they were dealing with
the company. But the House of Lords allowed the appeal. Lord Hoffmann maintained that the Williams reasoning
cannot apply to fraud. He pointed out that no-one can escape liability for his fraud by saying "I wish to make it
clear that I am committing this fraud on behalf of someone else and I am not to be personally liable." The director
was not being sued for the company's tort. He was being sued for his own tort and all the elements of that tort were
proved against him. In Williams Lord Steyn had made it clear that the decision had nothing to do with company
law. It was an application of the law of principal and agent to the requirement of assumption of responsibility
under the Hedley Byrne principle.

While the decision in Standard Chartered Bank is clearly right, it raises for consideration the question as to exactly
why liability for an intentional tort ought to be treated differently to liability for negligence. It is strongly arguable
that defendants no more "assume responsibility" for misstatements that are made negligently than for those that
are made deceitfully. Assumed duties normally are the province of contract. The notion of an assumption of
responsibility has value in tort actions only in deciding whether there is a duty to act or to speak. A person is
under no general duty to act, but by voluntarily taking on a task that person then is obliged to perform the task
with care. Likewise, mere silence is not actionable, but by undertaking to speak or inducing reliance in some way
responsibility is assumed, and the basis for a duty of care comes into existence. In a number of leading decisions
in the House of Lords it has been recognised that assuming a responsibility can mean no more than choosing or
undertaking to speak or to act. A person owes a duty of care in tort because the law *L.Q.R. 201 imposes the
duty on the basis of what he or she has said or done or assumed to do, not because that person somehow decides to
assume legal responsibility. (See, for example, Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465 at
p.486, per Lord Reid; Smith v Eric S. Bush [1990] 1 A.C. 831 at p.862, per Lord Griffiths; Caparo Industries Plc
v Dickman [1990] 2 A.C. 605 at pp.628, per Lord Roskill, and 637, per Lord Oliver of Aylmerton; White v Jones
[1995] 2 A.C. 207 at pp.273-274, per Lord Browne-Wilkinson; Phelps v Hillingdon L.B.C. [2001] 2 A.C. 619 at
p.654, per Lord Slynn of Hadley.) Yet in the present context "assumption of responsibility" is being invoked as
an additional test of liability, even where a person has in fact spoken or undertaken to speak, in order to decide
whether that person has in some sense assumed legal responsibility for his or her words. Used in this way, the
concept is not easy to understand.

In Williams Lord Steyn emphasised that the test should be objective and that the focus should be on things said
or done by the defendant or on his behalf in dealings with the plaintiff, yet went on to say that the inquiry
was into whether the defendant conveyed to the plaintiff, directly or indirectly, that the defendant was assuming
personal responsibility. This seems to focus on the defendant's subjective intentions. And in what sense is there
an assumption of responsibility in any successful Hedley Byrne action? Defendants never, or hardly ever, in fact
agree to shoulder responsibility. Courts simply impose responsibility on them where negligent words are relied
on by a sufficiently proximate plaintiff.

The director in Williams assumed the task of preparing the financial information. A duty should have turned simply
on whether there was a sufficiently close or "special" relationship with the client. Arguably, and contrary to the
views of Lord Steyn, the basis for such a duty on the part of the managing director did exist. He prepared a brochure
and financial projections which he knew would be given to prospective purchasers of a franchise and which he
knew would be relied on by them in deciding whether to purchase the franchise. Applying Caparo Industries Plc
v Dickman [1990] 2 A.C. 605, the relationship was of a kind which could give rise to a duty. The director did not
himself have to put the information in the purchasers' hands.

However, let us accept Lord Steyn's conclusion that there was no special relationship between the managing
director and the clients so as to give rise to a Hedley Byrne duty. Seemingly the reason was that there were no
personal dealings between them. Lord Steyn observed that the plaintiffs did not know the director and had no
material pre-contractual dealings with him. He said also that there were no exchanges or conduct which could have
conveyed to the clients that the director was willing to assume personal responsibility. But there were dealings with
someone, even if not with the director. A company employee gave the brochure to the clients and also sent them
various detailed financial projections. Now if a company is *L.Q.R. 202 liable at all it is because human conduct

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is attributed to it (Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 A.C. 500 at
pp.506-507). So Williams can be seen as a case where the conduct of two or more persons has been aggregated,
the combination of the attributed negligent conduct in preparing the information and the attributed conduct in
handing it over giving rise to a duty owed by the company. Perhaps (although doubtfully) the managing director
was not liable because he did not have a close enough relationship with the clients. Perhaps the employee who
gave the information was not liable because he did not prepare it and was not negligent. But put them together
and the Hedley Byrne requirements are satisfied.

Let us consider now, if Williams is right, how it can be reconciled with ordinary principles of vicarious liability.
Where an employee commits a tort in the course of employment, the employer is vicariously liable for the
conduct. Here the employee's personal liability is the very basis for the employer's vicarious liability. They are
joint tortfeasors. Indeed, it has been held by the New Zealand Court of Appeal, and not questioned by the Privy
Council, that a company and its directors may be joint tortfeasors on the basis that the actions of the directors are
identified with those of the company itself, as representing its directing mind and will (Brooks v New Zealand
Guardian Trust Co Ltd [1994] 2 N.Z.L.R. 134, CA, [1995] 1 W.L.R. 96, PC).

In Williams it was denied that the director was a joint tortfeasor with the company. Lord Steyn said that there
was a special relationship between the company and the client but not between the director and the client. Yet
if, as suggested, the elements for a duty of care were satisfied, then fairly clearly there was a breach of duty by
the managing director in the course of his employment. If this is right the company was vicariously liable for the
misinformation and was a joint tortfeasor with the managing director. If we hypothesise a slight variation of the
facts involving a closer relationship between the director and the client, it is even easier to reach this conclusion.

Similar principles apply in the case of agents. A principal is vicariously liable for the acts of an agent where the
principal has expressly or impliedly authorised the agent to commit a tort or has ratified the agent's act. Vicarious
liability simply for negligence can be problematic, but in most cases the question is resolved by asking whether
the agent acted within the scope of authority which the principal led the plaintiff to believe the agent held. In these
circumstances an agent, like a servant, remains personally liable.

Turning to the policy of the matter, it is hard to understand why directors should be treated more favourably than
ordinary employees. If directors are protected, the same should go for those carrying out company tasks at a lower
level of responsibility. Otherwise we have the paradoxical situation *L.Q.R. 203 that a director acting on behalf
of a company who negligently makes decisions or acts or gives advice at a high level of responsibility may not be
liable, whereas a company employee who is negligent at a lower level in performing company work in the course
of employment is liable in the ordinary way.

The argument underlying Williams is that the client decides to enter a contractual relationship with the company
and looks to the company as the party undertaking responsibility for the accuracy of the advice. The plaintiff
necessarily is a company client, not an unconnected third party. Accordingly, if there is to be a rule of the kind
laid down in Williams at all, it must operate as a defence to an otherwise existing liability of a director, employee
or agent to a client of the principal or employer. The plaintiff initially must show that the individual defendant
has spoken or acted in circumstances which give rise to personal liability for negligence. The defendant in answer
can raise a "representative capacity" defence, in the same way that he or she can seek to rely on any express
exclusion of liability given by notice in the employer's contract with the client (as to which see Smith v Eric S
Bush [1990] 1 A.C. 831 at p.848). The suggested defence can be seen as similar, being based upon an implied
exclusion of liability. In particular, by acting through a company the defendant might be regarded as giving notice
that he or she is not personally liable. But there will still be room for the plaintiff to argue that in the particular
circumstances the defendant had "stepped outside the contract", and did not simply carry out or purport to carry
out the principal's or employer's tasks. This analysis perhaps gives a clearer guide to an appropriate basis for any
immunity than the notion that there is a presumption against personal liability, which is displaced by the director,
servant or agent having assumed personal responsibility. But it would constitute a major change to the existing
law governing servants and agents.

Of course, it can be argued that directors, servants and agents should be liable for their negligent conduct like
everyone else. Entrepreneurial activity can be carried on quite satisfactorily without torts being committed.
Considerations of policy must determine whether it is desirable to set aside ordinary principles. Some stress the

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Assuming responsibility for torts, L.Q.R. 2003, 119(Apr), 199-204

significance of the corporate form and the need to give protection from both entrepreneurial and operational
liabilities (Borrowdale [1998] J.B.L. 96; Grantham and Rickett (1999) 62 M.L.R. 133). Yet it has been strongly
argued that corporate immunity which blots out effective individual wrongdoing undercuts deterrence and the
effective distribution of loss, and in effect encourages the use of an undercapitalised company as a form of cheaper
insurance (Shapira (1999) 20 Company Lawyer 130 at p.134). Further, limited liability in the context of private,
closely held, companies may exacerbate the costs of incomplete risk-adjustment by creditors, who may confuse
the owner with the company. So denial of limited liability for the owner of a *L.Q.R. 204 one man company
may yield social benefits (Armour [1999] L.M.C.L.Q. 246 at pp.252-254). It would be helpful if more attention
were directed at these underlying concerns.

STEPHEN TODD.

Footnotes

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