In brief – Company warranty can lead to personal
Directors and executives need to take steps to avoid unexpected
and unlimited personal liability when their company gives a
warranty or assurance. They are not safe just because it is only
their company entering into a document or dealing.
Metz Holdings directors held liable
Metz Holdings case, directors of a company were held to also be
liable by the Federal Court when their company was in breach of a
warranty in a contract for the sale of its business.
The directors were held personally liable despite only being
directors and not themselves parties to the contract. They were not
protected by their company being the usual limited liability
company or by their company's status as a separate legal
Even worse, they were not entitled to the benefit of any
exclusion or limitation wording in the contract.
Warranty that company had nothing to disclose
The company had given the type of warranty that a strong
purchaser will often require: that the company had nothing to
disclose that might be material to a purchaser.
Although it was "just" a contractual warranty the
court was very quick to conclude that by implication there was also
a corresponding personal representation about their own knowledge
of things, by each of the directors who had signed the contract on
behalf of the vendor company.
Because the representations proved to be untrue, the directors
were held to be liable for misrepresentation under what is now the
and Consumer Act (the old Trade Practices
A particular problem for the directors was that there had been
some unsavoury practices in the running of the business and the
directors had a direct hand in those practices. This made it was
easier for the court to join the dots.
Innocence no protection against legal exposure
Nevertheless, the principle is clear.
Even a completely "innocent" director or executive can
also have that type of liability or legal exposure without any
suggestion that they have been personally involved in any cover up
or wrongdoing. Misrepresentation liability does not depend on any
fault being proved against the director or executive.
Also, theoretically, it is not possible to exclude that type of
liability for misrepresentation purely by wording in a contract.
That is also very clear from the decided cases going back almost to
when this legislation started over 30 years ago.
Three tips for prudent directors and executives
Don't casually give any warranty or assurance for your
company in the first place. Often a warranty can be not given or
substituted. For example, don't warrant that products are free
from defects. Just offer a repair or replacement period if there is
If a warranty or assurance has to be given, be extremely
careful about the actual words. Explicitly state the limits,
restrictions and qualifications. Don't just hope that a judge
will imply them, because a judge usually won't.
Especially in larger companies, where a warranty is being given
that is really about "knowledge" of the company be very
specific in the warranty about what that means. Usually it just
means that questions have been asked of certain specific
executives. Directors especially need to ask the right questions of
the right people and keep good records.
On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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