In brief – Company warranty can lead to personal liability
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 case: directors of vendor company (defendants) held liable
In the 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 entity.
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 Competition and Consumer Act (the old Trade Practices Act).
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 meant 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 a defect.
- 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.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.