Analysis of the standard of care – diligence – conventional position one of subjective judgment – higher degree of skill required of certain individuals – recent test of greater objectivity substituted – duties as regards certain types of corporate asset service contracts – executives and non-executives have equal duties – position of persons acting as professional advisers – experts – comparisons with duties owed by other professional groups
(i) Historical position
No legal framework exists for directors which is equivalent
to the objective standard of performance of duties expected
of professional men. The reason usually advanced is historical:
company law evolved at a time when businessmen were not
expected to devote their services exclusively to the undertaking
which they served or promoted, and hence they were not
assumed to exercise that degree of care or diligence which
might now be expected of a full-time, salaried executive
or managing director: Re Forest of Dean Coal Mining Co (1878) 10 Ch
D 450 at 452. The impositions of statute, and particularly the ‘hindsight’ test
of stewardship applied by IA 1986 in relation to wrongful trading have, however,
substantially eroded the amateur’s charter. The view of the Law Commission
in 1998 (in its Consultation Paper no 153 Company Directors: Regulating
Conflicts of Interests and Formulating a Statement of Duties is that recent
cases which assume an equivalence of standard between a director of a company
which is a going concern, and one that has become insolvent, are correctly
decided.
(ii) Not an expert
A company director is not, per se, treated as an expert, either in the task
of general management or with regard to particular aspects of his stewardship,
such as finance, personnel or legal services, for which a professional might
reasonably be recruited: Re Brazilian Rubber Plantations and Estates Ltd [1911]
1 Ch 425 at 437; Re Macro (Ipswich) Ltd [1994] 2 BCLC 354,[1994] BCC
781. A director specifically appointed, however, because he professes and is
required to display some special skill or calling, will be liable in negligence
for failing to meet the objective standard of care set by the notional reasonably
competent exponent of that craft: Such a person will not necessarily be liable
to exhibit other higher skills of management or diligence than his non-qualified
fellow director, although this remains controversial: Dorchester Finance
Co Ltd v Stebbing (1977)[1989] BCLC 498.
(iii) Why no general test?
The law sets an objective standard in relation to directors by virtue of the
position of trust that they occupy over company property which they are empowered
to manage. However, in assessing the duty of care and skill that a director
is obliged to show in discharging his functions, an obvious paradox presents
itself in attempting to apply a like test. If a director of a small private
company were expected to exhibit the skill normally exercised by the chief
executive of a multinational corporation the two persons would in theory be
able to change places (and salaries!) without difficulty. It is clear that
such a juxtaposition is far-fetched, and that directors and senior executives
of large public companies are usually (although not always) men and women of
exceptional resource and skill whose services are much in demand by rival concerns.
It would represent a Utopian ideal if the law required every director of every
company to achieve the same level of professional competence: Re Produce
Marketing Consortium Ltd (No 2) [1989] BCLC 520, 5 BCC 569. Accordingly,
both as a matter of common law and as set out in the government’s White
Paper ‘The Conduct of Company Directors’ [1], a director has
conventionally been only required to exercise that degree of care and skill
which may be reasonably expected of a person of his knowledge and experience,
ie ‘ordinary prudence’: Overend, Gurney & Co v Gibb (1872)
LR 5 HL 480 [2].
[1] Cmnd 7037, 1977, reprinted as an Appendix in P Mitchell Insider Dealing and Directors’ Duties (2nd edn, 1989).
[2] Note that the obligation to provide services with reasonable skill and care is expressly excluded by statute from a contract for such services (not amounting to employment): Supply of Goods (Exclusion of Implied Terms) Order 1982, SI 1982/1771.
On this basis, the standard of skill is a subjective one
which, in theory, exonerates the honest but incompetent
person on the basis that he can do no better. When such
a lowly test is criticised, it is answered that the incompetent
director is not likely to last long since his shareholders
will be able to have him removed under CA 1985, ss 303
and 304 by ordinary resolution. However, in an owner-managed
business the directors are unlikely to authorise proceedings
against themselves and the shortcomings become material
only if the company goes into insolvency. It is therefore
unsurprising that there are relatively few modern cases
dealing with directors’ standards of care and that
increasing reliance is placed on the sanctions of wrongful
trading and disqualification.
As noted above, a distinction exists between skill and care. For the standard
of care, an objective test is set, namely, that to be expected of a reasonable
man. If a person drives a motor car, it matters not whether he is a professional
driving instructor or an elderly and infirm weekend motorist for the purpose
of imposing a duty to be careful in relation to other road users. If it be
said that the elderly and infirm are unable to achieve the requisite standard,
the answer must be that they should not attempt the task. A consideration of
the cases, therefore, shows that the courts have attempted to apply a dual
test of liability, with the negligence-related concept of ‘reasonable
conduct’ attaching only to the degree of carefulness which a director
must show in and about the tasks which he is treated as being competent to
perform, on the basis of what he would have done in his personal affairs: Re D’Jan
of London Ltd [1994] 1 BCLC 561,[1993] BCC 646; Bishopsgate Investment
Management Ltd v Maxwell [1993] Ch 1,[1992] 2 All ER 856,[1992] BCLC 475,
CA.
A director owes a duty to be diligent in relation to the company’s affairs. The term ‘diligent’ is primarily used to refer to the number of attendances at board and other meetings and attention to related paperwork. The amount of attention which a director is bound to give in terms of time spent will vary according to the organisation of the company and the number of other directors or executives who are participating: Re Cardiff Savings Bank, Marquis Of Bute’s Case [1892] 2 Ch 100, 61 LJ Ch 357 [1]. In the days when businessmen acquired directorships like luggage labels, the position of ‘ordinary directors’ was not at all onerous. They were required: Re Forest of Dean Coalmining Co (1878) 10 Ch D 450 at 452 per Jessell MR:
‘To use reasonable diligence having regard to their position, though probably an ordinary director, who only attends at the board occasionally, cannot be expected to devote as much time and attention to the business as a sole managing partner of an ordinary partnership, but they are bound to use fair and reasonable diligence in the management of the company’s affairs, and act honestly.’
[1] See also Re Montrotier Asphalte Co, Perry’s Case (1876) 34 LT 716, where Bacon V-C said that a director, ‘Is bound to attend every meeting of the directors. It is not part of the duty of a director to take part in every transaction which is considered at a board meeting.’
The effect of this is that except where there are so few directors that there is a risk of control being exercised (and abused) by one person [1], the requirement of attendance will be limited to such occasions as are necessary for the director concerned to maintain a reasonable understanding of the company’s affairs and of the performance of fellow directors and senior staff. However, this limiting principle cannot apply to persons who are appointed, usually under service contracts, to be full-time directors.
(i) Statements of principle
For over 70 years, and untrammelled by developments in
the general law of negligence, the analysis of a judge
of first instance in Re City Equitable Fire Insurance
Co Ltd [1925] Ch 407, CA provided an unchallenged
template for standards of skill and care.
(1) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.
(2) A director is not bound to give continuous attention to the affairs of his company.
(3) In respect of all duties that, having regard to the type of business and the articles of association, may properly be left to some other official, a director is normally justified in leaving that official to perform such duties honestly.[1] [1925] 1 Ch 407, 94 LJ Ch 445; recently applied in Dorchester Finance Co Ltd v Stebbing (1977)[1989] BCLC 498 (non-executives) and Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187,[1990] BCLC 868, PC (directors owing different duties under different contracts).
(ii) Negligence and gross negligence
A distinction evolved in the earlier cases between ‘culpable’ or ‘gross’ negligence,
and ‘ordinary negligence’ [1] but in Re City Equitable Fire
Insurance Co Ltd [1925] Ch 407 at 427, CA it was pointed out that one cannot
say whether a man has been guilty of negligence, gross or otherwise, unless
one can determine what is the extent of the duty which he is alleged to have
neglected. If two men owe the same duty to a third person, and neglect to perform
it, they are both guilty of negligence; but if it is said that of the two only
one is liable to a third party for gross negligence, then this means no more
than that the duties of the two are different. The one owes a duty to take
a greater degree of care than does the other. If a director is only liable
for gross or culpable negligence, this means that he does not owe a duty to
his company to take all possible care. ‘It is some degree of care less
than that. The care that he is bound to take has been described ... as “reasonable
care” to be measured by the care an ordinary man might be expected to
take in the circumstances on his own behalf.’
[1] Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392, 68 LJ Ch 699, CA.
The term ‘gross negligence’ has, however, survived as a measure by which the adequacy of professional or business services is to be judged. It is common for limiting clauses to be inserted in terms of engagement, trust deeds, agency contracts, and other documents evidencing agreement to provide services, that the party charged is to be liable only for ‘wilful default and gross negligence’. The intent is to modify the duty of care to cover only intentional or reckless conduct or omission, but it has no application in the modern law of delict [1] where reasonable care is expected of all who fall under a common law duty. Thus, whilst it is technically open for, say, a non-executive director to limit his liability to his appointor by inserting a provision in the letter of engagement which covers only gross negligence (although such a step is unlikely to endear him to the company), and this will be effective contractually [2], developments in the availability of parallel remedies [3] may mean that a delict-based claim for breach of duty will still be a risk.
[1] In Scots law, for ‘tort’ read ‘delict’.
[2] Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] BCLC 868 at 892, PC.
[3] Henderson v Merrett Syndicates Ltd [1995] 2 AC 145,[1994] 3 All ER 506, HL; Holt v Payne Skillington [1996] 02 LS Gaz R 29, CA; cf CA 1985, s 317.
(iii) Degree of skill
The level of skill required to be exhibited is the best an individual can muster
according to his own lights. In Lagunas Nitrate Co v Lagunas Syndicate [1899]
2 Ch 392, L Co was promoted and formed by the directors of L Syndicate for
the purpose of purchasing part of the property of the Syndicate, consisting
of nitrate works. Two years after the acquisition the shareholders of L Co,
believing the property had been acquired at an over-value, appointed an independent
board of directors to support an action against L Syndicate. It was held
that since the shareholders had notice from the company’s memorandum
and articles, and elsewhere, that the original directors were involved in
L Syndicate, such involvement (in the absence of any misrepresentation or
concealment) could not bring about rescission of the purchase contract. Also,
the defender directors had not been guilty of such negligence or breach of
trust as to render them liable in damages for the loss occasioned to the
company, or in equity to make good such loss.
The Court of Appeal indicated that if the directors act within their powers
and honestly for the benefit of the company, then their want of knowledge or
experience cannot render them liable even though more skilful directors might
not have allowed the loss to arise. They could not be liable for mistakes or
errors of judgment, even though such mistakes affect the relations of their
company with another company of which they are also members, and even though
the interests of the two companies may conflict. Similarly, Romer J said in
Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, CA that: ‘A
director of a life insurance company, for instance, does not guarantee that
he has the skill of an actuary or of a physician.’
The limitations of this test, at least on the older authorities, is made plain
by a dictum in Re Brazilian Rubber Plantations and Estates Ltd [1911]
1 Ch 425 at 437:
‘[A director] is, I think, not bound to bring any special qualification to his office. He may undertake the management of a rubber company in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which may result from such ignorance; while if he is acquainted with the rubber business he must give the company the advantage of his knowledge when transacting the company’s business.’
The shortcomings of the director’s skill are bound
to increase his reliance upon outside expert advice, if
he has the sense to take it, in which case the standards
considered above apply: Re Faure Electric Accumulator
Co (1888) 40 Ch D 141, 58 LJ Ch 48. As with trustees,
directors cannot rely on the advice to the extent of abrogating
their discretion. But to the extent that they exercise
their judgment bona fide, it seems that a court will not
be prepared to interfere: Howard Smith Ltd v Ampol Petroleum
Ltd [1974] AC 821 at 832, PC, even as regards managing
directors; Harold Holdsworth & Co (Wakefield) Ltd
v Caddies [1955] I WLR 352 at 356, HL.
(iv) Recent developments
Statutory intervention to raise the standard has been sporadic. The Supply
of Services (Exclusion of Implied Terms) Order 1982, SI 1982/1771 specifically
excludes all directors from the operation of The Supply of Goods and Services
Act 1982, s 13. However, the common law rules have undoubtedly been affected
by IA 1986, s 214(4). This provision makes a director of a company which has
gone into insolvent liquidation liable to contribute to its assets if at some
time before the liquidation he knew or ought to have concluded that there was
no reasonable prospect that the company would avoid going into insolvent liquidation,
and then failed to take steps to minimise the loss to creditors. For these
purposes:
‘the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in that company; and
(b) the general knowledge, skill and experience that that director has.’
Since the liability imposed by this provision is ex post
facto, it is arguable that the only safe course for a director
of a company which has not yet become insolvent is to exercise
a degree of care over its affairs as will exonerate him
in any event. The extent to which this necessitates a higher
degree of participation by eg non-executives than hitherto,
remains to be seen, but potentially the exposure is much
greater.
There are now signs that the courts are accepting that IA 1986, s 214(4) correctly
states what a director’s duties of skill, care and diligence are while
a company is a going concern (without differentiation between the three concepts),
and in consequence that the mainly subjective test in Re City Equitable
Fire Insurance Co Ltd [1925] Ch 407, CA has been replaced by a standard
approximating to ‘a reasonable director’. In Norman v Theodore
Goddard [1991] BCLC 1028, the court held this to be so, but that the liability
for failure to take care could be discharged where there was reasonable reliance
on the activities of others, even if they turned out to be fraudulent and company
property was misappropriated. The result, therefore, is not dissimilar to that
reached in the earlier decision. More recently, in Re D’Jan of London
Ltd [1994] 1 BCLC 561, the same judge invoked s 214(4) in holding liable
for negligence a director who signed an insurance proposal form without checking
its contents although, again, the same result might have been reached using
Re City Equitable criteria on the basis of lack of care or diligence
rather than want of appropriate levels of skill. A direct authority for the
proposition in question is therefore still awaited [1].
[1] But see Law Commission paper 153 (1998), esp pp 257–258.
Section 214(4) itself is not entirely free from ambiguity as a general statement of duties owed. ‘Diligence’ appears to be relegated to being a sub-set of care and skill, a mode of performance rather than a distinct obligation. The cumulative nature of paras (a) and (b) of subsection (4) appears to sideline the individual director’s personal skill level in favour of an objective test of what can reasonably be expected of someone else performing the same functions, so that if an incompetent director fails to match this minimum threshold he will be liable. But what then is the purpose of requiring, as para (b) does, an examination of his subjective qualities at all? A possible answer is that it covers the ‘expert’ director, ie one appointed to exhibit a special or higher professional or technical competence, so that his own liability threshold is placed above that of the ‘ordinary’ director and must be judged by the standards of a reasonably competent exponent of his particular calling (banker, accountant, lawyer etc). This would accord with other authority [1], but requires the court to detach paragraph (a) from the analysis unless it be said that even the ‘expert’ owes no greater duties generally, in the performance of his functions, than his ‘ordinary’ counterpart.
(i) Service contracts
The modern board of directors commonly consists of a handful
of ‘non-executives’ the
presence of whom may add status or prestige to the company, attract customers,
be useful for lobbying purposes or merely look impressive on the company’s
notepaper; and a number of full time executives who will be concerned with
the administration of the business on a level of continuous participation.
As we have seen, full-time directors are expected to show a high degree of
diligence. A corresponding enhancement of their duties of care and skill cannot
be inferred from any principle of law such as agency dealing with the position
of a director as such. Apart from the possible adaptation of IA 1986, s 214,
such inference must be drawn, if at all, from the traditional master and servant
relationship and any express or implied contractual terms applicable thereto.
This could be held to mean that a director operating under a service contract
which provides for the due performance of specific functions, owes higher duties
than a director (still full time), who does not, but instead derives his authority
(and the payment of his fees and expenses) from the articles of association
and from the fact that he is also likely to be a controlling shareholder.
In the case of ordinary employees, the courts have readily
inferred an implied term of the contract of employment,
requiring the exercise of reasonable skill in the performance
of the duties of the job: Eagle Trust plc v SBC Securities
Ltd (No 2) [1996] 1 BCLC 121,[1995] BCC 231 [1]. There is no reason
why the same test should not be applied to an employed director, and certainly
an employed managing director: the assumption of a greater liability is a quid
pro quo for the greater security afforded by a service contract in terms of
statutory protection and redundancy and pension rights. Thus a director who
is engaged under a contract of employment and is dismissed by ordinary resolution
of the company may sustain an action in damages for wrongful dismissal (he
may even be reinstated). A non-employed director is not in this position.
[1] A financial adviser was held to owe duties of reasonable skill and care, but no more.
In a small company the putting into place of a service contract for a sole director and shareholder may appear otiose. However, it will have important tax consequences and helps to establish the separation between the company as a legal entity and its human proprietor: Lee v Lee’s Air Farming [1961] AC 12, PC. Effective tax planning can take place if a company is formed round an individual which then procures for a third party his services as an employee. High profile media figures often take this route. At the other end of the scale, full-time directors of public limited companies are expected to operate under service agreements and the length and scope of these are partially controlled by statute (CA 1985, ss 318–319) and the Yellow Book [1]. But does the existence of a service contract automatically imply a higher set of duties or are these to be inferred from the expertise which particular individuals bring to the boardroom, ie a holding out of special skills? The matter is controversial, but cases such as Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187,[1990] BCLC 868, PC [2] suggest the latter approach is preferable and, if so, a service contract for an unskilled director will not of itself create additional or higher duties.
[1] Stock Exchange Listing Rules, Ch 16.9.
[2] Discussed further below
In Jackson v Invicta Plastics Ltd [1987] BCLC 329 the court had occasion to investigate the duties of an employed chief executive, who had been summarily dismissed for misconduct. It was emphasised that the duty of care owed by a director differs from that owed by an employee, although in citing Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, CA as authority, the nature of the distinction was not greatly illuminated. The passage relied on is that of Romer J:
‘A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.’
By implication, the employee duties of a chief executive
officer must be higher, and elaborate evidence was adduced
of the executive’s shortcomings in a managerial capacity,
whereas the judge’s finding was that ‘he was
a loyal executive who did his job honestly and well’,
and as such did not merit summary dismissal. Little can
be gleaned from this except that standards and expectations
differ from case to case and from company to company, as
to what a chief executive should be capable of performing.
(ii) The expert director
Two types of expert could be appointed to a board. First, persons having specific
knowledge of the business in question, who would be bound to use such knowledge
for the furtherance of the company’s interests: Re Brazilian Rubber
Plantations and Estates Ltd [1911] 1 Ch 425 at 437. Second, those who are
engaged because they are specialists in a certain part of the company’s
administration, eg as chartered surveyors or accountants. The law is well settled
that, for the latter type, there must be shown such a degree of skill as a
reasonably competent practitioner would have. The test is objective. The director
is trusted with a specific task because, by virtue of his professional qualifications
and experience, he is regarded as capable of fulfilling it and is relied on
by the remainder of the board to do so. This does not imply a possession of
skill to the highest degree, but it is obviously well above that of the ordinary
man: Harmer v Cornelius (1858) 5 CBNS 236; Lister v Romford Ice and
Cold Storage Co Ltd [1957] AC 555,[1957] 1 All ER 125, HL; Kuwait Asia
Bank EC v National Mutual Life Nominees Ltd [1990] 1 AC 187,[1990] BCLC
868, PC.
The standard to be achieved by the professional is to be judged by his peers: Chapman
v Walton (1833) 10 Bing 57, 2 LJCP 910:
‘The point, therefore, to be determined, is not whether the defender arrives at the correct conclusion upon reading the letter, but whether upon the occasion in question, he did or did not exercise a reasonable and proper care, skill and judgment. This is a question of fact, the decision of which appears to us to rest upon this further inquiry, viz: whether other persons exercising the same professional calling, and being men of experience and skill therein, would or would not have come to the same conclusion as the defender.’
Liability also arises where a person holds himself out
as being suitable or competent to do a particular job or
perform it with a particular degree of skill, even if he
is not professionally qualified: Esso Petroleum Co Ltd
v Mardon [1976] QB 801,[1976] 2 All ER 5, CA. Evidence
of failure on either count sounds in damages.
The modern position is not often tested in the courts. In Dorchester Finance
Co Ltd v Stebbing (1977) [1989] BCLC 498 (although actually decided in
1977) DFL had three directors, one only of whom was full-time. The others,
who were qualified accountants, attended meetings infrequently. DFL made loans
all of which were irrecoverable under the Moneylenders Act, and the company
brought proceedings in negligence against all the directors for allowing transactions
of this type to be undertaken. The full-time director had been privy to the
illegality. It was held that, in addition to the personal liability of such
director, the other two were liable for signing blank cheques without inquiry,
even though they had acted bona fide throughout. It was no defence that they
had exercised such diligence as they thought appropriate as outsiders. The
basis of the liability appears to have been their professional status.
Some confirmation of the above approach comes from IA 1986, s 214(4)(b), which
by implication suggests that a director with extra knowledge, skill and experience
will be expected to perform to a higher standard in his evaluation of material
facts bearing upon the company’s financial state.
(i) Equal standards of care
A board of directors acts as a whole and although some
of its members may be given additional powers by the
articles or by resolution, the general duties and responsibilities
are the same for all. There is no distinction between
the position of executive and non-executive directors. If a breach of duty
is to be attributed to a board on the basis that all of its members were present
at a meeting which had approved a wrongful act, then the liability of each
director is joint and several and no allowance is made for the fact that some
are part-timers and may have acquiesced in a situation which they did not fully
understand: Re Lands Allotment Co [1894] 1 Ch 616, 63 LJ Ch 291, CA.
For these purposes the directors are in the same position as trustees of a
fund, and may be held liable for knowledge of wrongdoings in relation to dealings
with its property: El Ajou v Collar Land Holdings plc [1994] 2 All ER
685,[1994] 1 BCLC 464, CA. Higher duties are owed by those who are employed
under service contracts or because of professional skill.
It is now the policy of The Stock Exchange to encourage the presence of non-executive
directors on all boards, and to this end an organisation called PRONED has
been constituted to advise companies on the selection of suitable candidates [1].
In an appropriate case, the company should approach an organisation such as
this where the board needs strengthening.
[1] Promotion of Non-executive Directors, Devonshire House, Mayfair Place, London W1X 5FH. This organisation has prepared a leaflet, The Role of the Non-executive Director, which is obtained from the stated address.
(ii) Professional advisers as directors
A question of both legal and practical difficulty is whether a solicitor or
accountant to a company should accept an invitation to that company’s
board. As a general rule, to avoid a conflict of interest arising, it is
preferable for a professional person who has a pre-existing contractual relationship
or office of profit with the company, not to join. There are two reasons
for this. First, the appointment may impair the independence of the professional
advice which will still be needed by the board. Second, if the solicitor
or accountant who has been appointed is a partner in a firm, it is possible
that civil liability will accrue to the firm for the negligence of the individual
acting in a managerial rather than professional capacity. We have already
noted that higher expectations exist of the standards of directors professing
special skills and if the company becomes insolvent, the liquidator may pursue
a misfeasance or wrongful trading claim against the person with the best
financial cover to meet it. Persons taking up appointments should ensure
that they have adequate professional indemnity insurance for the consequences
of their acts. Where an accountant is appointed director but shows ‘a
degree of indifference to his duties which constitutes unfitness’ to
act, he will be disqualified under CDDA 1986: Re GSAR Realisations Ltd [1993]
BCLC 409.
There is no objection to non-connected professionals, or even friends and colleagues
of such persons accepting an appointment. In the case of a growing private
company, particularly one that may ultimately seek a Stock Exchange listing,
the advice of an independent non-executive director with relevant experience
can be invaluable. A non-executive director must have time to attend board
meetings and to brief himself adequately beforehand. A typical time allocation
is two days a month, or about 10% of the director’s time. Some boards
delegate part of their work to committees and the non-executive should be prepared
to serve on a proportion of these. A non-executive director may also be asked
to carry out special duties, eg reporting on the adequacy of financial and
other information available to the board, level of remuneration of executives,
and other particular projects. If the non-executive is assigned tasks which
set him aside from the remainder of the board, it is strongly arguable that
he should be entitled to separate, independent legal or accounting advice paid
for by the company.
In Dorchester Finance Co Ltd v Stebbing (1977)[1989] BCLC 498, considered
above, a claim by the two non-executive directors to be exonerated from liability
for the defaults of the full-timer, was dismissed by the judge. Foster J said: ‘For
a chartered accountant ... to put forward the proposition that a non-executive
director has no duties to perform I find quite alarming’. Although almost
totally lacking in the citation of earlier authorities, the case has been cited
with approval on a number of subsequent occasions, and by commentators, and
must be taken to represent the modern law.
(i) Generally
A study of the decisions relating to negligence by professional
advisers is not necessarily helpful in determining a specialist
director’s liability
for breach of duty to his company, since it may be that such a director would
be accountable not so much for failing to exercise professional skill, but
for failing to apply it by analogy to a general management problem within the
company. Accepting that possibility, some specific examples of professional
negligence should nonetheless be considered.
(ii) Accountants
Accountants and auditors owe professional duties not merely
to their clients but to third parties who rely on their
information or advice: Caparo Industries
plc v Dickman [1989] QB 653,[1989] 1 All ER 798,[1989]
BCLC 154, CA. Where an accountant’s duty includes the checking of books of account, he has
been held to be negligent in not obtaining a bank’s certificate to verify
the cash, but relying instead on a cash book which had been falsely prepared
by a dishonest clerk: Fox & Son v Morrish Grant & Co (1918)
35 TLR 126. Where an accountant has been employed to advise
on the sale of a business, a liability for negligence arose
where the advice given was misleading: Bradford
v Wright Stephens and Lloyd (1962) Guardian, 27 February.
Company auditors have been held to owe a duty of care
to potential take-over bidders in preparing the company
accounts: JEB Fasteners Ltd v Marks, Bloom & Co (a firm) [1983]
1 All ER 583,[1982] Com LR 226, CA. In this case, no take-over
negotiations had begun when the accounts had been prepared;
however, the possibility was foreseeable and the auditors
were liable to the bidders for an inflated valuation
of the stock. This represents an advance on earlier law
when an accountant who was engaged to investigate the
books of the company but failed to find out that the
stock was over-valued, was held not liable because in
the absence of suspicious circumstances he was entitled
to rely on the accuracy of the stock sheets: Henry Squire Cash Chemist Ltd v Ball,
Baker & Co (1911)
27 TLR 269. In general, accountants are increasing targets of claims based
on foreseeability and reliance, particularly where the company is lent money: Galoo
Ltd (in liquidation) v Bright Grahame Murray (a firm) [1995]
1 All ER 16,[1994] 2 BCLC 492, CA.
The duties of auditors were increased by CA 1989, giving
rise to a greater statutory duty of care.
(iii) Solicitors
Solicitors appointed to a board may be asked to give advice
in a number of capacities. They may be consulted on contracts
with third parties, liabilities of the board itself, company
procedure, and the rights and duties of employees. It is
clear that they are under a duty to be careful when giving
advice in all these situations. As Lord Denning MR said
in Dutton v Bognor Regis UDC [1972]
1 QB 373 at 395, CA:
‘Nowadays ... it is clear that a professional man who gives guidance to others owes a duty of care, not only to the client who employs him, but also to another who he knows is relying on his skill to save him from harm. It is certain that a banker or accountant is under such a duty and I can see no reason why a solicitor is not likewise.’
A solicitor has been held liable for not explaining the
true effect and purpose of documents which the client is
being asked to execute: Stannard v Ullithorne (1834)
10 Bing 491, 3 LJPC 307. He is liable when acting for a
client who is advancing money to a third party, for not
ensuring that the security documents are properly executed
or legally effective: Whiteman v Hawkins (1878)
4 CPD 13, 39 LT 629. A solicitor, like an accountant, will
be liable for not taking reasonable care of documents entrusted
to him, or else for disclosing confidential information
which has been communicated to him: Weld-Blundell v
Stephens [1920] AC 956, 89 LJKB 705, HL.
A solicitor’s role in business matters may be more restricted unless he
is specifically engaged to undertake them. Thus in Duchess of Argyll v Beuselinck [1972]
2 Lloyd’s Rep 172, the plaintiff wished to have her life story published
and retained literary agents, and also a solicitor to advise her generally.
The agents prepared a contract which was sent to the solicitor to advise on.
He had gone abroad but his articled clerk, for whom he accepted responsibility,
approved the agreement. This involved the plaintiff in a considerable tax liability.
She claimed damages against him for failing to advise as to such liability,
or for not referring the matter to an expert tax consultant. It was held that
the defender was not liable, because a reasonably competent solicitor could
not be expected to perform as an expert in non-legal (tax) matters. It is submitted
that where a solicitor is appointed a director he will be expected to apply
the skills of his calling to management problems, and either attend to them
personally or draw the board’s attention to the fact that other expert
advice may be needed, eg as to tax or accountability matters.
The fact that a solicitor has been appointed may encourage a degree of reliance
or acquiescence by others, which in turn raises issues of liability if such
reliance is misplaced. In Norman v Theodore Goddard (a firm) [1991]
BCLC 1028,[1992] BCC 14 a fraudulent trustee-solicitor of an off-shore fund
(whose co-trustee was another partner in the same firm) persuaded the director
of an English property company whose shares were owned by the fund, to deposit
assets with a third party to secure a tax advantage. The third party was a
company which (unknown to the director) was owned by the solicitor-trustee,
and the assets were misappropriated. Proceedings brought by the trust’s
beneficiary against the firm of the solicitor-trustee were compromised, and
the firm then sued the director, who was a quantity surveyor unversed in company
law, for a contribution to the losses. It was held that a director was entitled
to trust persons, especially ‘professionals’ in positions of responsibility,
until there was reason to distrust them. The director was entitled to rely
on the information he obtained from the solicitor-trustee and to base his decision
to deposit funds upon it.
(iv) Surveyors, architects and engineers
The professional liability of a surveyor or engineer who is also a director
will only be apparent if the business of the company includes property transactions
or engineering works and the director involved is an expert in these matters.
It has been held that structural engineers were liable for not designing a
building fit for the purpose for which they knew it would be required: Greaves & Co
(Contractors) Ltd v Baynham Meikle & Partners [1975] 3 All ER 99,[1975]
1 WLR 1095, CA. It would follow that a surveyor-director of a property company
who was shown plans which turned out to be negligently prepared by a contractor,
but yet accepted them and caused the company loss, must be liable independently
of any claim the company might bring against such contractor. Similarly, it
has been held that an architect and a surveyor employed to give a general report
but not a detailed survey on a property were negligent in failing to discover
woodworm and dry rot: Sincock v Bangs (Reading) Ltd [1952] CPL 562;
see also Philips v Ward [1956] 1 All ER 874,[1956] 1 WLR 471, CA. So
a specialist director deputed by his board to inspect new offices which the
company might acquire, could similarly be liable. An architect has been held
liable for issuing interim certificates to a builder when the work has not
been carried out: Sutcliffe v Thackrah [1974] AC 727,[1974] 1 All ER
859, HL. Persons in the position of architects, surveyors and engineers will
be deemed to have a knowledge of law and practice which is appropriate to their
calling: Jenkins v Beltham (1855) 15 CB 168, 24 LJCP 94.
continue on/back to:
1. A SUMMARY OF DIRECTORS DUTIES | 3. TO WHOM ARE DUTIES OWED
Prepared by Peter Watson
© Levy & McRae 2008Terms and ConditionsPrivacyContactSitemap
266 St Vincent Street, Glasgow, G2 5RL +(0)141 307 2311