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Personal liability for misleading and deceptive conduct – directors, officers and employees beware!

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The recent decisions of CH Real Estate Pty Ltd v Jainran Pty Ltd and Houghton v Arms should reinforce the warning to directors, officers and employees of companies that they may become personally liable for any misleading conduct or representations made in the course of their employment.

Part V of the Trade Practices Act 1974 (Cth) (TPA) is primarily concerned with the conduct of companies.  For example, section 52 prohibits only companies, in trade and commerce, from engaging in misleading and deceptive conduct.

Under the TPA, individuals can be held liable, but only where they aided or abetted a contravention by a company or were knowingly concerned in a contravention.  Such “accessorial” liability generally required an Applicant to prove that the individual knew what he or she was doing did or might amount to a contravention of the TPA.

The recent decision of CH Real Estate Pty Ltd v Jainran Pty Ltd (Jainran) emphasizes that directors and officers of companies can be held personally liable for their own misleading conduct under the State Fair Trading laws throughout Australia.

Jainran follows the trend of Courts imposing personal liability on individuals through the State Fair Trading laws (such as the Fair Trading Act 1999 (Vic) (FTA)). It also demonstrates that the Courts are prepared to bypass the more restrictive accessorial liability provisions under the TPA.

The State Fair Trading laws were introduced to supplement the TPA. They have the effect of imposing liability directly on individuals for engaging in misleading and deceptive conduct.

In Houghton v Arms, the High Court held that employees of a company were individually liable for their misleading and deceptive conduct under the FTA. The High Court held that, as long as the individual’s conduct was “in trade or commerce”, the individual could be liable to pay damages for that conduct, even if they were only acting as employee of the company at the time. The High Court confirmed that “in trade or commerce” meant that the individual’s conduct still had to have “the character of an aspect or element of trading or commercial activities or transactions”.

Jainran

Jainran entered into a contract to purchase a service station and a convenience store from Boyana Pty Ltd (Boyana). The Contract of Sale included the standard requisitions with standard answers, which indicated that a proposal to widen an adjacent road would not affect the property and that  Boyana was not aware of any contemplated or current legal proceedings affecting the property.

In actual fact, the property was affected by a road widening proposal and the current tenant had commenced proceedings against Boyana for misleading and deceptive conduct.

Jainran later rescinded the contract on the basis that the statements contained in the answers to requisitions were false.

Jainran brought proceedings against Boyana for the return of its deposit and damages on the basis of rescission of the contract and damages under the TPA for misleading and deceptive conduct.

Jainran also brought proceedings against Boyana’s director, Mr Sgro, under the TPA and FTA for misleading and deceptive conduct. Mr Sgro was the sole director and shareholder of Boyana.

Mr Sgro argued that he was not aware of any reference to the affect of the road widening proposal and that without that knowledge he could not be held liable under principles governing the accessorial liability provisions of the TPA.

The Trial Judge found that Jainran was entitled to rescind the contract. He gave judgment for Jainran against Boyana and Mr Sgro for the amount the deposit on the basis that the answers provided to the requisitions were misrepresentations amounting to misleading and deceptive conduct. As Boyana did not have the resources to satisfy the judgment, ultimately liability fell on Mr Sgro.

Mr Sgro was held to be personally liable under the aiding and abetting provisions of the TPA for the misrepresentations contained in the contract on the basis that he was the “human embodiment” of Boyana and “all its actions were his actions”.

The Trial Judge said:

“Mr Sgro cannot escape liability for his engagement in misleading and deceptive conduct by showing that he did not know of the inclusion of the requisitions and answers, or of the Planning Certificate in the contract . He no less engaged in the conduct of putting forward the contract in the terms it had and entering into the contract whether or not he had a full understanding of what he was doing, he can no more escape on this ground than Boyana can.”

On appeal, Mr Sgro argued that there was no evidence that he had given instructions to include the standard requisitions and answers.

The Court of Appeal agreed that while Mr Sgro should not be held liable for contraventions by Boyana under the accessorial provisions of the TPA, this did not dispose of the claim against him under the FTA.

Following the decision in Houghton, the Court found that the FTA provisions do not require intent or negligence on the part of the Defendant.  Therefore, the fact that Mr Sgro may not have been aware of the existence of the statements in the contract did not relieve him of liability.

Summary

These decisions are good examples of cases where individuals, in the course of their employment or as directors or officers of a company had personal liability imposed upon them.  They could not hide behind the corporate veil and were held to be answerable for their own actions, even though they were supposedly in furtherance of their companys’ interests.

Although companies faced with such claims will often also defend the claims made against directors, officers and employees (and satisfy any judgment) there is usually no legal obligation on companies to do so.

Other companies, in order to promote a strict culture of compliance with TPA and FTA laws, make it clear to their directors, officers and employees that they will be “on their own” if a judgment is entered against them for breaches of these laws.

For more information on misleading and deceptive conduct, please contact one of our experienced Lawyers in the Dispute Resolution and Litgation Team.

Author: Louise Tolson

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