Breach of representations and warranties by seller of the entire share capital of a company resulting in the company being forced into liquidation and the newly appointed managing director of the company being dismissed - Court finds for managing director against seller on the ground of liability in tort.

A judgment dated September 28 1998 of the Paris Court of Appeal (CA Paris, 1er Ch. A, Banque Rivaud / Schwarz) provides an interesting example of liability in tort for damage caused to a third party as a result of a breach of a contractual obligation.

A French bank had sold the entire share capital of one of its fully-owned subsidiaries to two separate purchasers, each of the purchasers receiving title to a 50% interest in the company. Contemporaneously to the transfer of the stock of its subsidiary, the bank had represented and warranted that the audited financial statements for the company gave a true and fair view of the assets and liabilities of the company, that no material changes to the situation as reflected in the financial statements had occurred at the date of the completion of the transfer and that until that date the company had been managed in the normal course of business. Also, the bank had undertaken to make good any undisclosed liability that would not be accounted for in the financial statements and would have its origin prior to the completion of the transfer.

After the completion of the transfer, a financial audit conducted on behalf of the company's newly appointed managing director (président du conseil d'administration) led to the discovery of liabilities in the neighborhood of FF9million that allegedly had not been accounted for in the financial statements and had not been disclosed to the purchasers. The bank rejected the company's claim for indemnification and counter-claimed that it was the company that indeed was indebted to it. Shortly thereafter, the company sought bankruptcy protection and eventually was put in compulsory liquidation, while the company's managing director was laid off and a court-appointed liquidator brought recovery proceedings against the bank before the Commercial Court of Versailles.

On January 13 1994, the bank was ordered to pay more than FF9million in damages to the company in liquidation under the representations and warranties. This matter was later settled out of court between the bank and the company in liquidation. The company's former managing director then commenced proceedings before the Paris Commercial Court against the bank whose breach under the representations and warranties he considered had resulted in his dismissal as the company's manager.

It is a well-established principle that a dismissed managing director (président du conseil d'administration) is not entitled to compensation, except where the dismissal has been wrongful.

However, the Commercial Court and the Paris Court of Appeal equally found for the plaintiff who was awarded FF1.5million in damages. The Court of Appeal determined that the bank's breach under the representations and warranties had resulted in the company's bankruptcy. The Court further resolved that the bank was liable in tort vis à vis any third party who had suffered a loss from the bank's breach under the representations and warranties. On causality, the Court found that the bank's breach was the origin of the plaintiff's dismissal, noting in particular that the plaintiff had been newly appointed after the stock purchase and, due to the bank's breach, had lost a significant opportunity to continue to enjoy the benefits of his position during the five year term for which he had been appointed.

Although it is a well-established doctrine that a contractual relationship can give rise to liability in tort vis à vis third parties and that liability in tort can arise from a breach of contract, this decision sheds some interesting light on the far reaching implications that breaches of representations and warranties can have. Although a managing director would normally not be entitled to compensation against the company, where the decision to dismiss a managing director is caused under a duress imposed on a company by a non-performing contractual partner, a managing director who was dismissed as a result of this duress could seek compensation against the party causing such duress.

For further information of any of the above topics, please contact Philippe Blaquier-Cirelli at Jeantet & Associés, Paris office (Tel: +33 1 45 05 8008. Fax: +33 1 47 04 20 41 or by e-mail to [email protected]) or Elie Kleiman at Jeantet & Associés, New York office (Tel: 1 212 314 9499. Fax: 1 212 582 3806 or by e-mail to [email protected]).

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