A recent decision of the Court of Appeal provides useful guidance for directors in the context of representations made to third parties. Inter Export LLC v Jonathan Townley and Yaroslavna Lasytsya emphasises directors' continuing responsibilities when making such representations.
In the context of contractual negotiations, a continuing representation is one which endures until a contract has been performed, rather than being extinguished when a contract is made. The Court of Appeal has reinforced the law on continuing representations, rejecting the idea that the person making the representation must have been aware that it was a continuing representation for it to be classed as such. The judgment shows the need to be aware of the possibility that something stated in contractual negotiations may be classed as a continuing representation.
The defendant, Lasytsya, was the sole director of a company (NTL) from 2010. Inter Export had a relationship with NTL, pursuant to which Inter Export would supply NTL with edible oils. In July 2012, a director of Inter Export requested assurances from Lasytsya that NTL would be able to pay for a new contract for the supply of sunflower oil.
Lasytsya made seven oral representations (the July representations), including that (1) NTL had funds available, having negotiated a financing deal with a Russian businessman; (2) this businessman had agreed to provide funds for the purpose of this contract; and (3) there was no risk that NTL would not pay.
Relying on these representations and a SWIFT message forged by Lasytsya, Inter Export delivered the cargo of sunflower oil to NTL. NTL did not pay and subsequently went into liquidation.
Inter Export brought a claim against Lasytsya and a former director of NTL, Townley, for damages in deceit due to the July representations. The claim against Townley was dismissed in the High Court but the claim against Lasytsya succeeded. Lasytsya appealed.
Of particular interest are the Court of Appeal's findings on continuing representations and responsibilities, and on the assessment of loss.
The Court of Appeal summarised the nature of a continuing representation, as follows:
- A representation will be treated as a continuing representation where it has been made "as a matter of inducement to enter into a contract". A pre-contractual representation of this sort will continue from the time it is made until the time the contract is concluded.
- A person who makes a representation, the effect of which is continuous, has a simultaneously continuous responsibility to ensure its accuracy.
- Where a person makes a pre-contractual representation, the continuous effect on both the representation itself and attached responsibility also applies where:
- the person subsequently finds out that the facts are false; and
- the representation subsequently becomes untrue.
In both situations, the person is required to disclose the inaccuracy.
The judgment makes it clear that a director making a representation to a supplier does not need to be aware that the representation is a continuing one for it to be considered as such. Lasytsya's pre-contractual representations were clearly continuing representations relied upon by the supplier. The supplier could therefore claim against the director personally in deceit as, in this instance, the representations were found to be fraudulent. Of course, not all representations will be fraudulent but some may cease to be accurate with the passage of time. The requirement to disclose subsequent inaccuracy is therefore of prime importance.
The relevant assessment of loss
At first instance, the High Court had affirmed that the appropriate assessment of loss in a claim for deceit is to put the claimant in a position as though the deceit had not occurred.
On appeal, Lasytsya argued that the High Court's interpretation was wrong and Inter Export should only be compensated for expenses incurred in reliance on the contract, such as purchasing, processing and transporting the seeds. It should not be compensated for the value of the oil, which it would not have otherwise acquired or sold had the deceit not occurred.
The Court of Appeal upheld the High Court's decision, determining that the loss should be determined at the point in time to which the representation continued – in this case including the Claimant's claim for the purchase of the oil. This means that potential liability may also be minimised by the representing party correcting the representation at the earliest opportunity.
This decision is particularly relevant in a commodities context, when contracting for the supply of goods. It may come as a surprise that a company director can, in certain circumstances, attract personal liability in tort for representations he or she makes on the company's behalf.
If you are a company director, when making pre-contractual representations:
- Ensure to the extent possible that any representations are true and accurate at the time of being made.
- If you later become aware that the representation was false at the time it was made, or if the representation later becomes false, communicate this to your counterparty immediately.
- Be aware that a representation that your company has funds to pay a supplier for delivering goods is a continuing representation.