Supreme Court, 23 November 2012, LJN BV588 (Van de Riet/Hoffman et al.)

On 23 November 2012, the Supreme Court gave an important ruling in the field of directors' and officers' liability. In this ruling the Supreme Court has formulated a number of new standards.

1) The Judgement in Broad Outline and Its Importance for Practice

Besides the existing standard for directors' and officers' liability, by which directors could be held liable for non-performance by the company on grounds of a sufficiently serious blame against the director personally (see, for example, Supreme Court's judgment in Ontvanger/Roelofsen (LJN AZ0758)), the present judgment also makes it possible for a director to be held liable if:

  • the company is held liable because it has acted unlawfully and the director can personally be seriously blamed on the ground that he should have prevented such acts considering with the knowable interests of the injured party;
  • the director has acted in violation of a personal duty of care vis-à-vis a third party. In this case, the usual rules of unlawful conduct apply, and it is not required that the director can be seriously blamed.

Directors and parties that have been disadvantaged by a company's and/or its board's actions, and liability insurers should pay attention to this important judgment. Depending on the circumstances of the case, we expect that on the basis of this judgment injured parties may have more strings to their bow if they wish to hold the board (or one or more directors) liable.

In this specific case (in which a commercial property agency and its (indirect) director were held liable) professional and directors'and officers' liability seem to intersect with one another. For insurers this judgment may lead to interesting questions concerning policy cover and recourse. The (legal) advisors of directors will therefore have to point out the risks of (external) directors' and officers' liability in more detail and perhaps more quickly.

2) Discussion of the Judgment

Facts and Background

The buyers of a villa in Spain held the intermediary company and its (indirect) director, who were involved in the conclusion of the purchase agreement, severally liable after the villa had been demolished due to problems with the required building permits. The following facts are relevant:

  • At a housing fair in February 2004, the buyers were introduced to a company (the “Company”) that offers intermediary services to sellers and buyers of real property at the Costa Blanca in Spain;
  • In May 2004, the buyers inspected a housing project in Spain, accompanied by the (indirect) director (the “Director”) of the Company, among other people. On the project site, red signs with a warning text had been placed. According to the Director, these signs had been placed because more buildings were being constructed than was allowed. He declared that this problem would be solved after the owner of the project would have paid a fine;
  • In June 2004, the owner of the project and the Director paid a visit to the buyers together. In the period after that, they reached agreement about the purchase price to be paid for a house that was still to be built. When the buyers learn, not long afterwards, that the planned construction could not go ahead due to protests from the local residents, they dissolved the purchase agreement. It was suggested to the buyers to come to Spain to choose an alternative location/house;
  • At the end of November 2004, accompanied by the Director, the buyers visited a half-built villa that was part of another housing project in Spain. During this inspection, the Director told the buyers, among other things, that the house was a good investment, and he made a suggestion for the method of financing. At that time, the Director was aware of the problems regarding the building permits for this housing project, and of rumors that the villas were threatened with demolition. However, he did not share this information with the buyers;
  • Immediately after the inspection in November 2004, the buyers reached agreement with the seller. However, at the end of January 2005 the buyers learned that the villa they had bought had been demolished, because all constructions on the land concerned were prohibited and no building permit had been issued either. Next, the buyers started legal proceedings against the Director and the Company, among other parties.

Lower Courts

In the first instance, the buyers were ruled against, but on appeal their claim against the Company and the Director was successful. The Court of Appeal considered that the Director and the Company had been involved in the conclusion of the purchase agreements as professional third parties. On grounds of common decency, they should have taken the interests of the buyers to heart by becoming well-acquainted with the possibilities or impossibilities of completing the housing projects and of being able to obtain a building permit or not, and by informing and/or warning the buyers correctly and fully. The Director in particular has failed to do so.

His acts and/or omissions make the Director personally liable vis-à-vis the buyers on grounds of unlawful conduct. The Company too is liable on grounds of unlawful conduct. The unlawful acts of the Director are so much related to his acts and/or performance of his duties as representative of the Company that according to generally accepted standards, these acts can be regarded as the Company's acts.

The Supreme Court

Only the Director lodged an appeal in cassation against the judgment of the Court of Appeal. In light of earlier case law of the Supreme Court (including the Ontvanger/Roelofsen judgment) and the criteria formulated there, the Director was of the opinion – in summary – that the Court of Appeal had failed to recognize that a director can only be held liable beside the company if this director can personally be seriously blamed to a sufficient extent.

The Supreme Court rejected the complaint. The case law and the standard which the Director referred to, both relate to the liability of a director if:

  • there is a situation in which a creditor is being disadvantaged because his claim remains unpaid and unrecoverable, in the event that the director (i) has undertaken a commitment on behalf of the company, or (ii) has either effected or allowed that the company is not performing its statutory or contractual obligations;

Directors' and officers' liability in such cases is only possible if the director can be seriously blamed for the company's non-performance. But the Supreme Court held that a director may also be personally liable if:

  • the company has acted unlawfully and the director can be held liable beside the company, because the director can personally be seriously blamed on the ground that he should have prevented those acts by the company in connection with the knowable interests of the injured party;
  • a director has acted in violation of a personal duty of care vis-à-vis a third party.

The complaint in cassation cannot be successful, because in this case the last-named situation applies. In the case of such liability – which does not concern a failing or improper performance of duties of a director – the Supreme Court held that the common rules pertaining to unlawful conduct apply, and that it is not required that a director can be seriously blamed for his acts.

The same is true in this case, in which the Company itself is liable because of unlawful conduct, because according to generally accepted standards, this Director's unlawful conduct can (also) be regarded as the Company's conduct.