The conviction last week of a former Managing Director for breaches of the Fair Trading Act (FTA) does not create new risk for senior executives or directors in general and does not in any way extend the application of the FTA.
The facts of the case
The former Managing Director of Total Frame and Truss Limited, now in liquidation, pleaded guilty to 36 breaches of the FTA following a Commerce Commission inquiry instigated when a building inspector noticed that timber used in framing was different to that stated on the specifications.
The company supplied prefabricated frames and trusses which it represented to its customers were made using MSG8 premium grade timber. But, at the direction of the MD concerned, one Larry Roger Binns, most of the timber used was of a lower grade, known as non-load bearing, and did not have the characteristics of MSG8.
Announcing the result, the Commission said:
“This case highlights the fact that, even when a company is in liquidation, if the Fair Trading Act has been breached, company executives can be held to be liable under the Fair Trading Act and may face prosecution. Senior management should ensure that they are familiar with and comply with all relevant legislative requirements. Failure to do so can not only have serious consequences for their companies, but for them personally."
Chapman Tripp comments
The Commission’s decision to target Mr Binns is understandable from a consumer protection perspective. But to the extent the Commission’s publicity implies executives will always or even usually be in the gun for an FTA breach, it goes too far.
The leading case in this area is Body Corporate v Taylor (2008). The Court of Appeal decided by a 3-2 majority that the director of a property development company (also in receivership) was personally liable for the misleading or deceptive claims made in a company brochure because those claims relied upon his personal expertise and experience and therefore contained an element of “personal endorsement”.
The Court of Appeal said that in these circumstances, the consumer was best served by a broad approach to the FTA and that directors and employees faced strict liability even if they were acting in their capacity as employee or director.
Returning to Mr Binns, while it is clear from the Commission’s statement that Mr Binns gave the order to use the lower grade timber, it is not clear whether he personally endorsed the claim about the MSC8 treatment.
The Commission’s strategy toward Mr Binns seems to have been to place the onus on him to show that he did not personally misrepresent the company’s product. And because he pleaded guilty (presumably on legal advice), this episode takes the legal position no further.
Implications of the decision
The Commission’s advocacy on behalf of the consumer is understandable but can lead it to test the boundaries of the FTA. In both the Taylor and the Total Frame cases, the Commission’s application of the Act was fairly bullish - although in Taylor vindicated by a majority in the Court of Appeal and in Total Frame, not challenged because of the guilty plea.
But the position remains that directors or executives are not automatically responsible for FTA breaches. There must be particular circumstances in each case to expose the director to liability: an endorsement or other association of the executive or director with the misleading corporate statement.
The risks for the directors and senior managers of major corporates in being found personally liable for FTA breaches are lower than for smaller or one-person companies as it is less likely that they would be fronting for the company and making personal claims in trade.