Director not liable for £1.5m claim despite false statement

The importance of carrying out due diligence before making large purchases was highlighted in a recent case before the courts.

It involved an aviation company that faced a £1.5m compensation claim from one its customers.

The issue arose after the company sold an aircraft for £3.5m. The purchasers later became dissatisfied with the aircraft for various reasons. In April 2011, they discovered that it had been involved in a hard landing in 2009 before they bought it. This had resulted in it being grounded while repairs costing £70,000 were carried out.

The incident was recorded in the log at the time and reported to the insurers. The Federal Aviation Authority (FAA) in the United States was not informed as there was no legal obligation to do so. The purchasers sold the aircraft at a loss of £1.5m. They tried to recoup this loss from the aviation company that had sold it to them.

They alleged that a director of the company had told them that the aircraft had never been involved in an accident. They claimed this was a false statement and entitled them to recoup their money.

The judge, however, ruled against them. He held that although the director had made a false statement, he had not done so fraudulently because he didn’t think the hard landing incident amounted to an accident as it didn’t have to be reported to the FAA.

There would have been no reason for him to lie about it as the incident had been recorded in the pilot log and maintenance logs. These would, or should, have been inspected by the purchasers as part of the normal “pre-purchasing due diligence”.

The Court of Appeal has upheld the ruling.

Please contact Mark Pelopida about the issues raised in this article or any matter relating to contracts and company law.