Board member liability for erroneous commercial negotiations is a topic increasingly being discussed in the context of management risks and compliance. Can erroneous decisions made during discussions with a counterparty result in the personal civil liability of a board member? What regulations govern this issue and when does a breach of duty occur? We answer below.
What is a board member's liability in the context of commercial negotiations?
Personal liability of a board member - legal basis
Members of the board of directors of limited liability companies (limited liability companies and joint stock companies) are obliged to act in the interests of the company, with due diligence. Their responsibility is regulated by:
(a) Article 293 § 1 of the Commercial Companies Code (CCC) - liability of members of the board of directors of a limited liability company,
(b) Article 483 § 1 of the Code of Commercial Companies. - analogous regulation for joint stock companies,
(c) Article 299 of the Commercial Companies Code. - Liability for the obligations of the company in the event of its insolvency,
(d) Article 415 of the Civil Code. - Tort (tort),
(e) Article 72 § 2 of the Civil Code. - culpa in contrahendo, or liability for culpability in negotiations.
What is commercial negotiation and how does it affect accountability?
Negotiations in light of the Civil Code
Commercial negotiations are the stage preceding the conclusion of a contract, regulated by Article 72 of the Civil Code. According to § 1 of this provision, the commencement of negotiations does not yet create an obligation to conclude a contract. However, according to § 2:
"The party that conducts negotiations in violation of good morals (...) is obliged to compensate for the damage."
This means that damage can already be done at the negotiation stage - and thus expose you to civil liability, including personal liability.
When is a board member personally responsible for negotiations?
Internal liability - to the company
According to Article 293 § 1 of the Code of Commercial Companies, a member of the board of directors is liable to the company if, by his actions, he violated the law or the company's contract and caused damage to the company. Examples of situations:
(a) undertaking negotiations without preparing a risk analysis,
(b) grossly unfavorable contract terms,
(c) omission of legal or financial advice,
(d) overstepping management authority.
External liability - to the counterparty
Although, as a general rule, the company is responsible for the actions of the board of directors, in certain situations a board member may be liable directly to a counterparty, under Article 415 of the Civil Code, if:
(a) acted with willful misconduct,
(b) intentionally misled the contractor,
(c) acted without authority or after losing his mandate (cf. Articles 103 and 39 of the Civil Code),
(d) violated the principles of good faith or merchant integrity.
Examples of faulty negotiations that can result in liability
1. negotiation without authority
A board member who does not have effective authority (e.g., his mandate has expired), but nevertheless holds discussions or signs a contract, can be held personally liable (Article 103 of the Civil Code).
2. concealment of risks or insolvency
If a board member knowingly fails to inform a counterparty of the company's poor financial condition or of pending enforcement proceedings, he or she may be liable under culpa in contrahendo (Article 72 § 2 of the Civil Code).
3. entering into a grossly unfavorable contract
Lack of due diligence, such as signing a contract without legal or tax consultation, can result in liability to the company - and, if proven guilty, to third parties as well.
Liability of a board member - case law of the courts
Judgment of the Supreme Court of July 24, 2014, II CSK 627/13
The Supreme Court has allowed personal liability of a board member to a counterparty if his actions were unlawful and culpable, despite formally acting on behalf of the company.
Judgment of the SA in Krakow of May 15, 2018, I ACa 1501/17
The court held that withholding information that could influence a counterparty's decision to enter into a contract could lead to the imputation of negotiation fault.
Judgment of the SA in Warsaw of June 28, 2016, VI ACa 1966/15
The court pointed out that a lack of professionalism and actions based on a subjective hunch, without economic and legal analysis, violate the standard of due diligence of a board member.
How to avoid personal liability for faulty negotiations?
Key best practices:
(a) always act within the limits of authority,
(b) document the entire course of negotiations,
(c) conduct a risk analysis before entering into a contract,
(d) consult a lawyer on contracts, especially for complex or high-budget deals,
(e) inform the contractor of material circumstances that may affect the conclusion or performance of the contract,
(f) act in accordance with the principles of fair dealing and contractual loyalty.
Can a board member's liability be excluded?
D&O insurance
Directors & Officers (D&O) insurance is a practical solution to protect board members from civil claims. However, it is important to remember that:
(a) does not include intentional action,
(b) does not always protect against liability to third parties,
(c) the policy must be current and relevant to the scope of the board's activities.
Resolution of shareholders or supervisory board
The consent of the ownership body (e.g., the shareholders' meeting) to negotiations or specific decisions may limit the board member's liability - but does not completely exclude it if illegal action occurs.
Summary - when can the board be personally liable?
A board member is personally responsible for commercial negotiations when:
(a) acts through willful misconduct or gross negligence,
(b) violates code provisions or the articles of association,
(c) misleads the counterparty or withholds material information,
(d) exceeds the scope of authority.
Liability of a board member for faulty business negotiations is not the rule, but can be assigned in situations of serious breach of duty. That is why it is so important to exercise due diligence, document actions and consult with professionals.
If you have any questions on issues related to the liability of company directors, we invite you to contact us by email at kontakt@kancelaria-pozniak.pl or by calling +48 665 246 969.