Economic torts: another way to pursue the person behind the corporate veil

 

 

  1. You provide goods or services to a company, but the company is unable to pay. You know that the person behind the company, who received the benefit of the contract, has the money to pay – and that he is responsible for the company being insolvent. What can you do?
  2. The company has a separate legal personality from its directors and shareholders, its owner was not a party to your contract, and if you get a judgment against the company you cannot enforce it against his assets. Your obstacle is the “corporate veil”. Liquidators to the company could pursue directors who have caused loss to the company, and seek to recover funds to the company to pay creditors – but that is not always possible, or effective.
  3. What you want is a direct claim against the person who received the benefit of the contract, and who has the money to pay for it.
  4. The English High Court has, in its recent decision in Palmer Birch v Lloyd [2018] EWHC 2316 (TCC), identified an approach that could be very effective on the right facts: it allowed a claim against the individuals who owned and ran a company, based not on the company’s breach of contract or on any breach of insolvency law, but instead on the direct tortious liability of the individuals to the company’s creditor.
  5. The “economic torts” considered in the case are recognised in Jersey and defined in the same way as in England[1]. They are: inducement to breach a contract, unlawful interference and unlawful means conspiracy.

 

The facts

  1. Palmer Birch (“PB”), a construction business, refurbished a manor house in Devon which was the home of Michael Lloyd, the first defendant, and was beneficially owned by him. The contract was not with Michael but with a company, HHL, which held a 21 year lease over the manor house and its extensive grounds. HHL’s shareholder and director was Mr Lloyd’s brother Christopher, the other defendant; but HHL was funded by Michael, and the court found that in reality Michael controlled HHL: he “called the shots”.
  2. There were no personal guarantees from the Lloyds. As the judge noted: “This claim reveals the perils of contracting with an undercapitalised limited liability company, with no guarantees from the individuals associated with it, as HHL was plainly one such company.”
  3. The contract price was around £5 million. Some of it was paid by HHL, funded by loans deriving from Michael, as the contract progressed. However HHL had insufficient assets of its own to repay those loans, or to fund the refurbishment contract if Michael stopped making the loans.
  4. Michael stopped funding HHL at a stage when PB claimed to be owed just over £1m for work it had done. At Michael’s instigation his brother Christopher placed HHL into liquidation with unsecured debts of over £11m, and terminated the contract. HHL turned out to have realisable assets of only £155,000.
  5. The judge found that “the works under the Contract were carried out ostensibly for HHL when Michael knew that their value to him personally would inure despite or, perhaps no less accurately, because of the demise of HHL.” Michael knew he could deliberately deprive HHL of the funds due to pay for works already done, and that he would gain by doing so, as he enjoyed the benefit of the works done to his home without being personally liable to pay for them. He had no contractual obligation to continue funding HHL, and if he chose to stop paying, HHL’s creditors would be left high and dry.

 

The economic torts

  1. PB alleged that Michael procured or induced breaches of contract by HHL; that he unlawfully interfered in commercial relations between PB and HHL; and that he and Christopher conspired to injure PB by unlawful means.
  2. The Lloyds argued that PB knew at all times that HHL was dependent on third party funding; that Michael had no obligation to fund HHL; that PB had taken a commercial risk by entering the contract without personal guarantees from Michael; and that PB’s claim was an impermissible attempt to pierce the corporate veil.
  3. The court identified from a review of the English authorities the constituent elements of each tort. The tort of inducing a breach of contract is secondary to a finding of breach of contract. It requires more than mere prevention of the contract being performed: there must be “pressure, persuasion or procuration” of the breach – or it may be sufficient if the contract-breaker is willing to breach the contract and the defendant has dealings with the contract–breaker which he knows to be inconsistent with performing the contract. In the case of a company controlled by the alleged wrongdoer, procuration would seem to be the most obvious fit. There must be an intention to induce a breach of the contract; no intention to cause damage is required. But actual loss must be proved.
  4. The tort of unlawful interference is a primary tort and does not piggyback on a breach of contract. It requires interference by the defendant with the actions of a third party in which the claimant has an economic interest, by unlawful means used against the third party, with intention to cause loss to the claimant. The act constituting the unlawful means can be unlawful in either the criminal or civil sense, arising (if civil) from duties in tort or contract, or equity, or under a statute. Loss must be caused to the claimant.
  5. Unlawful means conspiracy requires an agreement between two or more persons, with intention to injure the claimant (though this need not be the sole motivation), involving unlawful acts (defined as above, including a breach of contract) to cause such injury; and actual loss must have been caused to the claimant. It is doubtful that a person can conspire with a company which he directs or controls, as two separate minds are required. However a company director may be personally liable for conspiracy even though he acts as director.

 

The decision

  1. The judge found as a fact that Michael and Christopher decided to place HHL into liquidation in order to avoid Michael having to fund the works that had been done and were still being done. He found that Michael thus procured HHL’s repudiatory breach of contract, and was liable for inducement – though he was not so liable simply for stopping funding HHL. The judge held that the decision to liquidate was on the right side of the line between prevention and inducement, because it represented a diversion of funds which Michael could and should have provided to the company, even though there was no contractual obligation compelling him to do so.
  2. Unlawful interference was not established, because failing to fund HHL was not unlawful, there being no obligation on Michael to fund HHL. However unlawful means conspiracy was proved, as the agreement between Michael and Christopher to bring about the breach of contract was unlawful and was intended to injure PB.
  3. As for the corporate veil, the judge declared that Michael’s conduct “was not a reflection of HHL’s separate corporate personality but an abuse of it.” No corporate veil was pierced, however, because it was not necessary to do so.

 

Implications of the decision

  1. This case is a welcome further affirmation, following decisions such as that of the Supreme Court in Prest v Petrodel [2013] UKSC 34, that those who seek to abuse the separate legal personality of a company in order to harm others cannot expect sympathy from the courts.
  2. This case is not an example of piercing the corporate veil, which the Supreme Court held can only happen when a person fraudulently interposes a company to evade an existing liability, and when there is no other remedy available. Rather, this case demonstrates an alternative way of pinning liability on a wrongdoer who has sought to abuse the separate corporate identity of a company – in this case to secure a benefit for himself at the expense of another, without paying for it.
  3. The facts of this case may be relatively unusual but one or more of the economic torts may have been committed in many other scenarios where a person has caused economic harm to another by abusing his control of a company to bring about a breach of contract, or by otherwise interfering in the company’s business with intent to harm another.
  4. On the right facts these economic torts may be an attractive alternative to breach of contract claims, whether against companies or people. They could bring in a wider field of defendants. But it is important to consider that the limitation period for torts in Jersey is three years, against ten years for breach of contract.
  5. It may not be easy to find a case whose facts fit within the definition of any of these torts. The distinction between “prevention” and “inducement” for inducing a breach of contract is fertile ground for disagreement, for example. But this case should provide encouragement for claimants, faced with an apparent corporate obstacle, who want to go after the assets of the person behind the company.

 

[1] Pell Frischmann v Bow Valley Iran [2008]JCA146, which also briefly considered other torts including deceit and injurious falsehood.

 

William Redgrave, Partner

williamredgrave@bakerandpartners.com

 

 

Our website uses cookies. By continuing to use this website you have consented to having cookies placed on your computer.

To find out more please read our cookie policy.