Clarification By The Singapore Court Of Appeal On The Principles For Imposing Tortious Liability On Directors For Contractual Breaches By A Company – Part 2

Clarification By The Singapore Court Of Appeal On The Principles For Imposing Tortious Liability On Directors For Contractual Breaches By A Company – Part 2

Imposing Tortious Liability on Directors

Part 2: Decision of the Court of Appeal

The counterclaim that was brought by Oxel against Sandipala’s directors on the ground of unlawful means conspiracy made the Court of Appeal consider when a director should be held personally liable for the consequences arising from his company’s breach of a contract, to which he himself, is not a party. Generally, directors act to represent their company, and so may decide that it is sometimes within the company’s scope of interest to breach its contract and compensate the other contracting party as opposed to continuing to perform.

To hold that a director could be liable for coming to such a decision, notwithstanding that he is acting the best interests of the company and is himself not a party to the contract, is not only unduly onerous on the director but also effectively penalises the company when the director acts in fear of personal liability and therefore refrains from deciding a breach of contract even if it may be in the best interests of the company.

The Court of Appeal therefore was of the view that the limits to such personal liability must be clearly demarcated.

The Court of Appeal established the legal principles for imposing liability on directors in respect of contractual breaches by the company.

 

A director may be held liable for the consequences of the breach of contract by their company under three potential causes of action:

 

    1. Where a director induces or procures his company to breach the company’s contract with a third party.

 

    1. Where the directors of a company conspire to procure their company to breach its contract with a third party.

 

  1. Where a director conspires with their company to cause the company to breach its contract with a third part

 

With regard to the aforementioned causes of action, a director may be immune from personal liability if he falls within the application of the principle in Said v Butt [1920] 2 KB 497 which establishes that when a director acts bona fide within the scope of his authority, he is immune from tortious liability for procuring their company’s breach of contract (“Said v Butt principle”). Since, before this, there was no detailed analysis by the courts of what precisely the Said v Butt principle entailed, the Court of Appeal’s decision in this case highlights the application of the Said v Butt principle in Singapore.

As a general principle, when a director who acts in the capacity as the director of a company, authorises or procures the company to make a contractual breach, they would be immune from tortious liability in respect of the company’s contractual breaches, unless in doing so, the director acts in breach of the legal duties they owe to their company. A third party who makes a claim against a director for liabilities in respect of their company’s breach of contract must prove that the director acting in breach of his personal legal duties to the company in directing or participating in the contractual breaches. The court’s focus is on the conduct and intention of the director towards the company and not towards the third party.

When the aforementioned principles were applied to the facts of the matter at hand, the Court of Appeal held that the directors of Sandipala were entitled to the protection of the Said v Butt principle since there was no evidence to suggest that Sandipala acted in breach of their personal legal duties to Sandipala. Based on this, the Court of Appeal allowed the appeal by Sandipala and its directors against Oxel’s claim in unlawful means conspiracy accordingly.

The judgment of the Court of Appeal also addressed the principles regarding director’s liability for a tortious act committed by a company. However, the court did not share a conclusive view on the issue since it was not particularly significant to the appeal before the court.

 

Concluding Words

The decision by the Court of Appeal provides clarification on the legal principles for imposing tortious liability on directors regarding a breach of contract by the company and provides certainty concerning directors in their performance of duty.

As a general principle, it is clear that a director is not personally liable for the breach of contract of a company if, when is acting on behalf of the company, the director has authorised or procured the company to breach the contracts. The director may only be deemed liable if it can be proven that their personal legal duties to the company were breached.

Despite this, it has yet to be seen how, in practice, an aggrieved party may prove tortious liability against a director and to what extent the court’s processes may allow for this purpose.

 

Please note that this article does not constitute express or implied legal advice, whether in whole or in part. If you require legal advice, please contact me at walter@silvesterlegal.com.

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