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    10:58 PM Christopher Zheng (LL.B., National University of Singapore, LL.M. (Corporate), New York University)

    Personal Liability of Directors for their Company's Contractual Breaches and Torts: Recent Developments

        

    Introduction

    While a company is a separate legal entity from its members, shareholders and directors (Gabriel Peter & Partners v Wee Chong Jin [1997] 3 SLR(R) 649 at [32], [34] ("Gabriel Peter")), decisions of a company are often made through its board of directors. Where a company breaches its contract with, or commits a tort against, an external party under the direction of its board, are the directors personally liable to the external party? This question was examined by the Singapore Court of Appeal in PT Sandipala Arthaputra v STMicroelectronics Asia Pacific Pte Ltd [2018] SGCA 17 ("PT Sandipala").

    With regard to breaches of contract by the company, the Court of Appeal refined the existing law and held that directors would not be personally liable (whether under the tort of procuring a breach of contract or unlawful means conspiracy) if they acted in their capacity as directors and did not breach their personal legal duties to the company (PT Sandipala at [62], [65]).

    In relation to torts committed by the company, such as defamation and trespass, the existing position is that directors would be liable as joint tortfeasors if they personally directed, authorised, or procured the tort (Gabriel Peter at [33]; TV Media Pte Ltd v De Cruz Andrea Heidi [2004] 3 SLR(R) 543 at [118] ("TV Media")). This is so even if they acted in the best interests of their company (PT Sandipala at [74]). However, the Court of Appeal in PT Sandipala noted the compelling arguments for and against the revision of this rule and left it open for future consideration.

    By clearly demarcating the boundaries of personal liability of directors for their company's breaches of contract, the PT Sandipala judgment provides welcome clarity for the conduct of affairs in Singapore companies. As regards any potential revision of the law on the liability of directors for their company's torts, this commentary suggests that a blanket defence akin to that for breaches of contract would not be appropriate.

    Background of the Case

    PT Sandipala concerned a contract ("Supply Contract") between an Indonesian company, PT Sandipala Arthaputra ("Sandipala"), and a Singapore company, Oxel Systems Pte Ltd ("Oxel"), under which Sandipala agreed to purchase microchips from Oxel. The microchips were manufactured by STMicroelectronics Asia Pacific Pte Ltd (“ST-AP”) and encoded with Oxel's operating system. The purpose of Sandipala's purchase was to fulfil a separate contract with the Indonesian government for the production of electronic identification cards ("e-KTP").

    Oxel’s operating system turned out to be incompatible with the e-KTP system. Consequently, Sandipala rejected a majority of the microchips delivered and paid for only approximately a sixth of the microchips it accepted.

    Sandipala commenced proceedings against ST-AP, Oxel and ST-AP’s country manager for, inter alia, breaches of alleged obligations in contract and tort owed to Sandipala by selling chips that could not be used to produce the e-KTP. Sandipala's claim was dismissed by George Wei J in the High Court on the grounds that, inter alia, Sandipala knew at all times that the Oxel chips would not be compatible with the existing e-KTP system.

    Oxel also brought a counterclaim: (i) against Sandipala for Sandipala's breach of the Supply Contract; and (ii) against Sandipala and its directors for the tort of conspiracy by unlawful means to cause Oxel economic loss.

    George Wei J in the High Court held that Sandipala had breached the Supply Contract by wrongfully rejecting and/or not paying for the Oxel chips. Further, Sandipala and its directors had unlawfully conspired to cause loss to Oxel by attempting to extricate Sandipala from the Supply Contract without accepting the consequences of its breach. This was done by: (i) creating a paper trail falsely stating different terms of the Supply Contract to found a claim against Oxel; (ii) bringing a false, trumped up claim in the suit below to apply pressure on Oxel; and (iii) causing articles with false allegations about Oxel to be published.

    The Court of Appeal’s Judgment

    The salient part of the appeal concerned Oxel's counterclaim against Sandipala and its directors for unlawful means conspiracy. The Court of Appeal reversed the decision of the High Court and held that Sandipala's directors were not liable. Firstly, the High Court had erroneously relied on acts occurring after Sandipala's breach of contract in finding that there was a conspiracy (PT Sandipala at [80] – [83]). Secondly, to the extent that the conspiracy was furthered by the directors authorising and directing Sandipala's breach of contract, the directors were protected because they were not in breach of their personal legal duties to Sandipala (PT Sandipala at [83]). The latter is the focus of this commentary.

    Key to the Court of Appeal's ruling was the principle set out in Said v Butt [1920] 2 KB 497 ("Said v Butt") and as interpreted by subsequent cases: when directors act bona fide within the scope of their authority, they are immune from tortious liability for procuring their company’s breach of contract (PT Sandipala at [53]). While Said v Butt concerned the tort of inducement of breach of contract, the Court of Appeal noted that the principle had been extended to other torts involving a company’s breach of contract (PT Sandipala at [54] discussing O'Brien v Dawson (1942) 66 CLR 18).

    The Court of Appeal remarked that, although the Said v Butt principle had been endorsed in multiple jurisdictions, some uncertainty remained (PT Sandipala at [55] – [61]). Firstly, it was unclear whether the Said v Butt principle protects directors ordinarily acting within their authority but not in good faith or in the best interests of the company (PT Sandipala at [59]). Secondly, there had been suggestions that, for directors to be liable, there must an "additional factor" such as a dominant purpose of depriving the external party of its contractual benefits (PT Sandipala at [60] discussing Imperial Oil Ltd v C&G Holdings Ltd (1989) 62 DLR (4th) 261).

    The Court of Appeal thus clarified the scope of the Said v Butt principle, holding that directors would not be personally liable for their company's contractual breaches (whether through the tort of inducement of breach of contract or unlawful means conspiracy) if their acts were: (i) in their capacity as directors; and (ii) not in themselves in breach of any fiduciary or other personal legal duties owed to the company (PT Sandipala at [62], [65]). The focus of the inquiry is on the directors' duties towards their company rather than towards the external party, and there is no need for any other "additional factor" to determine the directors' liability (PT Sandipala at [66], [67]).

    On the facts, the Court of Appeal held that although Sandipala's directors had authorised and directed Sandipala's breach of the Supply Contract, they had not acted in breach of their personal duties to Sandipala. As the microchips were incompatible with the e-KTP system, fulfilling the contract would have left Sandipala with 100 million useless microchips. It was therefore in the best interests of Sandipala to breach the Supply Contract. Sandipala's directors were protected by the Said v Butt principle and were not personally liable under the tort of conspiracy (PT Sandipala at [83], [84]).

    The Court of Appeal’s Further Observations

    The Court of Appeal also made further observations about the personal liability of directors for their company's torts.

    The existing legal position is that directors are liable as joint tortfeasors for any tort personally directed, authorised, or procured by them, notwithstanding that they may have done so in the best interests of their company (PT Sandipala at [74] discussing Gabriel Peter and TV Media).

    However, the Court of Appeal noted a potential anomaly in permitting immunity for directors in relation to their company’s breaches of contract but not their company's torts. Conceptually, if the act of a board of directors in directing a breach of contract could be regarded as the act of the company alone, it was uncertain why the same could not be said of the act of the board in authorising a tort. From the policy perspective of preventing the over-deterrence of directors, it was uncertain why a director may not also legitimately consider it to be in the best interests of the company to commit a tort and compensate the victim accordingly (PT Sandipala at [75]).

    The Court of Appeal acknowledged attempts to rationalise the discrepancy by reference to the doctrine of contractual privity. Since a contract is voluntarily entered into between the company and an external party, the external party’s recourse for breach of contract is ordinarily limited to the company alone. Conversely, a tort victim never had the opportunity to 'bargain' with the company and the law justifiably attributes responsibility to all actors who were personally implicated in the tort (PT Sandipala at [76]).

    Ultimately, in light of the compelling arguments in support of both positions, the Court of Appeal expressed no concluded view on whether the legal position relating to a company's torts should be harmonised with that relating to a company's breaches of contract.

    Analysis

    Personal liability for the company's breaches of contract

    The Court of Appeal's judgment provides welcome clarity in relation to the liability of directors for their company's breaches of contract. It assures boards of directors that they can legitimately direct their company to breach a contract if it is in the best interests of the company, and if it is not in breach of their other personal duties to the company. Compliance with the law is simplified as directors can refer simply to the existing body of law on fiduciary and contractual duties regulating how a director should act in relation to his company.

    Importantly, the judgment makes clear that directors need not be concerned about the interests of an external contractual counterparty in directing their company’s breach of contract. Even if the directors had intended to cause loss to the external party, they could still be protected from liability under the tort of inducement of breach of contract or unlawful means conspiracy. Were it otherwise, directors would be thrust into an extremely difficult situation of having to take into account the interests of two parties at the opposite ends of the same contract.

    It is also significant that the Court of Appeal emphasised the importance of the "efficacious conduct of commercial life" (PT Sandipala at [64]). It endorsed the perspective that the Said v Butt principle "assures that directors are capable of directing that a contract of employment be terminated or that a business contract not be performed, if it is in company’s best interests to instead pay the damages for failure to perform" (ibid).

    This appears to be an implicit affirmation of the view that a company's deliberate breach of contract (with the payment of damages) can sometimes be justified as part of the efficacious conduct of commercial life. Such a view is eminently reasonable. For example, if a better deal comes along after an original deal was signed, a company should be entitled to take the better deal in its own commercial interests, with the payment of damages to the original counterparty. The board of directors should be shielded from liability (whether under the tort of procurement of breach of contract or unlawful means conspiracy) for directing the company to do so.

    The Court of Appeal's reasoning is in fact reminiscent of the 'efficient breach' theory of contract law, albeit in the limited context of a company's breaches of contract. Proponents of the 'efficient breach' theory argue that, "far from being an unmitigated moral disaster, [a] breach of contract is sometimes precisely what ought to happen" and that "contract law is largely about commerce, not holiness" (see discussion in David Howarth, "Against Lumley v Gye" (2005) 68 MLR 195 at 202). Under this theory, a breach of contract with the payment of damages can be justified if it would cause limited resources to be more efficiently allocated. The opposing 'moral' theory is that the "breach of contract is so wrong that the law should take any step to discourage it", including "putting pressure on the inducer" (ibid). At least in the context of a company's breaches of contract, the 'efficient breach' theory is preferable and more consistent with the realities of commercial life.

    Personal liability as joint tortfeasors for the company's torts

    If the basis for shielding directors from liability is that their company's breaches of contract are part of the efficacious conduct of commercial life, it would explain why the law should treat differently the liability of directors as joint tortfeasors for their company's torts.

    While it could also sometimes be in the best interests of a company to commit a tort, such as trespass or intellectual property infringement (as recognised in PT Sandipala at [75]), such conduct cannot be justified simply as being part of the efficacious conduct of commercial life. In other words, unlike a company's breach of contract, a company's tort cannot be justified merely on the grounds that it furthers the company's own commercial interests. Consequently, directors who direct, authorise or procure their company's tort should not have a blanket defence for, inter alia, acting in the best interests of the company.

    The reason is that the focus of tort law is not on encouraging and regulating commerce. Tort law has wider functions such as "vindicating and appeasing the victim of wrongs, condemning socially disreputable conduct, giving a voice to the victims of civil wrongs… [and] signalling society’s commitment to retributive justice" (see discussion in ACB v Thomson Medical Pte Ltd [2017] 1 SLR 918 at [172] of Daniels v Thomson [1998] 3 NZLR 22). These wider considerations justify imposing liability on directors who are sufficiently involved in a tort towards the external party, even if they had complied with their duties to the company.

    Of course, it is a legitimate concern that the law should not cause directors to become overly defensive in making decisions on behalf of their company. In this regard, it bears mentioning that whether a director would be found to have authorised, directed or procured the commission of a tort "depends very much on the factual situation at hand" and requires a close examination of his "level of involvement" in each case (Gabriel Peter at [35]). Concerns about over-deterrence could perhaps be addressed through a refinement of the term 'authorise, direct and/or procure', rather than through a blanket defence akin to that for breaches of contract by the company. Alternatively, the Singapore Courts could consider a reformulation of the test, which appears to be the direction taken by the Australian Courts (see e.g. Keller v LED Technologies Pty Ltd (2010) 185 FCR 449 where Jessup J required a director to have "ma[de] the tort his or her own" and Emmett J required some act that made the director an "invader of the victim’s rights").

    Concluding Remarks

    Whether to hold directors liable for their company's breaches of contract and torts raises difficult conceptual and policy questions. The Singapore Courts should be lauded for adopting a clear rule, in relation to a company's breaches of contract, that takes into account the practical realities of commercial life. However, the same commercial considerations do not necessarily justify an equivalent blanket exemption for directors in relation to their company's torts. It is hoped that this commentary would assist when the latter issue arises for consideration in the future.

     

    Christopher Zheng
    (LL.B., National University of Singapore,
    LL.M. (Corporate), New York University
    )

     

    * This blog entry may be cited as Christopher Zheng, “Personal Liability of Directors for their Company's Contractual Breaches and Torts: Recent Developments”  (6 May 2018) (http://www.singaporelawblog.sg/blog/article/210)

    ** A PDF version of this entry may be downloaded here

     

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