Collude, Get Sued (And You May Even Be Held Personally Liable)

Palmer Birch (A Partnership) v (1) Michael Lloyd (2) Christopher Lloyd [2018] EWHC 2316 (TCC):

Background:

The claimant (a construction business specialising in house refurbishment) claimed the unpaid value of work carried out under a contract with a limited company (H). The second defendant (D2) was H's director. The first defendant (D1) was its sole funder.

The claimant and H had entered into a JCT Standard Building Contract with Quantities (2011) for the renovation of a property that was, essentially, D1's English residence. H had a leasehold interest in the property; the freehold was owned by a company (S), which was beneficially owned by D1. D1 arranged for loans by S to H to meet the renovation costs. H did not trade, had no independent financial resources, and had been incorporated largely for tax reasons, enabling D1, who lived abroad, to recoup VAT on the contract costs. H went into liquidation before completion of the works.

Claimant's case:

The claimant claimed under three economic torts:

Inducing breach of contract Unlawful interference Unlawful means conspiracy The claimant essentially argued that the defendants had colluded to bring about H's insolvency and procure repudiatory breach of contract, so as to avoid having to pay the claimant for work done. It asserted that D1 significantly influenced H's finances and used H as a conduit for his funding when it had been clear, from H's incorporation, that it had insufficient means to repay S.

Defendant's case:

The defendants' case was that the claimant had contracted with H, knowing that it was a new company dependent on third party funding, and was seeking to pierce the corporate veil. They maintained that H's legal personality, together with the absence of any obligation on D1 or S to fund the contract to completion, meant that there had been mere non-actionable prevention, not inducement. They relied on a defence of justification and maintained that no loss had been caused to the claimant, because H had lacked the means to pay in any case.

Court Judgment:

Inducing breach of contract: This allegation succeeded against D1. There was a fine line between acts of inducement and acts of mere prevention (where a defendant's conduct prevented a third party from performing the contract, but without any inducement or procurement). Here, D1 had incurred no tortious liability in respect of his failure to fund the contract, as he...