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What is tortious liability for breach of contract?

Tort v contract

This High Court case (see The next step ) was based on the breach of a construction contract, so why claim in tort? Economic torts arise out of a defendant’s intentional wrongdoing that results in the claimant’s economic loss. They are more difficult to establish than breach of contract claims because there are more elements to the claim and proving the intentions of the parties can be tricky. On the flip side, the remedies available are wider, damages can be higher and, crucially in this case, claimants can seek redress from defendants who try to hide behind contractual relationships and the legal personality of a company.

Complex ownership

Specialist building firm Palmer Birch (P) was engaged to renovate a 14-bedroom manor house in Devon. The property was essentially the UK residence of Michael Lloyd (ML), but for tax purposes it was owned by a company (which ML beneficially owned) that leased it to Hillersdon House Ltd (H). P’s contract was with H, a single purpose vehicle with no assets in real terms. Its only income came from ML. Its sole director and shareholder was Christopher Lloyd (CL), ML’s brother, but in reality ML called all the shots.

Project breakdown

The project overran, costs increased and H stopped paying P’s invoices. ML stopped funding H, pushing it into voluntary liquidation. H purported to terminate the construction contract on this basis, but the contract’s terms did not entitle it to do so. Tip. This repudiatory breach of contract was key. If you have to take action under a contract, always check first that its terms allow it.

Conspiracy theory

There would be little point in P bringing a breach of contract claim against H in the wake of its liquidation. Therefore, it sought damages directly from CL and ML. ML was found liable for inducing a breach of contract by causing H to terminate without the right to do so. ML and CL were found liable for conspiracy to cause loss by unlawful means by colluding to bring about this repudiatory breach of contract. ML and CL were found to have decided that they could avoid paying P for the remainder of the work if they wound H up. ML was also found liable for the tort of conversion (depriving someone of their property) by removing materials belonging to P from site.

Puppet and master

Tip 1. This convoluted tale emphasises the importance of directors acting independently and in the best interests of their companies. CL was described as “almost ventriloquial” by the judge because he just followed his brother’s instructions without question. The judge found that ML was not a shadow director, but a de facto director, i.e. a director in all but name, as he was entirely open about his control over H and the project. The fact that he was, on paper, merely H’s funder could not save him from liability. Tip 2. If a third party is involved in company decisions, make sure that the board considers those decisions independently. Never follow instructions without question.

For a link to the case and a director’s liability checklist, visit http://tipsandadvice-business.co.uk/download (CD 20.03.07).