Director liability for company breach of contract – the rule in Said v Butt revisited
In the recent decision of IBM United Kingdom v LZLABS GmbH and others [2022] EWHC 844 (TCC), the English High Court examined the circumstances in which a director may be liable for a company’s breach of contract. The decision will be of interest to all company directors, and in particular those who are at the helm when their company breaches the terms of a contract.
In IBM United Kingdom, the claimant licenced the use of its software to a corporate licencee. The claimant alleged that the licencee and other companies in the same corporate group reverse engineered the claimant’s software in order to create their own software, and that this was a breach of the licencing agreement. The claimant brought a claim against these companies, and against two individuals who were the directors of the licencee at the relevant time on the basis that they had procured the contractual breach by the licencee.
The directors sought to strike out the claim against them on the basis of the rule derived from the decision in Said v Butt [1920] 3 KB 498, which is that a director cannot be liable for inducing a company’s breach of contract unless the director was acting in bad faith or outside of the scope of the director’s authority.
The Court observed that, in considering whether a director acted in such a way as to attract liability for the company’s breach of contract, the focus of the analysis is the director’s duties to the company and not bad faith in relation to external parties. The key question is whether the director was properly acting to promote the success of the company, taking into account all of the circumstances, including the motivation of the director, the nature of the duties allegedly breached, the nature of the alleged breach of contract, and the consequences of that breach. So, for example, a director who causes the company to pay trade creditors late with a view to alleviating its temporary liquidity problems will not be in breach of his duties to the company, and would not attract liability for the company’s breach of trade credit terms.
In IBM United Kingdom, the claimant argued that the licencee’s entire operation was premised on a breach of the licencing agreement and therefore illegitimate, and that a director who causes a company to act in such a manner cannot be acting in accordance with his duties. While the court considered this argument was far from compelling, it held that the claim was sufficiently arguable to avoid a strikeout.
While claims in tort against directors arising from a company’s breach of contract are rare, directors should bear in mind the parameters of the protection offered by the rule in Said v Butt if they find themselves in a situation where they intend to cause the company to breach the terms of an agreement.
