Significance: Singapore Court of Appeal, hearing an appeal against a Singapore International Commercial Court (SICC) decision, clarifies when the tort of inducement of breach of contract by a parent company or shareholder may apply.
Generally, the basic requirement of the tort of inducement of breach of contract is that the tortfeasor must have acted with the requisite knowledge of the existence of the contract and must have intended to interfere with the contractual rights.
However, where it is claimed that a parent company (or shareholder) should be liable for inducing a breach of contract by its subsidiary, the court has to consider:
(i) whether the individuals responsible for breaching the contract were acting for the subsidiary and/or the parent; and
(ii) if they were acting for the parent, whether the circumstances were such that the parent ought to be held liable for inducing its subsidiary’s breach of contract.
The Court said that the fact that a company is wholly owned and entirely controlled by its parent company cannot, without more, mean that the parent had induced the subsidiary’s breach of contract. Otherwise, this would undermine the fundamental principle of separate corporate personality laid down in Aron Salomon (Pauper) v A Salomon and Company Limited [1897] AC 22. The mere fact that a shareholder with a controlling interest acted in such a way as to induce a company to breach its contract was not enough to make the shareholder liable for inducing the breach of contract as a matter of law.
The Court stated that, as a matter of law, a parent company cannot be found liable for inducing a breach of contract by its subsidiary if the actions said to give rise to its liability merely involved the parent pursuing in good faith its own interest in its capacity as the owner of, or shareholder in, that company.
If the parent in a company formed the view that the subsidiary would be better off if the subsidiary breached a contract, and summoned a shareholder’s meeting, or persuaded the directors, to give effect to that view, the injured party ought not to be able to proceed against the parent for inducing or procuring the subsidiary’s breach of contract. This is to uphold the separate legal personality of the subsidiary and parent companies.
Comment: this means that practically speaking, it would be very hard to hold a parent company liable for the subsidiary’s breach of contract. This may of course present practical challenges because often the subsidiary company may be asset-poor for the purpose of enforcement of judgments. Parties would do well to bargain for performance bonds at the time of contracting to mitigate their risks.