28 June 2018

PT Sandipala Arthaputra & Ors v STMicroelectronics Asia Pacific Pte Ltd & Ors [2018] SGCA 17

The Singapore Court of Appeal decision in PT Sandipala Arthaputra & Ors v STMicroelectronics Asia Pacific Pte Ltd & Ors sheds light on the legal principles for imposing tortious liability on directors in respect of contractual breaches by their company. A director who authorised or procured his company to breach contracts entered into by the company would, generally, not be personally liable for the company’s breaches unless in doing so, he had breached his personal duties to the company.

Facts

PT Sandipala Arthaputra (“Sandipala”) and Oxel Systems Pte Ltd (“Oxel”) entered into a contract where Oxel was to supply 100 million microchips to Sandipala (“Supply Contract”). These chips were manufactured by STMicroelectronics Asia Pacific Pte Ltd (“ST-AP”) and encoded with Oxel’s software known as “PAC” for the chips’ operating system (“Oxel chips”). The Oxel chips were purchased by Sandipala for fulfilling its obligations under a separate tender contract with the Indonesian government for the production of electronic identification cards called electronic-KTP cards (“e-KTP card Project”).

Sandipala claimed that the Oxel chips could not be used to produce the e-KTP cards as PAC was incompatible with the e-KTP system. Sandipala rejected the chips delivered under the Supply Contract and commenced the present action against Oxel and others for, among other things, breach of express and implied terms of the Supply Contract for selling the Oxel chips to Sandipala that could not be used for the e-KTP card Project or fraudulently representing that the Oxel chips could be used for the e-KTP card Project.

Oxel counterclaimed against Sandipala for breach of contract by failing to pay for and accept delivery of the Oxel chips under the terms of the Supply Contract, and against Sandipala and the directors of Sandipala (“Sandipala’s Directors”) for conspiracy to cause Oxel loss by attempting to unlawfully extricate themselves from their contractual obligations under the Supply Contract without paying compensation.

Decision of the High Court

The High Court judge dismissed all of Sandipala’s claims and allowed Oxel’s counterclaims against Sandipala for breach of the Supply Contract. He further found Sandipala and Sandipala’s Directors liable for the tort of conspiracy by unlawful means to cause Oxel economic loss. Sandipala and its Directors appealed against the entirety of the High Court judge’s decision.

This case summary focuses on the Court of Appeal’s judgment on the issue of whether Sandipala’s Directors should be held liable for the tort of conspiracy by unlawful means to cause Oxel economic loss.

Decision of the Court of Appeal - Directors’ liability for contractual breaches by company

On Oxel’s counterclaim against Sandipala’s Directors on the ground of unlawful means conspiracy, the Court of Appeal considered the question of when a director should be held personally liable for the consequences arising from his company’s breach of a contract, to which only the company, and not he himself, is party. A company often acts through its directors, who in turn may decide that it is sometimes in the company’s interest for it to breach its contract and compensate the other contracting party rather than continuing to perform. To hold that a director may be liable for taking such a decision, notwithstanding that he is acting in the company’s best interests and is not himself a party to the contract, is not only unduly onerous on the director but also effectively penalises the company when the director refrains from directing a breach of contract for fear of personal liability even though it may be in the best interests of the company to do so. Therefore, the Court of Appeal was of the view that the limits to such personal liability must be clearly demarcated.

It was in this context that the Court of Appeal laid down the legal principles for imposing liability on directors in respect of contractual breaches by the company.

A director may be held liable for the consequences of the breach of contract by his company under three potential causes of action:

  • Where a director induces or procures his company to breach the company’s contract with a third party.
  • Where the directors of a company conspire to procure their company to breach its contract with a third party.
  • Where a director conspires with his company to cause the company to breach its contract with a third party.

In relation to all the above causes of action, a director is immune from personal liability if he fails within the application of the principle in Said v Butt [1920] 2 KB 497 which provides that when a director acts bona fide within the scope of his authority, he is immune from tortious liability for procuring his company’s breach of contract (“Said v Butt principle”). As there had previously been no detailed analysis by the courts of what precisely the Said v Butt principle entailed, the Court of Appeal’s decision in this case sheds light on the application of the Said v Butt principle in Singapore.

As a general principle, when a director, acting in his capacity as the director of a company, authorises or procures the company to breach a contract, he would be immune from tortious liability in respect of the company’s contractual breaches, unless in doing so, the director breaches his personal legal duties to the company. Such breaches may include, for example, when a director breaches his fiduciary duty to act in the best interests of the company or breaches a contractual duty towards the company to act within the scope of his authority as granted by the company (for example, fraud against the company). A third party who claims against a director for liabilities in respect of his company’s contractual breaches is required to prove that the director has breached his personal legal duties to the company in directing or participating in the breach of contract. The focus of the court is on the director’s conduct and intention towards the company and not towards the third party.

Applying the above principles to the facts of the present matter, the Court of Appeal held that Sandipala’s Directors were entitled to the protection of the Said v Butt principle as there was no evidence that they had acted in breach of their personal legal duties to Sandipala. Therefore, the Court of Appeal allowed the appeal by Sandipala and its directors against Oxel’s claim in unlawful means conspiracy accordingly.

The Court of Appeal’s judgment also addressed the principles relating to a director’s liability for a tort committed by a company. However, the court did not express a concluded view on the issue as it was not directly material to the appeal before the court.

Comment

The Court of Appeal’s decision in this case clarifies the legal principles for imposing tortious liability on directors in respect of contractual breaches by the company and provides a measure of certainty for directors in the performance of their duties. It is now clear that, as a general principle, a director would not be personally liable for the contractual breaches of his company if, in acting in his capacity as a director of the company, the director has authorised or procured the company to breach the contracts. He would only be liable if he is proved to have breached his personal legal duties to the company in doing so.

Having said that, it remains to be seen how, in practice, an aggrieved party might go about proving such tortious liability against a director and how - and also to what extent - the court’s processes may be availed for this purpose.

 

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