Can directors who procure a company's breach be liable?

A TORT is an act or omission which Singapore law recognises as a civil wrong. A person committing a tort can be liable for the loss or harm caused by the act or omission. Commonly recognised torts include negligence, defamation and deceit.

A less common tort is the act of procuring or inducing a breach of contract. That is, a person may be personally liable for the loss or harm he causes if he instigates a third party to breach its contract even if he himself is not a party to that contract. This situation often arises where a company induces a key employee of its competitor to join it in breach of his non-compete provisions.

For directors, this tort of procuring a breach of contract raises an interesting question: If a company breaches a third-party contract because it is authorised to do so by the directors of that company, can the directors be personally liable for causing the breach?

The Sandipala case

Singapore's highest court, the Court of Appeal, recently considered this question in PT Sandipala Arthaputra & Ors v STMicroelectronics Asia Pacific Pte Ltd & Ors.

Sandipala entered into a supply contract with Oxel under which the latter agreed to supply microchips to Sandipala for use in an electronic card project. Sandipala eventually rejected the microchips, claiming they were not compatible with the project. It then sued Oxel for breaching the supply contract.

In its counterclaim, Oxel alleged that Sandipala's directors should be held personally liable for conspiring to cause Oxel loss by attempting to unlawfully extricate Sandipala from its contractual obligations.

The Court of Appeal held that a director of a company should not be personally liable for the company's breach of contract if the director acted in good faith within the scope of his authority.

In this case, the directors entered into the supply contract knowing that the microchips were not compatible with the project, but believed they could make it work. When that failed, they authorised Sandipala to breach the supply contract and to attempt to renegotiate its terms, instead of taking delivery of the microchips.

The court found that the directors had acted in the best interests of Sandipala. However, in determining whether they should be liable for the company's breach of contract, the court did not take into account the fact that they had acted in bad faith towards Oxel.

The court felt that to hold a director liable, 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 as he may refrain from directing a breach of contract for fear of personal liability.

When the director is liable

The court however indicated that this immunity is lost if the director breaches his personal duties to the company. For example, when he is in breach of his fiduciary duty to act in the best interests of the company, or when he is in breach of a contractual duty owed to the company to act within the scope of his authority.

A director is not acting in the best interests of the company if his action falls short of what an objective honest and intelligent man, in the position of the director, would reasonably conclude to be in the interests of the company.

The interests of a company generally refer to its interests as a corporate entity, or to the collective interests of all members of the company (as distinguished from the interests of a few shareholders). Where a company is insolvent, the interests of the creditors of the company must also be taken into account.

For example, the Companies Act empowers the court to hold a director personally liable for any corporate debt incurred by the company if, at the time the debt was contracted, the director was knowingly a party to the contract, and had no reasonable or probable ground to expect the company would be able to repay the debt.

Director's personal liability for tort

However, a director may not enjoy the same immunity if he authorises his company to commit a tort, as opposed to a breach of contract.

So, directors can be held personally liable for passing a resolution that defames a third party. And in the much publicised 2004 case involving a local actress and slimming products, the principal director of a company was held personally liable for authorising it to distribute slimming products that did not comply with Singapore's safety requirements.

The question of personal liability, however, remains open if a director authorises his company to commit a tort, but he was acting in the best interests of the company.

Directors of a company should always adopt a best practice of documenting their deliberations before taking an adverse position against a third party. This can demonstrate that the decision is being taken in the best interests of the company, and in compliance with their fiduciary duties. Such evidence would be useful in the event of any third party's claim against the directors personally for the company's actions.