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Putting the right party in the corner

Posted on 11 May 2015 by Derval Walsh

Putting the right party in the corner

A recent High Court judgment serves as a strong reminder to bind the right people – those with the real power and control – when transactions are structured through companies. Under English law, companies are distinct from those who own them, and it is unlikely that you will be able to enforce obligations owed by companies against the individuals who control them.

The case concerned an investment vehicle used to exploit rights to arrange theatrical productions of the musical Dirty Dancing.  A company called Liberty Investing (Liberty) entered into a series of contracts to invest in the vehicle (FRL), taking a minority share in Topco, a holding company that sat above the vehicle.  Topco's main shareholder was a company named Dance With Mr D Limited (DWMD), which was owned and controlled by Karl Sydow, who was also a director of both the holding and operating companies.

When Topco breached a contractual obligation under the shareholders agreement (SHA) pertaining to it, Liberty began proceedings against Sydow personally on the basis that he was a shareholder of Topco and therefore owed a contractual obligation to Liberty to procure Topco's contractual compliance.  This was, however, a mistake because Sydow was not a shareholder in Topco; the only shareholders were Liberty and DWMD.  Realising its mistake, Liberty sought permission to amend its claim to allege that Sydow (as a party to the shareholders agreement who was also the controlling director and sole shareholder of DWMD and a director of FRL and Topco) had breached an implied term of the shareholders agreement that he would co-operate in and/or not prevent compliance by DWMD, FRL and Topco with their obligations under the SHA.

Sydow asked the Court to strike out the claim against him or enter summary judgment in his favour on the basis that Liberty's claim had no reasonable prospect of success.  Mr Justice Leggatt agreed, holding that despite the fact that a company can only act through individuals, this does not mean that where a company undertakes to perform specific contractual obligations, those relevant individuals who control the company also undertake to perform the same obligations themselves personally. Thus, a company's failure to perform a binding obligation is not a breach of contract by the party who controls it.  Unless there is a basis for implying into the contract an obligation on the part of the controlling individuals to procure contractual compliance by the company, liability for contractual non-compliance will rest solely with the company.

The decision is not surprising, but it provides a warning to ensure that in a multi-party situation the parties who enter into contracts are the right legal entities and contracts contain express provisions allocating responsibility to all those intended to be bound by specific obligations.  It also shows that while it is common to argue for the implication of a term into a contract, proving the existence of such a term is not an easy matter.

Liberty Investing Limited v Sydow [2015] EWHC 608 

Derval Walsh
Partner, Dispute Resolution

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