The Commercial Court has held that a shareholders’ agreement did not contain an implied term which would have rendered the company’s controller personally liable for failing to ensure the company’s compliance with its obligations under that agreement: Liberty Investing Limited v Karl Gordon Sydow & Others [2015] EWHC 608 (Comm).

This case illustrates the difficulty of seeking to go behind the allocation of responsibility agreed in a contract, in an attempt to make a company’s controller personally liable for obligations taken on by the company. While an individual may, in practice, control the activities of a corporate entity, the court will be reluctant to impose a personal obligation to procure the company’s compliance without an express term to that effect.

It is also a reminder of the court’s general reluctance to imply obligations into an agreement, particularly where the parties have expressed their bargain in a detailed written contract prepared with the assistance of highly skilled legal advisors. However, each case will turn on its facts and there are of course circumstances in which the courts have been willing to imply contract terms.

The decision is also of interest for the court’s comment that raising arguments as to the need to consider the factual matrix is not a “get out of jail free card” for a party that wants to defer consideration of a question of construction until trial; it is often the case, the court said, that questions of construction can properly and appropriately be decided on a summary basis.

Alex Sharples, an associate in our dispute resolution team, considers the decision further below.

Background

The claimant (Liberty) was a company which invested in the exploitation of rights to arrange theatrical productions of the musical “Dirty Dancing”.  A series of contracts was negotiated which governed Liberty’s investment.  Under a shareholders’ agreement (the Agreement), Liberty took a minority share of a holding company (Topco) which wholly owned the relevant operating company (FRL). The other shareholder in Topco was a company (DWMD) owned and controlled by Mr Karl Sydow. Mr Sydow was also a director, but not a shareholder, of both Topco and FRL.

The parties to the Agreement included Topco, FRL, DWMD and Mr Sydow. The Agreement included a provision requiring each of Topco’s shareholders to procure that Topco would not incur any capital expenditure or debt of more than £100,000 without Liberty’s written consent.

Liberty alleged a breach of this provision. It wrongly alleged in its original particulars of claim that Mr Sydow was a shareholder of Topco and therefore owed the relevant obligations under the Agreement. Realising its mistake, Liberty sought to amend its particulars of claim to allege an implied term that Mr Sydow, as a party to the Agreement who was also the controlling director and sole shareholder of DWMD and a director of Topco and FRL, would cooperate in and/or not prevent the relevant companies complying with their obligations under the Agreement.

Mr Sydow opposed the amendment and applied for strike out or summary judgment on the basis that there was no such express or implied obligation on him under the terms of the Agreement.

Decision

The Commercial Court (Leggatt J) granted summary judgment in favour of Mr Sydow.

No implied term

Leggatt J commented that Liberty’s arguments confused what is practically or factually necessary with what is legally necessary in order for a company to perform it contractual obligations.  A company is a creation of law and therefore cannot perform any contractual obligation unless a human takes the requisite action. However, that does not mean that a company cannot perform a contract unless those relevant individuals also undertake contractual obligations themselves, personally.

The court referred to Attorney-General of Belize v Belize Telecom Ltd [2009] 1WLR 1988, the leading case on the implication of terms, which established the default position that nothing is to be implied into a contract. Where parties intend to impose an obligation on one or other of them, the ordinary expectation is that they will say so, particularly where there is a detailed written contract prepared by their legal advisers.

The real question the court had to answer was therefore whether it was necessary in order to make the Agreement workable, or was so obvious that it went without saying, or was otherwise implicit in the contractual wording, that Mr Sydow would have a personal legal liability under the Agreement rather than the legal liability resting solely on the companies concerned.

The court considered that there was nothing inherently unworkable or objectionable in the wording of the Agreement which imposed legal liability only on the relevant corporate entity and not on the person who controlled that corporate entity, regardless of the degree of control Sydow could exercise.

No need to defer decision until trial

Liberty submitted that, as this was a hearing of the amendment application and not the trial of the action, the court should proceed with caution and refuse the amendment only if it could be seen, on the basis of the Agreement and the other material before the court, that Liberty’s argument had no real prospect of success.  In particular, if there were matters of fact on which evidence would be needed that would only properly be explored at a trial (the factual matrix), it would be inappropriate for the court to grant summary judgment.

While the court agreed that there are cases in which the court cannot form a clear view on a question of construction without the sort of consideration of evidence that can only properly be undertaken at a trial, it was equally important that invoking arguments as to the factual matrix did not become a “get out of jail free card” for any party who wished to defer consideration of a question of construction until trial.

In this case, the relevant factual matrix was common ground between the parties. The court could therefore examine the meaning of the Agreement without having to defer that consideration until background factual matters had been decided at trial.