A chip off the old block: can a parent company be liable for inducing a subsidiary's breach of contract?

In reversing the SICC's decision, the Court had to grapple with conflicting tensions arising between: (a) the well-established legal concept that a parent company and its subsidiary are separate legal entities; and (b) the practical reality that the subsidiary was wholly-owned by the parent company and conducted much of its business through the employees of the parent company.

Relevant Background Facts

In this case, the appellants were Bumi Armada Berhad (the "Parent Company"), a Malaysian publicly listed company engaged in the business of the provision of offshore oilfield services, and BAB's wholly-owned subsidiary, Bumi Armada Offshore Holdings Limited ("Subsidiary").

The SICC had previously ruled that the Parent Company was liable in tort for inducing the Subsidiary's breach of its contract with Tozzi Srl ("Tozzi") for failing to grant Tozzi a right of first refusal in respect of the supply of seven Topside Process Modules for the purposes of a project for the supply of facilities and services in the connection with the development of the Madura BD Gas and Condensate Field in Indonesia.

The Court's Decision

On the facts of the case, the traditional legal test for the tort of inducing breach of contract required the Court to consider:

1. Whether the Parent Company had acted with the requisite knowledge of the existence of the contract between the Subsidiary and Tozzi (although knowledge of the precise terms is not necessary); and
2. Whether the Parent Company had intended to interfere with the performance of the contract, such intention being objectively determined.

However, the Court went a step further by including two novel issues for consideration in a situation where it is contended that a parent company may be liable for inducing a breach of contract by its own subsidiary:

1. the parent company had, as a matter of fact, induced the subsidiary to breach the contract; and
2. In inducing the breach, the parent company had acted in a way other than in good faith in pursuing its own interests as the owner of the subsidiary.

With regard to the novel issues above, the mere fact that the Subsidiary was wholly and entirely controlled by the Parent Company did not, by itself, mean that the Parent Company would be automatically be liable for inducing the Subsidiary to breach its contract. The Court did not consider it significant that Tozzi only corresponded and dealt with the Parent Company's employees and executives. The Court opined that even if the Subsidiary had no employees of its own, this did not mean that the Parent Company's employees were precluded from acting for the Subsidiary as well.

Further, even if it was proven as a matter of fact that the individuals responsible for breaching Tozzi's right of first refusal were, in fact, acting for the Parent Company as well as the Subsidiary, the Court made it clear that it would be slow to find that the same acts performed on behalf of the Parent Company as well as the Subsidiary could be said to have led the Parent Company to induce the Subsidiary to breach its contract with Tozzi.

The Court took the view that the Parent Company, as a shareholder of its Subsidiary, was entitled to act in good faith to further its interests in its capacity as a shareholder of the Subsidiary if it took the view that its shares would be worth more had the Subsidiary's contract with Tozzi been breached.

Accordingly, in order to impute liability to the Parent Company, the Court opined that a lack of good faith on the Parent Company's part would be necessary.

In this regard, the Court also considered that there was nothing in the evidence of the case to support the proposition that the Parent Company's employees, insofar as they were acting for the Parent Company, were doing anything other than pursuing the Parent Company's bona fide interests as owners of the Subsidiary's shares.

Conclusion

Accordingly, in allowing the appeal brought by the Parent Company and its Subsidiary on this issue, the Court acknowledged the commercial realities of business by doing away with the distinction between representatives who are formally employed, and representatives who, on the other hand, possessed no formal employment. This is good news for companies whose staff often assist in carrying out the operations on behalf of its fully-owned subsidiaries despite being on the payroll of the parent company. As seen above, the Court will be slow to allow this commercial reality to pierce the corporate veil of separate legal personality, and staff who carry out functions on behalf of a subsidiary company may continue to operate with some degree of immunity on the condition that their actions are performed in good faith for the good of the parent company.

This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please contact our lawyers if you have any specific queries.