Sidestepping Limited Liability in Corporate Groups Using the Tort of Interference with Contract

By Edmundson, Peter | Melbourne University Law Review, April 2006 | Go to article overview

Sidestepping Limited Liability in Corporate Groups Using the Tort of Interference with Contract


Edmundson, Peter, Melbourne University Law Review


[This article examines the tort of interference with contract. In particular it analyses the application of the tort to a holding company that 'starves "its subsidiary of funds. In this context the tort provides a potential mechanism to 'sidestep' the principle of limited liability. The elements of the tort are highly malleable and the tort is prone to expansion. Such expansion could erode the benefits of limited liability. For this reason the application of the tort in this context should be constrained with reference to the justifications of limited liability and courts should be reluctant to allow its application by a voluntary creditor who had other available mechanisms to protect their interests.]

CONTENTS

I    Introduction
II   Limited Liability and Corporate Groups
III  An Illustration of the Tort in a Corporate Group Context:
      Stocznia Gdanska
IV   Does the Tort Provide a Potentially Useful Remedy in Australia?
V    An Examination of the Tort in Australia
        A The Basis of Holding Company Liability
        B The Mental Element: Knowledge and Intention
        C Interference with the Contract
             1 Failure to Act
             2 Direct and Indirect Interference
             3 Is the Interference Unlawful?
        D Damage
        E Justification
VI   The Breadth of the Application of the Tort in the Corporate Group
      Context
VII  Conclusion

I INTRODUCTION

This article examines the tort of interference with contract. (1) It does so in the context of a potential claim by a third party against a holding company where the third party has contracted with a subsidiary of that holding company. (2) In particular, this analysis contemplates the application of the tort where a holding company 'starves' its subsidiary of funds, with the effect that the subsidiary is unable to perform its contractual obligations to the third party. (3)

Analysis of this matter is both timely and important. Recently there has been renewed focus on the ability of holding companies to distance themselves from the obligations of their subsidiaries. (4) Also, the recent High Court decision in Zhu v Treasurer (NSW) (5) has highlighted the application of the tort of interference with contract to commercial dealings and has demonstrated a divergence from the law in England. Discussion of the application of the tort to holding companies allows analysis of these issues and reveals the complexities of their interaction. It also illustrates the potential for the tort to apply in a manner that 'sidesteps' the principle of limited liability in corporate groups.

The analysis below first places the issue of holding company liability for interference with a subsidiary's contracts in the context of the limited liability of such a company for the debts of its subsidiary. This is followed by a discussion of the English case of Stocznia Gdanska SA v Latvian Shipping Co [No 3], (6) a recent Court of Appeal decision that illustrates the potential use of the tort against a holding company. Following this, there is a more detailed critical analysis of the elements of the tort in Australia, with a particular focus on the intricacies of those elements when there is a claim based on the 'starvation' of a subsidiary of funds. Finally, there is a discussion of whether a broad or narrow approach towards the scope of the tort should be taken in the case of corporate groups.

II LIMITED LIABILITY AND CORPORATE GROUPS

The issue of holding company liability for interference with a subsidiary's contract must be seen against the backdrop of two overlapping concepts that are the central legal features of corporate groups: the fact that corporations in groups are treated as separate juridical persons and the fact that limited liability applies to the constituent corporations in a group. These features, although subject to some limited exceptions, (7) give rise to the possibility that a holding company may, with limited risk of liability, allow one of its subsidiaries to 'wither on the vine' by refusing to provide the subsidiary with sufficient funds to operate. …

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