How and when can a parent company be liable for conduct of its (foreign) subsidiaries
A subsidiary is a separate legal entity. This fundamental principle of independent corporate identity is the bedrock of company law in Singapore.1 The doctrine of separate legal personality is not to be displaced simply because the companies in question are organised as a single economic unit.2 Nor will the doctrine be displaced simply because the owners of the company incorporated it for the very purpose of insulating themselves or other group companies from liability.3 That is the very purpose of the limited liability company.
Exceptionally, however, the law will go behind the separate legal personality of a company, to prevent the abuse of corporate legal personality, for example by evading the law or frustrating its enforcement.4
Distinct from the principle of separate legal personality and limited liability under company law, a parent company may be liable under tort law for the conduct of its subsidiaries. To knowingly procure or induce a third party to breach its contract with the other contracting party without reasonable justification or excuse forms the basis of the tort of inducing a breach of contract.5 An act of inducement per se is not by itself actionable. The plaintiff must satisfy a two-fold requirement in order to found a sustainable cause of action: (a) that the defendant acted with the requisite knowledge of the existence of the contract; and (b) intended to interfere with the claimant’s contractual rights, with such intention to be objectively ascertained.
In a case where it is contended that a parent company is liable for inducing a breach of contract by its subsidiary, rather than simply concentrating on the knowledge and intention of the individuals involved, the Singapore court focuses on two additional issues: (a) whether those individuals were acting for the subsidiary and/or the parent, and if they were acting for the parent, (b) whether the circumstances are such that the parent can properly be liable for inducing its subsidiary’s breach of contract. In this connection, it must be established that: (a) the parent company had, as a matter of fact, induced its subsidiary to breach the contract; and (b) in inducing the breach, the parent company had acted in a way other than in good faith in pursuing its own interest as the owner of its subsidiary.6
Jurisdiction gateway considerations
When can you bring a claim in the Singapore courts?
To bring a claim in the Singapore courts, it must be established that the Singapore courts have jurisdiction to hear the claim notwithstanding that the subsidiary is a foreign company. If parties have not expressly agreed that the Singapore courts have jurisdiction or that service out of Singapore on the foreign subsidiary is allowed, the claimant will need to obtain court approval to serve the originating papers on the foreign subsidiary. The Singapore court will only have jurisdiction upon such service.
To obtain a court’s approval for service out of Singapore, the claimant must apply to a court of competent jurisdiction in Singapore and establish that the court has the jurisdiction (for example under an exclusive choice of court agreement) or is the appropriate court to hear the action. In respect of the latter, under Singapore law, a two-stage analysis is applied to determine the appropriate forum.7 The question at the first stage is whether there is prima facie some other available forum that is more appropriate for the case to be tried. This requires identifying the factors that have the most relevant and substantial association with the dispute: (a) personal connections of the parties and the witnesses; (b) connections to relevant events and transactions; (c) the law applicable to the dispute; (d) the existence of proceedings elsewhere; and (e) the “shape of the litigation”, which is shorthand for the manner in which the claim and the defence have been pleaded.8
It is the quality of the connecting factors that is crucial in determining whether a particular forum is more appropriate than another for the determination of a dispute.9 The search is for the connections that are most relevant to the dispute so as to enable it to be tried in the jurisdiction that is most suitable for the interests of the parties and the ends of justice.10
Even if the claimant successfully serves the originating papers on the defendant overseas, the defendant may seek a stay of the proceedings on the basis that Singapore is not the appropriate forum. The burden at the first stage lies on the defendant (who seeks the stay). If the defendant succeeds in this regard, the burden shifts to the claimant (who resists the stay) to satisfy the court (at the second stage) that there are circumstances by reason of which justice requires that a stay should nonetheless be granted.
A key recent case
In Bumi Armada Offshore Holdings Ltd and anor v Tozzi Srl  1 SLR 10 (Bumi), a dispute arose from a project for the supply of facilities and services in connection with the development of the Madura BD Gas and Condensate Field in Indonesia (the Project). Bumi Armada Offshore Holdings Ltd (BAOHL), which is a wholly owned subsidiary of Bumi Armada Berhad (BAB), entered into a pre-bid agreement with Tozzi Srl (Tozzi). The pre-bid agreement provided that if BAOHL was awarded the Project, BAOHL would subcontract to Tozzi the provision of certain services known as the “IT Packages” and granted Tozzi a right of first refusal for the supply of such services. The pre-bid agreement expired before the Project was awarded. Subsequently, BAOHL was awarded the contract for the Project and BAOHL awarded the subcontract for the supply of IT Packages to another entity, which Tozzi alleged was inconsistent with its right of first refusal. Tozzi claimed, among other things, that BAB was liable for inducing the breach of contract committed by BAOHL.
The Singapore Court of Appeal found that BAB, the parent company (incorporated in Malaysia), was not liable for inducing the breach of contract by BAOHL, its wholly-owned subsidiary (incorporated in the Marshall Islands), as the evidence was insufficient to justify a finding that the individuals responsible for breaching the contract were acting for the parent company.11
On the facts, BAOHL had no employees and the individuals acting for BAOHL were actually employed by its parent company. However, this did not, of itself, mean that BAB, as a matter of fact, was responsible for BAOHL’s breach of contract.12 The Court found that the decision not to give effect to Tozzi’s right of first refusal must have been made by the individuals concerned as agents for BAOHL, as it was BAOHL which granted the right of first refusal and it was BAOHL which owed the consequential obligation to Tozzi to offer a right of first refusal. Moreover, it was BAOHL which was the main contractor under the Project and was therefore in a position to comply with this obligation, and it was BAOHL which deprived Tozzi of the opportunity for which it had contracted. In these circumstances, the Court found that it would require cogent additional evidence to show that the individuals responsible for BAOHL’s failure to honour Tozzi’s right of first refusal were also acting for BAB.13
The Court further found that even if the evidence had been sufficient to justify a finding that the individuals responsible for breaching the contract were acting for BAB, it still would not justify the conclusion that BAB was liable in tort to Tozzi.14 The Court reasoned that such a finding would not alter the fact that the individuals were also, indeed primarily, acting for the subsidiary, and it was difficult to see how the same individual doing the same thing on behalf of the subsidiary and the parent could lead to the parent doing anything to induce the subsidiary to breach its contract. Further, there was no evidence to support a finding that, if and in so far as they were acting for BAB, the individuals were doing anything other than pursuing BAB’s bona fide interests as the owners of all the shares in BAOHL.15
Practical implications and key takeaways from the Singapore law approach
- For tortious inducement, it follows from the principle of independent corporate identity that the fact that a company is wholly-owned and entirely controlled by its parent company cannot, without more, mean that the parent had induced the subsidiary’s breach of contract.16 The mere fact that the parent could have prevented the subsidiary from breaching its contract, that is, mere inaction, would not be enough to render the parent liable for the tort of inducing a breach of contract.
- Following the decision in Bumi, in order to establish liability against a parent company, it is not sufficient to establish an actual act of inducement which caused a breach of contract. There must also be evidence that the parent company had acted in bad faith. In this connection, shareholders might find comfort in the fact that insofar as they act in pursuit of the company’s bona fide interests as the owner of all or majority of the shares in the subsidiary company, they would not be liable for tortious inducement.However, it remains to be seen what the Courts would consider acceptable pursuit of a parent company’s bona fide interests.
- Further, it is cautioned that shareholders are not immune from direct liability under company law (rather than tort law) if the corporate veil is pierced on the basis of the same conduct of inducing a breach of contract. In other words, group companies should be mindful that there may potentially be concurrent liability under tort law and company law where there is assistance in a subsidiary company’s breach of contract.