Groundbreaking ruling: director of a (sub)contractor privately liable for walking away from a project

Last month, in a joint effort, Poelmann van den Broek's attorneys corporate and construction law attorneys achieved a landmark judgment. What began with a client's major frustration ended in a judgment holding a #director of a #subcontractor privately #liable for the damages our client suffered due to that subcontractor's breach of contract.

The facts, anonymized and somewhat simplified, were as follows. Our client - a large contractor from the middle of the country - was a general contractor on a large and complex construction project. A detailed #specification was applicable. Some of the masonry work in the specifications had been subcontracted back-to-back with a subcontractor; a specialized masonry company.

Initially, everything was going well: the project was progressing, the subcontractor was also fulfilling its contractual obligations, and our client naturally paid the subcontractor's partial invoices. But during construction meetings, the director of this subcontractor began to complain about the price. According to the subcontractor, the masonry work was more complicated than he had thought beforehand and he therefore wanted to be paid more than contractually agreed upon. He wanted to unilaterally increase the price. However, our client was strengthened by extensive negotiations in the preliminary stage, during which the contracted specifications had been discussed in detail with the subcontractor. It was clear to our client that the subcontractor's obligations were or should have been clear to everyone at the time the subcontract was concluded. There was therefore no reason for a price increase. So our client stood firm: contract is contract.

The director of the subcontractor unilaterally filed a claim of €60,000 and then threatened to terminate the subcontract if that amount was not paid. In our client's opinion, however, there were no valid arguments for this. Nevertheless, our client invited the director of the subcontractor for a consultation. At that consultation, however, he did not show up, and then, overnight, the subcontractor's director removed the personnel of his masonry company from our client's project. He then deployed those personnel to other projects, where he could (presumably) be paid a higher price per hour for deploying his personnel.

As a result, our client faced immediate stagnation in the progress of the project and delay claims threatened. The subcontractor was placed in default and summoned to perform the contract and held liable for any damages our client would suffer as a result of the default. The summons was not acted upon. Subsequently, our client rescinded the subcontract. Another party was engaged to complete the subcontracted masonry work. This new subcontractor, due to changing market conditions, was able to set a higher price with our client. That higher price thus caused our client damages due to the initial subcontractor's default, in addition to the stagnation damages.

The initial subcontractor was held liable by our client for damages resulting from its culpable breach of its obligations under the subcontract, effectively consisting of walking away from the construction project. But shortly thereafter, the subcontractor went bankrupt, much to the frustration of our client. Because there was no prospect of benefits from the bankruptcy, it seemed that our client would be left with damages.

The opening: director liability

This case was discussed internally with us and we saw an opportunity to hold the director of the subcontractor liable in private. It is settled case law of the Supreme Court, elaborated in lower case law, that a director of a legal entity may be liable in private for damages of a creditor of that legal entity if that director has brought about or allowed the legal entity to breach its legal or contractual obligations. The starting point according to that established case law is that if a company fails to fulfill an obligation, then only the company is liable for resulting damage. However, under special circumstances, in addition to liability of that company, there is also room for liability of other parties involved, such as the director.

The Supreme Court considered, in a Van Dullemen v. Sala judgment handed down as early as 1958, that the refusal of a natural person as an organ of a company to perform an obligation of that company could, under circumstances, qualify as an unlawful act of that natural person towards a third party. More recently, the Supreme Court considered in Ontvanger v. Roelofsen:

In respect of this detriment, in addition to the liability of the company, there may also, depending on the circumstances of the specific case, be grounds for liability of the person who as director (i) has acted on behalf of the company or (ii) has caused or permitted the company to fail to fulfill its statutory or contractual obligations. In both cases, it may generally only be assumed that the director has acted unlawfully vis-à-vis the company's creditor where, also in view of his obligation to perform his duties properly as referred to in Article 2:9 of the Dutch Civil Code, a sufficiently serious reproach can be made against him.

Thus, there must be a serious fault on the part of the director in the willful non-performance of the legal entity he manages. It is extremely important to state sufficient (substantiated) facts and circumstances. In practice, this case law is particularly used when it comes to willful #recovery frustration or #payment unwillingness of a director. Consider cases where all creditors are paid except for one creditor, whom the director had grown to dislike, or the "emptying" of the company by transferring the business out of the company that still has a sizable debt and continuing it in another (newly formed) legal entity, or by suddenly paying much higher management fees, distributing dividends, or otherwise ensuring that the company cannot pay the debt to that one creditor.

But the Supreme Court judgments cited above (Ontvanger v. Roelofsen and the old Dullemen v. Sala judgment) offer more room than that: These are situations where the director has brought about or allowed the company to breach its legal or contractual obligations. These need not (therefore) be only payment obligations, was our contention on behalf of our client in the proceedings against the director of the subcontractor. The case law can also be used in a case such as this one; in which the director of a (sub)contractor willfully frustrates the fulfillment of the contracting obligations by prohibiting his personnel from completing the work and then putting the personnel to work on other projects.

The result

The court adopted our reasoning and held the director of the subcontractor privately liable for the damages suffered by our client due to his (personal) removal of his personnel from our client's project and deployment to other projects. The director must pay approximately €100,000 to our client in private.

#Director liability has once again proven to be an important tool in our "toolbox" for extracting justice and results for our clients. Not only in cases of foreseeable non-performance (#Beklamel) and #recourse frustration, but also in cases of (other types of) #compliance frustration. (Sub)contractors of our clients will think twice from now on before walking away from a project of our clients. And so this is not only a nice success in this case, but this case will also have a #preventive effect in the future!