UK: England and Wales: party autonomy and the company's separate legal personality

Last week the Court of Appeal gave judgment in MacDonald v Costello [2011] EWCA Civ 930. A summary of this interesting decision has been provided by the ICLR: see here. The litigation arose in respect of a company, Oakwood Residential Ltd., formed by Mr and Mrs Costello, its only shareholders and directors. The Costellos obtained bank finance to build some houses. For tax reasons, these funds were routed through Oakwood and Oakwood entered into a contract with some builders. The builders were aware of the reasons for the arrangements being structured this way. A dispute arose between the parties regarding the quality of the building work and invoices went unpaid by Oakwood.

In the County Court the Recorder held that the Costellos were jointly and severally liable with Oakwood for an amount just short of £90,000, on the basis of their unjust enrichment and, in effect, permitting the builders to claim directly against the shareholders of the company with which they had contracted. This order was overturned by a unanimous Court of Appeal (Pill, Patten and Etherton LJJ). Patten LJ delivered the only reasoned opinion and observed (see paras. [21] and [23]):

The parties arranged the transaction as one in which legally enforceable promises were made only between Oakwood and the respondents [i.e, builders], even though the benefit of the contract was to be conferred on Mr and Mrs Costello. The obligation to pay for the respondents' services, and so the risk of non-payment, was contractually confined to Oakwood. If a claim was permitted directly against Mr and Mrs Costello, it would shatter that contractual containment. It would also alter the usual consequences of Oakwood's insolvency, which was one of the risks assumed by the respondents in contracting with Oakwood, since a direct claim against Mr and Mrs Costello would improve the respondents' position over Oakwood's other unsecured creditors.

I am clear ... that the unjust enrichment claim against Mr and Mrs Costello must fail because it would undermine the contractual arrangements between the parties, that is to say the contract between the respondents and Oakwood and the absence of any contract between the respondents and Mr and Mrs Costello. The general rule should be to uphold contractual arrangements by which parties have defined and allocated and, to that extent, restricted their mutual obligations, and, in so doing, have similarly allocated and circumscribed the consequences of non-performance. That general rule reflects a sound legal policy, which acknowledges the parties' autonomy to configure the legal relations between them and provides certainty, and so limits disputes and litigation."