HT-2021-000363 - [2025] EWHC 532 (TCC)

The wrongful procurement case against Mr Cresswell and Mr Rockmann is limited to their role as directors of Winsopia.

The basis of the case against the two directors is pleaded as follows:

“33.

… each of the Fourth and Fifth Defendants:

33.1.

In their capacity as directors and executive officers of the Second Defendant, directed, instructed and/or requested the activities of the Second Defendant that amounted to or gave rise to breaches of the ICA or, alternatively, in their capacity as directors and executive officers of the Second Defendant, approved and/or ratified such directions, instructions and/or requests;

33.2.

Knew that the activities of the Second Defendant being so directed, instructed and/or requested amounted or would give rise to breaches of the ICA or, alternatively, they were reckless in that regard …

34.

In light of the aforesaid, it is inconceivable that the Second Defendant carried out the aforesaid activities without both the Fourth and Fifth Defendant intending the breaches of the ICA to which those activities amounted or gave rise (or, alternatively, being reckless as to whether those activities amounted to or gave rise to such breaches).

34A. As the Fourth and Fifth Defendants must have appreciated, likely consequences of the breaches of the ICA as identified in paragraphs 24 to 26 above, and as further particularised in paragraph 27 above, included that upon discovery of such activities by the Claimant (i) the ICA would be terminated, (ii) the Second Defendant would be severely hampered in its ability to carry on its business activities and to make any use of the IBM Mainframe that it purchased, and (iii) the reputation of the Second Defendant and its only shareholder would be harmed to such a degree that they would no longer be able to market or sell their core product, the SDM. In such circumstances, by engaging in the conduct identified in paragraphs 33 and 34 above, the Fourth and Fifth Defendants were in breach of their duties to the Second Defendant under section 172 of the Companies Act 2006.

34B. Accordingly, the Fourth and Fifth Defendants are each liable to the Claimant for such damage as was caused by the Second Defendant’s breaches of the ICA.”

It is first necessary to consider whether Mr Cresswell and/or Mr Rockmann caused Winsopia to act in breach of the ICA before considering the Said v Butt defence relied on by them.

As set out above, to the extent that Winsopia carried out activities that amounted to a breach of the ICA, it did so at the direction and under the control of LzLabs. Mr Cresswell and Mr Rockmann were directors at Winsopia. In those roles, they directed, instructed and encouraged the Winsopia employees to carry out the discovery work requested by LzLabs. Mr Rockmann controlled the work requested by LzLabs and carried out by Winsopia as explained above, in particular pursuant to the Services Agreement and through the DR process. Mr Cresswell was brought in to the project by Mr Moores to get a minimum viable product to market as quickly as possible. His protestation that he did not give any technical instructions to Winsopia personnel does not exonerate him from responsibility because he knew what work they were undertaking as part of his delivery plan for the minimum viable product. Examples of Mr Cresswell’s immersion in the technical detail can be seen in his email dated 1 May 2015, stating that he understood the technical issues under discussion, his email discussions with LzLabs and Texas Wormhole dated 29 December 2015, and his receipt of the Lynch reports in November 2015 and April 2016. On that basis, I am satisfied that, in their positions as directors of Winsopia, they induced the acts that amounted to breaches of the ICA.

For the reasons set out above in relation to LzLabs, both Mr Rockmann and Mr Cresswell had the requisite knowledge of the essential facts, namely knowledge that the terms of the ICA prohibited the acts of reverse engineering and other misuse of ICA Programs that Winsopia carried out at LzLabs’ direction. Further, Mr Rockmann and Mr Cresswell knowingly caused Winsopia to act in breach of the ICA with the intention of developing the SDM and getting it to market as quickly as possible.

It follows that, in their role as directors of Winsopia, Mr Cresswell and Mr Rockmann caused Winsopia to act in breach of contract.

That then makes it necessary to consider the defence based on the principle in Said v Butt [1920] 3 KB 497 per McCardie J at p.506:

“if a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken.”

The rationale behind this principle was examined by Lord Leggatt in Lifestyle Equities:

“[54] I think that the rule stated in Said v Butt is sound … When parties make a contract, unless the contract is personal in nature, the general rule is that a party may employ agents to carry out its obligations. When the contracting party is a company, that is of course the only possible means of performance. If a company breaks a contract, that must be because one or more agents of the company have caused the breach. When an agent, acting as such, makes a contract, the normal understanding is that the agent assumes no liability towards the other contracting party. Only the principal does. Similarly, the normal understanding is that, if the agent causes the principal to break the contract, only the principal will incur liability to the other contracting party, and not the agent. This is, I think, a general norm or social understanding which the law should and does reflect.

[55] It would be inconsistent with that understanding for the law of tort to make an agent who, acting within the scope of their authority, causes or procures a breach of contract by the principal liable to compensate the other contracting party for loss resulting from the breach. By the same token, to allow the injured party to recover damages from the agent would give them a free ride. That is because the same norm or understanding that, unless otherwise specifically agreed, only the contracting parties themselves will be liable in the event of a breach of the contract entails that, if a party wants a right of recourse against an agent of the other party, they must bargain for it.”

The effect of the rule in Said v Butt is that a director of a company who caused his company to act in breach of contract cannot be found to have committed the tort of inducing a breach of a contract to which the company is party, provided that the director acted bona fide in the course of his duties as a director.

The concept of good faith was considered by David Richards J (as he then was), in Lictor Anstalt v Mir Steel UK Ltd [2011] EWHC 3310 (Ch) at [54]:

“In this context good faith connotes the proper conduct of his duties and functions as a director”.

Section 172(1) of the Companies Act 2006 requires the director of a company to act in the way that they consider, acting in good faith, will be most likely to promote the success of the company for the benefit of its members as a whole having regard to matters including: (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company. The matters to which a director must have regard under section 172 do not impose absolute duties; they can arise in many different factual circumstances and in most cases, when the relevant factors are considered and weighed in the balance, they will produce a range of reasonable options open to the director.

Not every breach of contract will amount to bad faith or breach of a director’s duties. In Ridgeway Maritime Inc v Beulah Wings Ltd (“The Leon”) [1991] 2 Ll.Rep. 611, a director who wrote a letter on behalf of his company which he knew would place the company in repudiatory breach was entitled to rely on Said v Butt by way of defence.

In Antuzis v DJ Houghton Catching Services Ltd [2019] EWHC 843 (QB) at [114] Lane J observed that it was the director’s conduct and intention in relation to his duties towards the company, not towards third parties, that provided the focus of the enquiry to be undertaken pursuant to the rule in Said v Butt. On the facts of that case, the officers of the company were found to have acted in breach of their duties under section 172 because their exploitation of employees was manifestly not in the employees’ interests and ruined the company’s reputation in the eyes of the community. They had not acted bona fide because they knew that what the company was doing was unlawful. Thus they were not protected by the rule in Said v Butt.

As noted by Eyre J in an earlier judgment in this case, IBM v Lzlabs & Others [2022] EWHC 884 at [36], in considering whether a director was properly acting in accordance with the duties imposed by section 172, it is necessary to consider the circumstances of the particular case as a whole:

“Not every instance of causing a company to breach a contract or a legal obligation will involve a director in breach of the section 172 duties nor will every such instance cause him or her to be characterised as acting in bad faith for the purposes of the rule in Said v Butt. The key will be whether the director was properly acting to promote the success of the company taking account of the matters to which he or she is required by section 172 to have regard. Those will include the motivation of the director and the nature of the duties said to be broken but in addition the nature of the obligations being broken by the company and the consequences of the company’s breach can be relevant to the question of whether the director can properly have been said to have been acting in the interests of the company.

In Northamber plc v Genee World Limited and others [2024] EWCA Civ 428, in upholding a finding that directors were liable for inducing the company to act in breach of an injunction, exposing the company to fines for contempt of court, sequestration of its assets and reputational damage, Arnold LJ stated at [92]:

“A director who causes his company not merely to breach its contract, but also to act in breach of an injunctions is plainly in breach of his duty under section 172. Even if not every breach of section 172 would suffice to deprive the director of protection, this is a serious breach of duty for the reasons given by the judge.”

In Northamber Arnold LJ at [81] stressed the importance of putting to a director in cross-examination any allegation of bad faith or breach of duty as a director. It was put expressly to each of Mr Cresswell and Mr Rockmann in cross-examination that they were in breach of their duties as directors and were acting in bad faith so as to engage this issue. They both denied any such breach.

In my judgment, Mr Cresswell and Mr Rockmann did not act in bad faith or outside the scope of their authority as directors of Winsopia. Firstly, their motive was assistance in development of the SDM. To that intent, they simply ensured that Winsopia complied with the requests of LzLabs. Secondly, although the means by which such assistance was provided was through breach of the ICA, there was no dishonesty on the part of the directors vis-à-vis the company. Thirdly, despite the findings of systematic and widespread breach of the ICA, they did not involve egregious conduct on the part of Winsopia, such as exploitation of employees or contempt of court, so as to attract public opprobrium. Fourthly, the likely (indeed, inevitable) consequence of their actions was termination of the licence by IBM but that in itself would not be sufficient to establish bad faith (see Ridgeway).

A distinction can be drawn between the impact of the findings of breach on Winsopia and the impact of the findings of procurement of such breaches on LzLabs. LzLabs exploited the fruits of reverse engineering and misuse of IBM software for its own gain. The consequences for LzLabs are likely to include restrictions on its ability to carry out its business activities, in particular, marketing and sale of the SDM, and severe damage to its reputation. But the claim against Mr Cresswell and Mr Rockmann is confined to their role as directors of Winsopia. This was the result of a consent order dated 17 January 2023 to resolve an appeal in respect of a strike out application, as a result of which, references to the claim against Mr Cresswell and Mr Rockmann in their capacity as directors of LzLabs were deleted from the pleaded case. Given the limited ambit of Winsopia’s business, and the purpose for which it was set up, namely, to provide discovery and testing support services to LzLabs, the directors’ duties did not extend to promoting success of the development and marketing of the SDM.

For those reasons, Mr Cresswell and Mr Rockmann fall within the scope of rule in Said v Butt and are not liable for unlawfully procuring breach of contract on the part of Winsopia.