Development companies often set up a Special Purpose Vehicle (‘SPV’) when they wish to develop a property. These are usually limited liability companies. They are set up to protect a holding or investment company from claims if the project goes wrong.

Liability is limited to the assets of the SPV, which may be very small. The SPV often owns the property being developed but this will often be worthless as it will have a charge on it from funders, either the parent investment company or bankers. 

If problems occur with the development, the SPV is put into liquidation. That limits the investment company’s liability as claims cannot be made against it. Sometimes the problems are no fault of the developer but, on occasion, this is done deliberately so as not to have to pay for the work carried out by contractors. 

Often the contractor and its subcontractors are left unpaid for their work, whilst the parent company completes the development and takes advantage of not having to pay for the work done. There was little that could be done as the contract for payment was with the SPV that was in liquidation. 

A recent High Court case (Palmer Birch (a Partnership) v Lloyd) may have highlighted a possible route to make a claim. There are a group of causes of action called ’Economic Torts’. These include ‘inducing breach of contract’, ‘unlawful interference’ and ‘unlawful means conspiracy’. The issue with these causes of action though is that they are very difficult to define and there is a very fine line between claims which are successful and those that are unsuccessful. The burden of proof on the claimant is very high.

In this case the claimant was successful. The claimant was a building contractor. It contracted with a company that had a leasehold interest in a property to carry out significant refurbishment works. The two defendants were brothers. The second defendant was the sole director of the lease holding company. The freehold of the property was owned by another company which was beneficially owned by the first defendant. The first defendant was, in effect, financing the refurbishment work.

Before completion of the contract, and whilst substantial monies were owed to the claimant, the defendants agreed to put the lease holding company into liquidation. That company had no monies and therefore could not pay any claim from the claimant. The claimant made claims against the defendants alleging that they had induced a breach of contract by the lease holding company by withdrawing funding so that it could not pay the claimant. It was also alleged that the brothers had concluded to bring about the insolvency so that the company had to repudiate its contract with the claimant. 

This was a complex case, but the High Court found that both of these causes of action were proved against the defendants. The two individuals were therefore liable for the outstanding value of the work, which was over £1 million. 

As a contractor, if you have been working on such a project and have not been paid it may be possible to investigate potential claims against directors, development companies and third-party funders who have taken action to close down the SPV and avoided paying for the works carried out.