Failure of unjust enrichment argument

Costello –v- MacDonald [2011] BLR 544 Court of Appeal

Mr and Mrs Costello owned some land and wanted to develop it with 8 new houses.  They had a limited company which they called Oakwood Residential Limited.  Oakwod Residential Limited placed a contract to construct 8 new houses on the plot with MacDonalds.  The work was carried out but the company did not pay all the invoices.  Mr and Mrs Costello now had 8 houses on their land, which they were able to let and receive rental income.  The builders decided to sue Mr and Mrs Costello (presumably because Oakwood Residential Limited did not have enough money to be worth suing).

HELD:

The Court of Appeal held that although Mr and Mrs Costello had benefitted from and had been enriched by the work carried out by the builders, there was no contract whatsoever between them and the builders. The builders had taken a contractual risk by entering into a contract with Oakwood Residential and arguments based on unjust enrichment would fail.  The prevailing rule is that there is a “veil of incorporation” which protects the shareholders and directors of companies from being sued for their company’s actions including failures to pay.

Comment:

1. The veil of incorporation principle is long established.  The most surprising thing about this case is that the first instance judge agreed to set it aside.
2. MacDonalds should have been advised to put Oakwood into liquidation and the work with the liquidator to pursue the Costellos as directors of Oakwood for wrongful trading, and breach of their fiduciary duty to the company.  See Roberts –v- Frohlich reported in our Muckle Construction briefing earlier this year.