Monday 28 April 2025
Dear Subscriber,
I hope you had a great Easter and weekend! Please see below for the question, the answer to the previous question and associated resources. This is the web version of this newsletter.
Question: BuildRight Ltd., a construction company, hires Leo, a subcontractor, to refurbish several apartments for a fixed price of £50,000. Midway through the project, Leo struggles financially and is at risk of not completing the work on time, which would cause BuildRight Ltd. to incur penalty charges under their main contract. To avoid delay, BuildRight Ltd. offers Leo an additional £10,000 if he completes the refurbishment on time. Leo accepts and continues working. After finishing the work on time, BuildRight Ltd. refuses to pay the extra £10,000, arguing that Leo was merely performing his original contractual obligations. Leo considers legal action to recover the additional payment. Can Leo successfully claim the additional £10,000?
1. No, because performing an existing contractual duty can never amount to valid consideration for a new promise.
2. Yes, because Leo provided a practical benefit to BuildRight Ltd. by completing the work on time and helping them avoid penalty charges, which can amount to valid consideration.
3. No, because any modification to a contract must be supported by entirely new work beyond the original obligations.
4. Yes, but only if Leo can prove that BuildRight Ltd. acted in bad faith by promising to pay without any intention of honoring it.
5. No, because under the rule in Stilk v Myrick (1809), no additional payment can be enforced if the contractor merely does what they were already contractually obliged to do.
Resource: Learn more about contractual modification by watching this video. Pick up a copy of our free study planner here.
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Answer and feedback to last week’s question: Daniel and Priya set up a private limited company, SolarGen Ltd, to manufacture and sell solar-powered generators. They each invest £10,000 as shareholders and appoint themselves as directors. The company takes out a business loan of £100,000 from a bank to purchase equipment. A year later, SolarGen Ltd. fails to generate profits and becomes insolvent. The company is unable to repay the bank loan. The bank demands that Daniel and Priya personally repay the outstanding balance. Daniel and Priya seek legal advice, arguing that they are not personally liable for the company’s debts.
Which of the following legal principles best protects Daniel and Priya from personal liability for SolarGen Ltd’s debts?
1 The rule in Foss v Harbottle, which prevents shareholders from being sued for company losses.
2. The principle of ultra vires, which limits company liability to acts within its constitutional powers.
3. The doctrine of separate corporate personality established in Salomon v A Salomon & Co Ltd, which provides that the company is a separate legal entity responsible for its own debts.
4. The common law principle of caveat emptor, which limits liability in commercial transactions.
5. The veil of incorporation, which automatically makes directors immune from all legal claims relating to company operations.
Correct Answer: 3. The doctrine of separate corporate personality established in Salomon v A Salomon & Co Ltd, which provides that the company is a separate legal entity responsible for its own debts. The foundational case of Salomon v A Salomon & Co Ltd [1897] established the principle that a company, once properly incorporated, is a separate legal person from its shareholders and directors. This means:
- The company can own property, enter into contracts, and be sued or sue in its own name.
- Shareholders’ liability is generally limited to the amount unpaid on their shares.
- Directors and shareholders are not personally liable for the company’s debts, unless there has been fraud or wrongdoing (e.g., wrongful trading or lifting the corporate veil in exceptional cases).
In this scenario, since SolarGen Ltd. is a properly incorporated company, Daniel and Priya are not personally liable for the company’s debts merely by virtue of being directors and shareholders. The limited liability principle protects them.
Why the Other Options Are Incorrect:
- Option 1 (Foss v Harbottle) relates to the rule that only the company can sue for wrongs done to it, not about personal liability for debts.
- Option 2 (Ultra vires) relates to companies acting beyond their stated powers, but does not directly concern personal liability for debts.
- Option 4 (Caveat emptor) means “buyer beware” and is a principle in contract law, not about corporate personality or liability.
- Option 5 (Veil of incorporation) is misdescribed—while the corporate veil offers protection, it can be lifted in exceptional circumstances (e.g., fraud). Directors are not automatically immune from all legal claims.
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All the best
Dr Ioannis Glinavos
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