IBM v LZLABS

The claimant alleged that the defendants developed a Software Defined Mainframe by reverse engineering the claimant's Mainframe Software in breach of an IBM Customer Agreement (the ICA). The court considered pleading standards, CPR Pt 3.4(2)(a) and (b) and Pt 24 summary judgment principles, and the rule that a director acting bona fide and within authority will not be personally liable for procuring his company to breach a contract (the Said v Butt principle).

The court held that paragraphs 11 and 12 of the Amended Particulars of Claim, which pleaded matters about non-parties, were immaterial and struck them out. The pleading that defendants 4 and 5 "personally" induced breaches was insufficient insofar as it alleged conduct other than in their capacities as directors of the second defendant; summary judgment was given for those defendants on that basis because no real prospect of success was shown. However, the claim against them in their capacity as directors of the second defendant was not struck out: the claimant was permitted to re-amend narrowly to plead that the directors acted in breach of their section 172 Companies Act 2006 duties (on the basis that the second defendant's business depended on illegitimate conduct) such as to displace the protection of Said v Butt.

The claimant, IBM United Kingdom Limited, sued LZLabs entities and individual officers alleging that LZLabs' Software Defined Mainframe (SDM) was developed by reverse engineering IBM Mainframe Software in breach of a licence (the ICA). Relief sought included delivery up, declarations, injunctive relief and an account of profits or damages.

Procedural posture: This was a first instance application by the fourth and fifth defendants for striking out and/or summary judgment, and by the first and third defendants to strike out specified paragraphs as immaterial.

Issues for decision:

• Whether paragraphs 11–12 of the Amended Particulars of Claim were immaterial and should be struck out;
• Whether the claimant's pleading disclosed a tenable cause of action against the fourth and fifth defendants for inducing breaches of the ICA;
• Whether the rule in Said v Butt (that a director acting bona fide and within authority is not personally liable for causing his company to breach a contract) prevented personal liability, and what must be pleaded to displace that rule;
• Whether summary judgment should be given against the claimant on parts of its case and whether amendment should be permitted to plead breaches of directors' duties under section 172 Companies Act 2006.

Court's reasoning and outcome: The court applied the tests for strike out under CPR Pt 3.4 and for summary judgment under Pt 24. It held that paras 11–12 were immaterial to the issues between the parties and struck them out. The court accepted the Said v Butt principle remains good law and that a claimant alleging a director induced the company's breach must plead factual material showing the director acted in bad faith or outside authority; it relied on Holding Oil, Crystalens, Antuzis and related authorities to explain that assessment focuses on the director's duties to the company (including s.172). The claimant's allegations that the fourth and fifth defendants "personally" induced breaches or acted as officers of the first defendant were speculative and had no real prospect of success; summary judgment was therefore given for those defendants to that extent. However, the court found that the claimant had a narrow, arguable case that the defendants, acting as directors of the second defendant, may have caused the company to operate an illegitimate business dependent on breaching the ICA, and that if so this could amount to a breach of s.172 displacing Said v Butt. By a narrow margin the court permitted re-amendment limited to that point and refused to strike out the remainder of the claim at this stage.

The court struck out paragraphs 11 and 12 of the Amended Particulars of Claim as immaterial and directed re-amendment to remove an incorrect reference in paragraph 31. The fourth and fifth defendants were granted summary judgment to the extent the claim alleged they acted other than in their capacities as directors of the second defendant (for example, personally or as officers of the first defendant) because no real prospect of success was shown. The claim against them in their capacity as directors of the second defendant was not struck out; the claimant was given leave narrowly to re-amend to plead that those directors acted in breach of their section 172 Companies Act 2006 duties (arguing the second defendant's business depended on illegitimate use of the claimant's software) such as to displace the protection of Said v Butt.