Court: Chancery Division
Judgment Date: 26 July 1961
Where Reported: [1962] 1 W.L.R. 832; [1962] 1 All E.R. 442
Legal Issue in Jones v Lipman
Jones v Lipman examined whether a court can order specific performance of a contract against a vendor who, after agreeing to sell property, transferred it to a company he controlled, to avoid the contract’s obligations.
Jones v Lipman delves into the principles of equitable remedies, specific performance, and the concept of “piercing the corporate veil” to prevent misuse of corporate structures for fraudulent purposes.
Material Facts in Jones v Lipman
Benny Lipman agreed to sell a freehold property to David and Martha Jones for £5250.
Before the completion date, Lipman sold and transferred the property to a company he controlled for £3000. The company had nominal capital and was essentially under Lipman’s complete control.
Lipman’s actions were aimed at evading the contractual obligations to the Joneses. The Joneses sought specific performance of the contract, arguing that the transfer to the company was a sham to defeat their rights. T
he legal question was whether specific performance could be ordered against both Lipman and the company he controlled​​​​​​​​.
Judgment in Jones v Lipman
The court held in favour of the plaintiffs (Jones’s). It found that the company was merely a façade or a ‘mask’ used by Lipman to avoid his contractual obligations. Consequently, the court ordered specific performance against both Lipman and the company.
The court recognised that the company was entirely under Lipman’s control and that the transfer of property to it was done solely to defeat the Joneses’ rights to specific performance. This admission by the defendants’ counsel was pivotal.
The court concluded that a vendor could not resist specific performance when he had absolute ownership and control of a company in which the property was vested and thus had the power to complete the contract.
The court drew parallels with the precedent set in Gilford Motor Co Ltd v Horne, where a company was deemed a sham or a cloak for the individual’s activities, warranting an equitable remedy against both the individual and the company​​.
The Reason for the Decision in Jones v Lipman
The decision was underpinned by the principles of equity, specifically the application of specific performance as an equitable remedy.
The court recognised that specific performance is ordered against a party to a contract who can compel another person (or entity) to convey the property in question.
In this case, Lipman’s complete control over the company meant he could compel it to fulfil the contractual obligations.
The court’s reliance on the principle of “piercing the corporate veil” was significant. This principle applies when a company is used as a façade to conceal the true facts, thereby avoiding legal obligations.
The court found that the company was a mere device or sham used by Lipman to escape the eye of equity.
The use of a corporate entity to circumvent contractual obligations was deemed an abuse of the corporate form.
The court’s application of this principle illustrated its willingness to look beyond formal legal structures to the substance of the transaction and enforce equitable principles.
The court’s decision in Jones v Lipman also echoed the ruling in Gilford Motor Co Ltd v Horne, where the court had prevented an individual from using a company as a cloak for his actions that breached covenants.
This precedent was essential in establishing that when a company is entirely controlled by an individual and used to circumvent legal obligations, both the individual and the company can be held liable.
In concluding, the court highlighted the need for justice and fairness in contractual relations, emphasising that legal structures should not be used as instruments to perpetrate fraud or evade obligations.
By ordering specific performance against both Lipman and his company, the court reinforced the principle that courts can and will intervene to prevent the misuse of corporate structures for fraudulent purposes.
Conclusion in Jones v Lipman
Jones v Lipman is a seminal case in English business law, particularly concerning the concept of piercing the corporate veil.
The case illustrates the court’s willingness to enforce equitable remedies and prevent individuals from using corporate structures to avoid contractual obligations.
This judgment stands as a warning against the misuse of corporate entities for fraudulent purposes, reinforcing the integrity of contractual commitments.
The case underscores the court’s role in ensuring that legal structures and entities are not exploited to defeat justice, particularly in situations where the substance of a transaction contradicts its formal legal appearance.
Jones v Lipman remains a precedent in cases where the separation between individual and corporate identity is blurred for wrongful purposes.
