Tuesday, June 28, 2011

Tortious Interference with Contracts

Book recommendation: The Law of Torts: Examples & Explanations, Third Edition

Research by Yasser Latif Hamdani and Zeeshan Zafar Hashmi
In order to state a claim for tortious interference with existing contractual relationships, a plaintiff must allege:
 (1) it had a contract with a third party;
(2) the defendant knowingly induced the third party to break the contract;
(3) the defendant had an improper motive or means for doing so; and
(4) it was harmed by such actions.

1.       1 OBG Ltd and another v. Allan and others [2008] 1 A.C. 1 at paras 174-193 on Page 46-49
Preventing performance of a contract: “interfering with contractual relations”
174 I must move now to more troubled waters. In Quinn v Leathem [1901] AC 495 the House upheld
the decision in Lumley v Gye 2 E & B 216 . In doing so their Lordships expressed the principle
underlying that decision in broad terms. Lord Macnaghten, at p 510, said that Lumley v Gye was
rightly decided, not on the ground of malicious intention, but “on the ground that a violation of legal right committed knowingly is a cause of action, and that it is a violation of legal right to interfere with contractual relations recognised by law if there be no sufficient justification for the interference.” (Emphasis added.)Lord Lindley said the “principle which underlies the decision [in Lumley v Gye ] reaches all wrongful acts done intentionally to damage a particular individual and actually damaging him”: p 535.

175 These broad, indeed, sweeping affirmations made no mention of the need for inducement of
breach of contract in Lumley v Gye cases. Lord Macnaghten spoke quite generally of “interfering with
contractual relations” as a violation of legal right. Lord Lindley expressed the underlying rationale in
even wider terms. On the face of these observations the Lumley v Gye tort is not confined to cases
where the defendant induced a contracting party to break his contract. These observations could be
taken to suggest that the Lumley v Gye tort covers also cases where the defendant with intent to
damage the claimant prevented a party to a contract from performing his contractual obligations.

176 In GWK Ltd v Dunlop Rubber Co Ltd (1926) 42 TLR 376 Lord Hewart CJ applied these
statements in a “prevention” case. GWK, a car manufacturer, agreed with a tyre manufacturer
Associated Rubber Manufacturers (“ARM”), that the latter's tyres would be fitted on all *60 GWK cars
exhibited for sale. Two of GWK's cars were exhibited at the Glasgow motor show. On the eve of the
show Dunlop wrongfully removed ARM's tyres from the cars and replaced them with its own Dunlop

177 Clearly, Dunlop did not induce GWK to break its contract with ARM. Equally plainly, Dunlop was
liable to ARM for unlawful interference with its business. Dunlop intended to damage ARM by
unlawful means, namely, by trespass to the goods of GWK. But Lord Hewart followed a different
route. He gave effect to the broad observations of Lord Macnaghten and Lord Lindley in Quinn v
Leatham [1901] AC 495 . Dunlop had knowingly committed a violation of ARM's legal rights by
interfering without justification with the contractual relations existing between ARM and GWK and had
done so with intent to damage ARM.

178 With hindsight it is evident that application of the Lumley v Gye tort to a “prevention” case was
unfortunate. There is a crucial difference between cases where the defendant induces a contracting
party not to perform his contractual obligations and cases where the defendant prevents a contracting
party from carrying out his contractual obligations. In inducement cases the very act of joining with the
contracting party and inducing him to break his contract is sufficient to found liability as an accessory.
In prevention cases the defendant does not join with the contracting party in a wrong (breach of
contract) committed by the latter. There is no question of accessory liability. In prevention cases the
defendant acts independently of the contracting party. The defendant's liability is a “stand-alone”
liability. Consistently with this, tortious liability does not arise in prevention cases unless, as was the
position in GWK , the preventative means used were independently unlawful.

179 Jenkins LJ made this point in D C Thomson & Co Ltd v Deakin [1952] Ch 646 , 693: “acts of a third party lawful in themselves do not constitute an actionable interference with contractual rights merely because they bring about a breach of contract, even if they were done with the object and intention of bringing about such breach.” (Emphasis added.)

Evershed MR was of the same view. Suppose, he said, a defendant buys up all the commodities of a
particular character with the object of preventing performance of a contract whereby the claimant
would receive a supply of those commodities. The defendant would not act tortiously in such a case:
p 680.
180 Given this difference between prevention and inducement, it is confusing and misleading to treat
prevention cases as part and parcel of the same tort as inducement cases. The rationale is not the
same, nor are the ingredients. But the rationale and ingredients of liability in prevention cases are the
same as those of the tort of interference with a business by unlawful means. Prevention cases should
be recognised for what they are: straightforward examples of the latter tort, rather than as
exemplifying a wider version of Lumley v Gye labelled “interference with contractual relations”.

A step too far
181 A regrettable consequence of treating “preventing performance” as an extension of the Lumley v
Gye tort has been to widen the ambit of this tort in an unprincipled fashion. It has meant that a
defendant who intentionally harmed a plaintiff may be liable even though he did not use unlawful
means nor did he induce a party to break his contract. A defendant may be held liable for intentional
harm even though he did not cross the Rubicon by doing something he had no legal right to do. He is
liable for intentional harm effected by lawful means.

182 This step was taken by the Court of Appeal in the well known case of Torquay Hotel Co Ltd v
Cousins [1969] 2 Ch 106 . A trade union and its officials blacked supplies of oil to the Imperial Hotel in
Torquay. This prevented the oil company Esso from performing its contractual obligation to supply oil
to the hotel. The Court of Appeal held this was actionable at the suit of the hotel.

183 In reaching this conclusion Lord Denning MR said Lord Macnaghten, in the passage quoted
above from Quinn v Leathem [1901] AC 495 , 510, extended the principle of Lumley v Gye . The time
has come, Lord Denning stated, to extend the principle further, to cover deliberate and direct
interference with the performance of a contract without causing any breach. The interference must be
“direct”. Unlawful means was an ingredient of liability if, but only if, the interference was “indirect”, as
in Evershed MR's example of cornering the market in a commodity. In the instant case the
interference was direct. So liability arose irrespective of whether the means used by the defendants to
prevent performance of Esso's supply contract was lawful or not.

184 The court went further in another respect. The court held that the tort applied even though the
interference did not give rise to a breach of contract. Esso's supply contract included a force majeure
clause. This mattered not. What mattered was that Esso was prevented or hindered from performing
its contractual obligations. This view of the law was approved by your Lordships' House in Merkur
Island Shipping Corpn v Laughton [1983] 2 AC 570 , 608, per Lord Diplock.

185 With the very greatest respect I have difficulty with Lord Denning's extension of Lumley v Gye 2 E
& B 216 . The effect of this extension is that a person who directly prevents performance of a contract
by wholly lawful means, and thereby intentionally inflicts damage on the claimant, is liable to the
claimant. No reason was given, and none is discernible, for this fundamental extension of the law.
Why should a defendant, acting wholly lawfully , be liable in such a case, although the use of unlawful
means is a prerequisite of liability if he intentionally inflicts damage in any other way?

186 Nor is the basis of the distinction between direct and indirect interference apparent. One would
suppose the outcome on liability would be the same whether a person sought to achieve his end by
direct or indirect means. It would be remarkable if this were not so.

187 This extension of the Lumley v Gye tort must be going too far. To hold a defendant liable where
the intentional harm is inflicted by lawful means runs counter to the limit on liability long established in
English law. So long as this general limit is maintained in respect of other forms of *62 interference
with a claimant's business, and Lord Denning did not suggest this should be changed, the extension
in liability proposed by him and seemingly approved by Lord Diplock is irrational. Despite the high
authority of these cases, I have to say that on this occasion these distinguished judges fell into error.
They were led astray by the width of Lord Macnaghten's observations made in 1901, long before the
unlawful interference tort became shaped. The jurisprudence of the economic torts had not then been
thought through.

188 For these reasons this extension of the inducement tort of Lumley v Gye cannot stand
consistently with the economic torts having a coherent framework. This extension is productive of
obscurity and, hence, uncertainty. This, in turn, as Lord Diplock himself once said, is destructive of
the rule of law: see Merkur Island Shipping Corpn v Laughton [1983] 2 AC 570 , 612.

189 I feel bound to say therefore that the ambit of the Lumley v Gye tort should properly be confined
to inducing a breach of contract. The unlawful interference tort requires intentional harm effected by
unlawful means, and there is no in-between hybrid tort of “interfering with contractual relations”. In so
far as authorities suggest or decide otherwise they should not now be followed. I leave open the
question of how far the Lumley v Gye principle applies equally to inducing a breach of other
actionable obligations such as statutory duties or equitable or fiduciary obligations.
190 On this footing the “force majeure” point seems largely to disappear. It can hardly arise in

inducement cases. An exemption clause can scarcely apply to a contracting party who chooses to
default. Nor would the existence of an exemption clause have any obvious relevance in unlawful
interference cases. If a defendant prevents performance of a contract by unlawful means, the
existence of an exemption clause will be neither here nor there. The question will always be: how
much loss did this interference cause to the claimant?

Inducing a breach of contract: the mental element

191 I turn next to the mental ingredient of the Lumley v Gye tort. The mental ingredient is an intention
by the defendant to procure or persuade (“induce”) the third party to break his contract with the
claimant. The defendant is made responsible for the third party's breach because of his intentional
causative participation in that breach. Causative participation is not enough. A stranger to a contract
may know nothing of the contract. Quite unknowingly and unintentionally he may procure a breach of
the contract by offering an inconsistent deal to a contracting party which persuades the latter to
default on his contractual obligations. The stranger is not liable in such a case. Nor is he liable if he
acts carelessly. He owes no duty of care to the victim of the breach of contract. Negligent interference
is not actionable.

192 The additional, necessary factor is the defendant's intent. He is liable if he intended to persuade
the contracting party to breach the contract. Intentional interference presupposes knowledge of the
contract. With that knowledge the defendant proceeded to induce the other contracting party to act in
a way the defendant knew was a breach of that party's obligations *63 under the contract. If the
defendant deliberately turned a blind eye and proceeded regardless he may be treated as having
intended the consequence he brought about. A desire to injure the claimant is not an essential
ingredient of this tort.

193 For completeness I mention, but without elaboration, that a defence of justification may be
available to a defendant in inducement tort cases. A defendant may, for instance, interfere with
another's contract in order to protect an equal or superior right of his own, as in Edwin Hill & Partners
v First National Finance Corpn plc [1989] 1 WLR 225 .
2.       Lumley v. Gye 2 El. & Bl. 215, 118 Eng. Rep. 749 (1853)  at Page 11
“If a contract has been made between A and B that the latter should go supercargo for the former on a voyage to China, and C, however maliciously, persuades B to break his contract, but in vain, no one, would contend that any action would lie against C. On the other hand suppose a contract of the same kind made between the same parties to go to Sierra Leone and C urgently and bona fide advises B to abandon this contract which on consideration B does where loss results to A; I think no one will be found bold enough to maintain that action would lie against C. In the first case no loss has resulted; in the second loss has resulted from the act, that act was not C’s, but entirely and exclusively B’s own. If so let malice be added, and let C have persuaded not bona fide but mala fide and maliciously , still, all other circumstances remaining the same, the same reason applies; for it is malitia sine damno, if the hurtful act is entirely and exclusively B’s, which last circumstance cannot be affected by the presence or absence of malice in C…”

3.       Enterprise Oil Ltd v Strand Insurance Co Ltd [1990] 2 All ER 1024 at Para 111
In that case the Defendant, Baker, (the alleged tortfeasor), was held to have a unity of interest with HHI, and so Baker could not be held liable for the tortious interference with the Plaintiff, Welch's, prospective business relations with HHI. The unity of interest existed because Baker was the founder, sole shareholder and President of HHI. Mr Pakalka accepted that the decision in Baker v Welch supported the proposition that a parent company cannot be held liable in tort for interfering with a contract between its subsidiary and a third party; nor could a subsidiary be held liable for tortiously interfering with a contract between its parent and a third party. (XX: Day 4/pp 85 line 15 to p 88 line 4.) There are at least two reasons for such a rule. First, if the parent and subsidiary are commercially identical, then without the rule it would give a plaintiff two rights of action where in common sense there should only be one. Secondly, where there is a unity of interest between the parent and the subsidiary and one or other is in contract with the Plaintiff third party, then to allow the third party to sue in tort would be an easy way to get round any limitations or exceptions that there are in the contract. (The same reasoning was applied by the Supreme Court of Texas in Holloway v Skinner 898 S.W. 2d 793 (1995); and the US Court of Appeals of the Fifth Circuit in Deauville Corp v Federated Department Stores 756 F.2d 1183 (1985).)

4.       Baker v. Welch, 735 SW 2d 548  towards the end of 549
A party to a business relation cannot tortiously interfere with himself. Liability must be founded upon the acts of an interfering third party. An agent, such as Baker, generally is not regarded as a third party. Rather, his legal identity is that of his principal. Thus, an agent is generally not personally liable for interfering with his principal's business relations. Gonzalez v. Gutierrez, 694 S.W.2d 384, 388 (Tex.App.—San Antonio 1985, no writ); Terry v. Zachry, 272 S.W.2d 157, 160 (Tex. Civ.App.—San Antonio 1954, writ ref'd n.r. e.). The agent and the principal are treated as one because the agent is the principal's "alter ego"; their financial interest is the same.

5.       Ferrandino & Son, Inc. v Wheaton Bldrs., Inc., LLC  2011 NY Slip Op 02346 Decided on March 22, 2011 Appellate Division, Second Department Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. (On page 2 of the attached judgment)
“To state a cause of action alleging tortious interference with contract, the plaintiff must allege: the existence of a valid contract between it and a third party, the defendant's knowledge of that contract, the defendant's intentional procurement of the third party's breach of that contract without justification, and damages.”
6.       Pallavan Transport Corporation ... vs Dhaulat K. Nichani  AIR 1982 Mad 72 at Para 204
204. Causation. Only such damages are recoverable as are the reasonably foreseeable consequences of the tortious act. The law has regard to the proximate cause. A plaintiff, on whom the burden of proving damage lies, discharges the onus if he shows that, on a balance of probabilities, the tortious act caused or materially contributed to the injury or damage .............."
Winfield and Polowics on Tort, 11th Edn. at page 599, dealing with the various heads of damages in actions for personal injury says thus-
"If restitutio in integrum is the object of damages awarded for pecuniary loss and compensation the object of damages for non-pecuniary loss, it might have been expected that in calculating the plaintiff's total damages in a given case the Court would always have drawn clear distinction between these two aspects of his damage. The distinction has, of course, been acknowledged many times, but the practice of the courts has tended until recently to cut Across the obscurity by the making of global awards which did not distinguish between the different aspects of damages. This practice was supported by the Court of Appeal, partly on the ground that separate assessment and addition of individual items might lead to 'overlapping', and a consequently excessive award. However, the introduction by the Administration of Justice Act, 1969 of a new basis for the award of interest on personal injury damages and subsequent decisions that different heads of damage should be treated in different ways for this purpose have meant that a Judge is compelled to itemise his award at least into pretrial pecuniary loss, future loss of earnings and non-pecuniary loss. Indeed, if recently proposed alterations in the principles governing the off-setting of social security payments against damages are implemented it will be necessary to carry the process of 'itemisation' even further. Whatever the future of 'itemisation', it has long been the case that a variety of situations, each presenting some unusual feature, has compelled the Courts to consider particular 'heads of damage, within the broad categories of non-pecuniary and pecuniary loss and it is
to these that we must now turn."
According to the Authors, damages can be claimed under the following heads-1. Non-pecuniary loss-(i) pain and suffering (ii) loss of expectation of life; (iii) loss of amenity and (iv) the injury itself.

7.       Walchandnagar Industries Ltd. vs Saraswati Industrial Syndicate 2010 INDLAW DEL 3234 [DELHI HIGH COURT] at Para 14

The Plaintiffs have based their Suit on the tort of interference allegedly committed by OIA by interfering with their contract with TENDAHO and illegally conspiring to replace them with another party who, as per the Written Statement filed by Defendant No.1, is Walchandnagar Industries Ltd. Black's Law Dictionary defines 'tortious interference with contractual relations' as a third party's intentional inducement of a contracting party to break a contract, causing damage to the relationship between the contracting parties. As soon as opposition to the proposed amendments stands withdrawn, the argument that the nature of the Suit has been transformed pales into significance. The case before us is not one where the sequence of events and additional pleas are barred from adjudication for any reason. A fresh suit could always have been filed. Therefore, upon a concession having been made, there can be no conceivable reason for the Court to decline leave to amend the plaint.

8.       Pepsi Foods Ltd. And Others vs Bharat Coca-Cola Holdings Pvt.Equivalent citations: 1999 VAD Delhi 93, 81 (1999) DLT 122, 1999 (50) DRJ 656 at Para 28

28. As far as the tort of inducement of breach of contract is concerned, it is submitted that the tort is committed only where the alleged tortfeasor approaches the contractor, or where the contract is not terminable, or where the means are unlawful or where the predominant motive is to injure the other party to the contract. It is submitted that the allegations contained in the plaint, do not satisfy any of the requirements to justify the complaint that the answering defendant or any of the other defendants have committed the tort of inducement of breach of the contract.

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