Breach Of Contract Induced By Third Parties
It is normal for most businesses to have dealings with third parties in the course of their operations, such as suppliers, service providers, distributors, brokers and agents. But it can be particularly challenging if a contract breach occurs and a third party is alleged to have caused or induced the breach.
Recently, the court gave important guidance1 on the liability of a third party as an accessory to the breach. The case provides a useful summary of the degree of third party participation needed to satisfy the requirements of liability as an accessory for a wrongful act (here, inducing the contract breach).
Liability as an accessory
The common law doctrine of privity of contract means only the parties to the contract can be held liable for breach of contract or enjoy rights under it. There is also a general principle in tort that someone who procures another to commit a wrong – such as a contract breach – is liable as an ‘accessory’.
In this case, a company had breached an exclusive supply agreement with the claimant by supplying other customers with AV equipment. At trial, the judge dismissed a claim against the third party for inducing the breach – but the claimant succeeded on that point on appeal.
Inducement
Lord Justice Arnold set out the required elements required for third party liability in tort (by ‘A’) for inducing a breach of a contract between two parties (‘B’ and ‘C’):
· There must be a breach of contract by B
· A must induce B to break the contract with C by persuading, encouraging or assisting them to do so
· A must know of the contract and know that their conduct will have that effect
· A must intend to induce the breach of contract either as an end in itself or as the means to achieving some further end; and
· A must have no lawful justification for that conduct
The court confirmed the longstanding authority that any active step taken, having knowledge of the covenant by which they facilitate a breach of that covenant, is enough. Such steps by the third party include ‘direct persuasion’ or ‘procurement’, as well as inducement.
The court acknowledged the potential difficulty with the “dividing line between mere facilitation of an infringing act and procuring an infringing act”. But if the third party’s involvement is necessary for the breach to occur, it will be pretty clear that the third party will be liable for inducing said breach.
Here, the third party had induced the breaches of the exclusivity agreement. It had the requisite knowledge and intention and they were therefore liable as an accessory for the breaches. It would have been different had the third party not known of the exclusivity agreement.
Lessons for businesses
The ruling restates existing law and reiterates the requirements for the conduct of a third party to amount to inducing a breach of contract. Circumstances where a third party could be held liable as an accessory include unlawful means conspiracy (the claimant’s unlawful means argument failed in this case), dishonesty, fraud and conduct in relation to restraint of trade.
Where a dispute arises involving breach of contract and the potential liability of a third party , always take specialist advice.
1Northamber PLC v Genee World Ltd & Ors (Rev1) [2024] EWCA Civ 428
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