A recent Canadian decision by the New Brunswick Court of Appeal
in SAR Petroleum et al v Peace Hills Trust Company 2010
NBCA 22 held that the tort of inducing breach of contract (or
interfering with contractual relations) only arises if the breach
was the desired end or means to an end. The fact that a breach is
merely a foreseeable consequence of the defendant's actions was
insufficient to establish the tort.
In doing so, the Canadian court adopted the position taken by
the English House of Lords in OBG Ltd v Allan  1 AC
1, reflecting wider recognition that mere foreseeability does not
amount to an intention to cause a breach.
Australian courts have not yet adopted this position, but it is
expected that Australian defendants will begin to argue this in the
In the Canadian case, the Court of Appeal rejected that the
respondent, Peace Hills Trust Company (Peace
Hills), had committed the tort of inducing breach of
contract by enforcing its loan rights against Eel River Bar First
Nation of New Brunswick (Eel River).
The appellant, SAR Petroleum Inc. (SAR
Petroleum), had a contract with Eel River to erect a
gas-bar and convenience store for $4.9 million. Importantly, the
contract prohibited Eel River from "holding back" any of
the SAR Petroleum's fees.
To finance the project, Eel River obtained a loan from Peace
Hills. Peace Hills was aware of the terms under which Eel River had
contracted with SAR Petroleum, but Peace Hills and SAR Petroleum
did not otherwise have any direct contractual relationship.
At first, Eel River paid SAR Petroleum's invoices from its
own money and, when Eel River had no more money, it alerted Peace
Hills that it was unable to pay SAR Petroleum the remaining $1.4
million owed. Peace Hills agreed to pay SAR Petroleum the remaining
money, but it "held back" 15% and cited clauses 10 and 11
of the loan agreement as authority for doing so.
Soon afterwards, SAR Petroleum went into receivership and, with
the approval of its receiver, it commenced action against Peace
Hills and Mr McBrearty (Peace Hills' lawyer) on the grounds
that, by "holding back", Peace Hills wrongfully induced
Eel River to breach its contract with SAR Petroleum.
In deciding the case in favour of the respondent, the Court of
Appeal held that the tort of inducing a breach required the
defendant to have an intention to induce the breach, which was not
present in this case.
The Court of Appeal explained that, in holding back 15% of the
invoiced amount, Eel River's breach of its contract with SAR
Petroleum was a foreseeable consequence of Peace Hills'
actions, but it was not Peace Hills' intended consequence. That
is, the breach was not the desired end or the means to any such
Importantly, the Court of Appeal also held that, even if clauses
10 and 11 of the loan agreement did not allow Peace Hills to
withhold the money (as was argued by SAR Petroleum), Peace Hills
would still not have committed the tort because the
"intent" to induce breach was still not present.
In Australia, the tort of inducing breach of contract also
requires that the defendant demonstrate an intention to cause a
third party to breach a contract with the plaintiff. To date, the
courts have not explored the requisite level of intent in the same
way as the Canadian or English courts. Instead, Australian courts
have tended to rely on whether a justification (such as a superior
right) is available (see Zhu v Treasurer of New South
Wales (2004) 218 CLR 530). However, this situation does not
bar application of the Canadian and English principles in
Australia, and Australian cases will likely begin testing these
principles, at least in relation to determining the requisite level
of intent, in the near future.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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