UK: When Can A Party Be Liable For Inducing A Breach Of Contract?

Last Updated: 20 June 2007
Article by James Libson and Joanna Blackburn

The tort of interference with contractual rights consists of inducing a person to break his or her contract with another party. In an employment relationship, this happens regularly in the context of industrial action when a union calls its members out on strike, but it can also be triggered where a new employer seeks to employ an individual who is bound by, for example, confidentiality or restrictive covenants and the new position involves a breach of those obligations. In what circumstances will the old employer be entitled to pursue not only the ex-employee but also his or her new employer (who normally has the greater financial resources)?

Background

A recent House of Lords ruling, Mainstream Properties Limited v Young and Others, has confirmed an important principle for employers concerned about breaches of contract by their employees where a third party is involved.

The complaint in Mainstream Properties was that two employees of a property company diverted a development opportunity away from the company towards a joint venture in which they were partners with a third party, Mr De Winter. Mr De Winter provided the finance for the joint venture. He had no connection with Mainstream Properties, however he was aware that his two partners were subject to contracts of employment. There was no dispute that the two employees had breached their employment contracts in diverting the opportunity to their joint venture and there was no dispute that Mr De Winter provided the finance. The question was whether Mr De Winter could be liable for inducing his partners to breach their contracts. It was clear that without Mr De Winter's financial assistance the breaches would not have occurred, but the tort of interference requires something more than a mere causal link. The Court found that for Mr De Winter to be liable for inducing the breach of contract, he had to be aware that his actions breached the terms of the employment contracts and specifically intend to cause a breach of the contract.

What knowledge and intent is required?

How much does the third party need to know and how extensive should its inquiries be? For example, when an employer knows that a new employee is subject to restrictive covenants, they must make genuine enquiries as to the extent of the covenants to establish whether the new employee may be in breach. However, it does not matter if the employer comes to the wrong conclusion. In fact, the third party employer will not be liable even if its belief that there is no breach is "muddle-headed and illogical" as the House of Lords put it. This is because in order for a third party to be liable it needs not only to know about the contract but it must also intend to induce a breach of it. An honest belief that the act will not involve a breach of contract is inconsistent with an intention to induce a breach of contract.

In the Mainstream Properties case, Mr De Winter inquired of his partners whether their action of diverting business to their joint venture would breach their employment contracts and was told that it would not because the company was not interested in the property in question. This was untrue but Mr De Winter genuinely believed it. In addition, he had been given a similar (and more truthful) assurance concerning another project with the same partners, which was progressing without incident and he genuinely believed that the second development would proceed in a similar manner. The House of Lords found that he was not liable for inducing a breach of contract due to the lack of intention on his part to cause a breach. Had Mr De Winter deliberately failed to make enquiries despite knowing of the existence of the contract he may well have been found to be liable. This is because a party that makes a conscious decision to turn a blind eye, or is reckless about the consequences, may well be considered as having intended the consequence to be brought about.

As well as showing that the third party intended the employee to breach their contract, it also has to be shown that the third party’s actions caused the breach, i.e. that it "induced" the breach. However, the threshold is reasonably low – active co-operation is usually enough to constitute inducement. The remedy for the wronged party is damages on the standard tortious basis (which is different from that for breach of contract) i.e. such sum as would put the employer in the same financial position it would have been in if the breach had never taken place. This means that the employer who wishes to bring a claim against a third party for inducement must also show that it has suffered or will suffer loss as a result.

What can an employer do to protect itself against inducement by third parties?

Apart from ensuring that important obligations, such as restrictive covenants, are properly drafted and included in employment contracts (a third party cannot be liable if the employee is not held to have committed a breach in the first place) employers will want to ensure, insofar as this is possible, that any prospective employers are aware of the contractual terms. It is possible to impose a contractual obligation on the employee to make any prospective employer aware of the relevant contract terms. However, if the employee fails to do so, you are back where you started. Another way, which assumes that the ex-employer knows about a prospective breach, is to remind the ex-employee and at the same time inform the new employer (in writing) of the obligations and the ex-employer’s belief that there will be a breach, and to provide a copy of the relevant terms. This way, the new employer would find it difficult to argue that they were not aware of the existence of the contract or that there may be a breach.

Whilst the above measures will provide some protection to the ex-employer seeking to defend its business interests, it must be remembered that without the subjective intention of the third party to secure the breach of the contract there may be no case for the third party to answer. It must be shown that the specific object or purpose of the new employer is to interfere with the ex-employer's rights either as an end in itself, or as a means to another end (and it is not enough that the breach of contract is merely a foreseeable consequence of the action). This will be a factor that will need to be considered carefully in each and every potential claim.

Reminder – smoking ban

Smoking will be prohibited in all enclosed or substantially enclosed public places and workplaces in England from 1 July 2007. Employers who currently allow their staff to smoke in designated smoking rooms or other parts of their premises (or even in some types of smoking shelters outside) will no longer be able to do so and will need to implement a no-smoking policy.

Issues to consider include whether to allow smoking in outdoor areas of the workplace, whether to limit the number of smoking breaks or introduce a total ban. In fact, clear policies with defined sanctions are advisable for all employers as the failure to prevent smoking in a smoke-free place will be a criminal offence, which carries a fine of up to Ł2,500. If employees are caught breaking the ban, employers will only avoid liability if they can show that all reasonable steps have been taken to prevent any breaches. In addition, all employers must display no smoking signs of a prescribed size and type at each entrance to their premises.

www.mishcon.com

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.

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