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Alfie Lewis examines recent case law on the tort of inducing a breach of contract

24.07.24

The Court of Appeal has handed down judgment in the case of  Northamber PLC v Genee World Limited anors [2024] EWCA Civ 428. Arnold LJ, with whom Phillips LJ and LJ Lewison agreed, has shed light on important aspects of claims for inducing breach of contract.

Background

The claimant, Northamber is a distributor of IT equipment. The first defendant, Genee was an importer of AV displays until it went into voluntary liquidation in November 2018 followed by dissolution in April 2024. From November 2015, the sole director of Genee was the second defendant, Mr Ranjit Singh (“RS”). RD’s wife, Mandeesh Kaur (“MK”) is the sole director of the third defendant, IES, which supplies IT equipment to educational establishments.

Northamber and Genee entered into an exclusive supply agreement in July 2017, under which Northamber was to be the sole source of Genee’s products in the UK (subject to a few excluded resellers to which Genee could still sell directly). In late 2017 or early 2018, Northamber learned from its resellers that Genee was supplying products directly to them in breach of the exclusivity agreement.

In August 2018, Northamber brought proceedings against the defendants for, inter alia, inducing breach of contract. On 10 September 2018, Northamber obtained an injunction enforcing the exclusivity agreement. The trial of the claim took place in October 2022 before Rawlings J who found:

1. Genee had made significant sales of products in breach of the exclusivity agreement between 1 July 2017 and 12 November 2018, including sales to IES.
2. IES was not liable for inducing Genee to breach contract as IES had not induced Genee to breach contract merely by placing orders for goods.
3. RS had induced Genee’s breach of the exclusivity agreement; however, he was only liable for the period during which there was an injunction to enforce the exclusivity agreement when he had not acted bona fide within the scope of his authority as a director.

On appeal:

1. Northamber argued, inter alia, that IES had induced Genee to breach contract by placing orders with Genee.
2. RS argued, inter alia, that RS had acted bona fide within the scope of his authority as a director of Genee during the period after the injunction had been granted.

 Acts of inducement (paras. [34]-[63]

Arnold LJ upheld Northamber’s appeal on the basis that IES, knowing of the exclusivity agreement through MK, had induced Genee to breach its contract with Northamber by placing orders for goods. Arnold LJ started by setting out the elements of inducing breach of contract at [30], citing Kawasaki Kisen Kaisha Ltd v James Kemball Ltd [2021] EWCA Civ 33:

In order for A to be liable in tort for inducing B to breach a contract with C, the following requirements must be satisfied: (1) there must be a breach of contract by B; (2) A must induce B to break the contract with C by persuading, encouraging or assisting them to do so; (3) A must know of the contract and know that their conduct will have that effect; (4) 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 (5) A must have no lawful justification for that conduct.

Tracing the development of the tort of inducing breach of contract through Lumley v Gye (1853) 2 El & Bl 216 and OBG Ltd v Allan [2007] UKHL 21, Arnold LJ drew out the following points:

1. The tort amounts to accessory liability for breach of contract and thus only requires the degree of participation necessary for accessory liability (at [34]-[35]).
2. The first question when establishing liability for inducing breach of contract is whether the defendant’s acts of inducement have a sufficient causal connection with the third party’s breach of contract (at [38]).
3. The second is whether the defendant intended through his/her acts of inducement that the third party would act in breach of contract (at [39]).

Arnold LJ then reviewed several authorities in considering the threshold for establishing a sufficient causal connection at [42]-[59]:

1. There will be sufficient causal connection where A offers B a price for goods that are sold in breach of contract to C. By offering a price that B is willing to accept, A induces B to act in breach (at [42]-[44]).
2. There will be sufficient causal connection where A knowingly enters into a contract with B that is inconsistent with a contract between B and C. Where B requires A’s involvement or cooperation to act in breach of B’s contract to C, A’s involvement or cooperation will establish the required causal connection (at [45]-[48]).
3. It is not sufficient that A should merely take an action with the practical consequence that B is prevented from observing a contract with C (at [51]).
4. There is a distinction between a case in which A buys goods from B where B sells those goods in breach of contract with C, and circumstances where A sells goods to B that B uses to breach contract with C. In the former situation, A will be liable to C for inducing breach of contract as discussed above; in the latter, A will not (without more) be liable as B acts independently from A in using the goods to breach contract with C (at [55]-[59]).

The liability of directors for inducing breach (at [83]-[93][1]

RS sought to argue that a director should only be exposed to liability for inducing breach of contract i) where he/she has acted dishonestly or as part of a conspiracy, or ii) even if dishonesty of conspiracy is not required it is nevertheless insufficient that the director has breached a duty owed to the company.

Rawlings J had based his decision on the recent High Court decisions of Antuzis v DJ Houghton Catching Services Ltd [2019] EWHC 843 (QB) and IBM United Kingdom Ltd v Lzlabs GmbH [2022] EWHC 884 (TCC). Both of these cases had considered the scope of the principle in Said v Butt [1920] 3 KB 497 that a ‘servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken’.

In Antuzis, directors who had caused the company to overwork its employees below minimum wage and without overtime or holiday pay had not acted bona fide within the scope of their authority. The directors had acted in breach of ss. 172 and 174 Companies Act 2006, which require directors to promote the success of the company and to exercise reasonable care and skill respectively. Furthermore, they had not acted bona fide as they knew the company was acting unlawfully.

IBM went on to clarify that while a director acting breach of s. 172 will not be acting bona fide, not every inducement by a director for a company to breach a legal obligation will amount to a breach of s. 172. The key question is whether the director was properly acting to promote the success of the company, having regard to the factors set out in s. 172 and the circumstances as a whole. Relevant factors will include the motivation of the director, the nature of the duties said to be broken by the director, the nature of the obligations being broken by the company, and the consequences of the company’s breach of those obligations.

Arnold LJ rejected RS’ argument that conspiracy or dishonesty was necessary to take a director outside the Said v Buttprinciple (at [90]). Arnold LJ further found that Rawlings J had applied the correct test when finding that RS had not acted bona fide within his authority as a director (at [91]).

Arnold LJ declined to explore the limits of the Said v Butt principle. However, from Antuzis and Northamber one can see the courts finding liability for inducing breach of contract where the breach coincides with the breach of rules that reflect wider policy considerations: in Antusiz the directors had caused the company to breach those rules affording protection to workers, and which provide for the outer limits of the free market; in Northamber the breach of a court-ordered injunction reflected a contempt for the court that is incompatible with the efficacy of the legal system and the rule of law. On the other end of the spectrum, one might not expect the courts to find such liability where a director causes a company to breach a sale contract where doing so would allow it to make more profit (i.e. efficient breach): here there are no intervening policy considerations and the director’s actions might properly be understood as furthering the profit and success of the company.

[1] Northamber had also appealed Rawlings J’s decision that RS had not acted bona fide within the scope of his authority as a director of Genee for the period up to the granting of the injunction. However, this was not open to Northamber where Rawlings J had relied in part on the fact that counsel for Northamber had not put this case to RS in cross-examination (at [81]).