Developments in contract: Procuring a breach
A brief summary of the principles, recent developments and practical tips relating to actions for procuring a breach of contract.
- The economic tort of inducing or procuring a breach of contract has three elements:
- (i) the Defendant must act in a way which intentionally induces or procures a third party to act in breach of contract
- (ii) the Defendant has knowledge of the breach of contract, and
- (iii) the third party commits the breach of contract causing economic loss to the Claimant.
- For the purposes of this tort, whether the Defendant has the requisite knowledge is a subjective test. It is therefore not sufficient if the Defendant honestly, but unreasonably, believed there would be no breach, nor if the Defendant had knowledge only that there was a likelihood of a contract being breached.
- However, if the Defendant had knowledge of the contract, then knowledge of the terms may be established if the Defendant must have known the terms or was recklessly indifferent as to the terms.
- In Wolff v Trinity Logistics USA Inc, Mr Wolff was a Director of TFG, a company to whom Trinity was shipping goods, via its agent. The agent agreed with Mr Wolff for the early release of these goods in return for prompt payment of the agent’s fees, in breach of the agency agreement which required that the goods were only released upon presentation of the requisite bill of lading. As TFG fell into insolvency and was unable to pay for the goods already received, Trinity brought an action against Mr Wolff, who was found personally liable for procuring a breach of contract.
- Mr Wolff appealed this decision on three grounds:
- (i) the alleged act of procuring the breach between him and the agent was made prior to the agency agreement, so it could not be the foundation of liability
- (ii) the arrangement with the agent did not amount to procuring a breach, and
- (iii) the High Court’s finding that Mr Wolff “must have known” of the contract and its terms was insufficient to establish actual knowledge or “blind eye” recklessness.
- The Court of Appeal rejected the appeal, holding:
- (i) the date of the arrangement was irrelevant; the procurement occurred every time goods were called to be released without the requisite documents being presented
- (ii) the arrangement did amount to a procurement; Mr Wolff was giving the agent business and promising to pay its fees early, therefore incentivising it to act in breach of the agreement, and
- (iii) Mr Wolff “well understood” that he and the agent were arranging a course which was outside the contractual structure. At the very least, he was recklessly indifferent to the breach as the whole point of the arrangement was for the agent to release the goods earlier than provided for in the contract.
- Importantly, in relation to Mr Wolff’s requisite knowledge, the court focused on his position in the company and his previous dealings with freight forwarders, which gave him familiarity with the terms usually imposed in such agreements.
What this means
- Businesses and their principals must be careful not to “turn a blind eye” to arrangements that they know, from their experience, would be in breach of a third party contract. Whilst knowledge is still a subjective standard, this case demonstrates that the Court will look to an individual’s industry experience to decide whether the fact of knowledge is made out. This arguably weakens the principle that a person must know of the breach and not merely the likelihood of a breach.
- A party does not have to be the originator of the idea to be liable for procuring a breach of contract. The fact that it was the agent that made the initial offer of the arrangement did not assist Mr Wolff as he agreed to a scheme that incentivised the agent to breach its contract.
- In addition, this case serves as a reminder to directors as to their potential personal liability for actions otherwise taken on behalf of the company.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.