This Article is written by Janhavi Arakeri, 1st-year student, Symbiosis Law School, Noida. She discusses the meaning, effects and remedies of Inducing Breach of Contract.

Introduction

In Lumley v Gye [1853] EWHC QB J73 A singer named Johanna Wagner was hired for three months by Benjamin Lumley to sing exclusively at Her Majesty’s Theater. Frederick Gye, who ran the Covent Garden Theater, promised to pay her more to break her contract with Mr. Lumley. Although an injunction was issued to prevent her from singing at Covent Garden, Gye persuaded her to ignore it. Therefore, Lumley sued Gye for damages.

The above case is a foundational English tort law case, heard in 1853, in the field of economic tort. It held that one may claim damages from a third person who interferes in the performance of a contract by another.

What is a Breach of Contract?

It is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party’s performance.

Breach of contract may arise in two ways:

(1) Actual breach of contract

(2) Anticipatory breach of contract

Anticipatory breach of Contract

In an example, where Mr. Sherlock contracts with Mr. Watson on 25th August 2018 to supply 15 kilos of Rice for a specified sum on 25th September 2018 and on 12th September 2018 informs Mr. Watson, that he will not be able to supply the said cotton on 25th September 2018, there is an express rejection of the contract.

In another example, where Mr. Darko agrees to sell his white horse to Mr. Elric for ` 50,000/- on 14th January 2018, but he sells this horse to Mr. Armstrong on 9th January 2018, the anticipatory breach has occurred by the conduct of the promisor.

An anticipatory breach of contract is a breach of contract that occurs before the time fixed for performance has arrived. When the promisor completely refuses to fulfill his promise and signifies his unwillingness even before the time for performance has arrived, it is called Anticipatory Breach. Anticipatory breach of a contract may take either of the following two ways:

  • Expressly by words are spoken or written, and
  • Impliedly by the conduct of one of the parties.

Is Anticipatory breach of Contract protected under Law?

Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides as follows: “When a party to a contract has refused to perform or disable himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, but words or conduct, his acquiescence in its continuance.”

What are the effects of Anticipatory breach of Contract?

Effect of anticipatory breach: The promisee is excused from the performance or from further performance. Further, he gets an option

  • To either treat the contract as “rescinded and sue the other party for damages from breach of the contract immediately without waiting until the due date of performance; or
  • He may elect not to rescind but to treat the contract as still operative, and wait for the time of performance and then hold the other party responsible for the consequences of non-performance. But in this case, he will keep the contract alive for the benet of the other party as well as his own, and the guilty party, if he so decides on re-consideration, may still perform his part of the contract and can also take advantage of any supervening impossibility which may have the effect of discharging the contract.

Actual breach of Contract

Unlike the anticipatory breach, it is a case of refusal to fulfill the promise on the scheduled date. The parties to a lawful contract are bound to fulfill their respective promises. But when one of the parties breaks the contract by refusing to fulfill his promise, a breach is said to have been committed. In that case, the other party to the contract obtains the right of action against the one who has refused to fulfill his promise.

Actual Breach of Contract under Law

Section 37 of the Indian Contract Act,1872 provides that the parties to the contract are under obligation to perform or offer to perform, their respective promises under the contract, unless such performance is dispensed with or excused under the provisions of the Indian Contract Act or of any other law.

When is an Actual breach of contract committed?

At the time when the performance of the contract is due

For example, Mr. Vader agrees to deliver 130 bags of wheat to Mr. Yoda on March 21, 2018. He failed to supply Mr. Yoda with 130 bags of wheat on the said day. This is an actual breach of contract. Mr. Vader committed the breach at the time the performance is due.

During the performance of the contract

Actual breach of contract also occurs when one party fails or refuses to fulfill its obligation under it by an express or implied act during the performance of the contract.

What is Tortious Interference?

Wrongful or tortious interference with contracts refers to a situation in which a third-party intentionally causes a contracting party to commit a breach of contract. This may be accomplished through inducement or by disrupting a party’s ability to perform their contractual obligations. The purpose of tortious interference laws is to allow parties the freedom to contract with one another and fulfill their contractual obligations without third-party meddling.

In Pepsi Foods v. Bharat Coca-Cola Holdings Pvt. (1999) Delhi High Court, The plaintiffs have filed a suit for declaration and permanent injunction against the defendants. In this suit, the plaintiffs have also prayed for the grant of an injunction during the pendency of the suit. The plaintiffs broadly categorised the illegal and unethical actions of the defendants in six heads, which are reproduced below:

  • Inducing by unlawful means, groups of key marketing and other strategic employees of the plaintiffs to breach and/ or terminate their employment contracts with the plaintiffs and enter into employment contracts with the defendants.
  • Inducing by unlawful means, employees of Pepsi’s independent bottlers, into breaking/ breaching their contracts.
  • Inducing by unlawful means, the independent business consultants under contract with the plaintiffs to break/breach their contracts with the plaintiffs.
  • Inducting by unlawful means, the distribution partners of the plaintiffs to breach their distribution agreements/arrangements with the plaintiffs and enter into similar agreements/arrangements with the defendants.
  • Inducing by unlawful means, institutional accounts to breach their marketing and sponsorship agreements/arrangements with the plaintiffs and enter into similar agreements/arrangements with the defendants.

“Post-employment restrictions were held to be invalid and violative of Article 19 (1)(g) of the Constitution”. Negative covenant in contract restraining employee from engaging or undertaking employment for twelve months after leaving the services of the plaintiff was held to be contrary and in violation of Section of the Indian Contract Act, 1872 and injunction was declined.

Who is a Tortfeasor?

The third-party interferer, called the “tortfeasor,” is usually an individual that was not a party to the contract and is interfering for his own financial gain. For this reason, the plaintiff’s remedy will be in tort law, rather than contract law. The plaintiff (the non-breaching party to the contract) will have to show that the tortfeasor acted intentionally, both with regards to his own actions and the resulting contractual breach (meaning he must have known about the contractual relationship and caused the breach anyway).

What does Inducement in Law mean?

An advantage or benefit on the part of an individual that precipitates a particular action.

In contract law, the inducement is a pledge or promise that causes an individual to enter into a particular agreement. Induction to buy is something that encourages an individual to buy a particular item, such as the promise of a price reduction.

The plaintiff had a contract with farmers on a particular route to transport their milk to the creamery of the defendant. The defendant sent a letter to the farmers doing business with the plaintiff, informing them that only milk picked up by their own trucks would then be accepted at the creamery. The farmers continued to give milk to the plaintiff until the defendant refused to accept milk from the plaintiff who was forced to discontinue his route because he was unable to find another market. The plaintiff takes action for the wrongful procurement of a contract breach. Notwithstanding the verdict in favour of the plaintiff, the trial court gave a judgment of no cause of action. Held on appeal that the defendant’s act of persuading a breach of contract, whether to injure the plaintiff or to benefit himself, was malicious and actionable. His refusal to accept further deliveries from the complainant was wrong because it was done for the unlawful purpose of causing a breach of the latter’s contract with the farmers, which was expressed in his letters to them. The defendant is liable even though the plaintiff’s proximate cause of loss was his inability to find another market (Wilkinson v. Powe, 1 N.W. (2d) 539 (Mich. 1942)).

In general, an action cannot be maintained for inducing a person to breach his contract with another.

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Inducement as a Tort

The classic form of this tort, as featured in Lumley v Gye, involves persuading the defendant to breach the contract partner of the claimant. Subsequently, courts accepted varieties of this tort, some of which focused not on induction but prevention, and one of which focused on interference rather than induction. This uncertain ambit resulted from the failure to identify the other major general economic tort namely the unlawful means tort. OBG re-asserts the classic scope of this tort, rejecting the modern varieties (most of which would now be covered by the unlawful means tort) and restricting liability to those claimants who have actual knowledge of the contract which they seek to persuade the claimant’s partner to breach.

Despite being suggested that the tort today is almost unrecognisable as a descendant of its ancestor, Lumley v Gye still provides the essential foundation for the modern action. A helpful statement of the tort was offered in Crofter Hand-Woven Harris Tweed v Veitch:

If Mr. Rick has an existing contract with Mr. Morty and Mr. Walter is aware of it, and if Mr. Walter persuades or induces Mr. Rick to break the contract with resulting damage to Mr. Morty, this is generally speaking, a tortious act for which Mr. Walter will be liable to Mr. Morty for the injury he has done him. In some cases, Mr. Walter may be able to justify his procuring of the breach of contract.

The elements of A contract between Mr. Rick and Mr. Morty;

  • Mr. Walter’s knowledge thereof;
  • Mr. Walter’s persuasion or inducement for Mr. Rick to breach the contract with Mr. Morty;
  • Resulting damage; and
  • The defence of justification will be considered in turn.

The contract between Mr. Rick and Mr. Morty

There must be a contract on foot; inducing someone not to enter into a contract is not actionable. The contract must be valid, enforceable and not voidable or otherwise defective cases involving mistake, a lack of capacity and contracts invalid for being contrary to public policy did not give rise to the tort.

Knowledge

The defendant must know of the contract between Mr. Rick and Mr. Morty. While “there need not be knowledge of the precise terms of the contract,” an appreciation of the broad nature of the contractual relationship is required. Once that knowledge exists, “the intervener is sufficiently fixed with notice that he interferes at his own risk.” Inducement and breach The defendant must then induce or procure Mr. Rick to breach their contract with Mr. Morty. Any breach is sufficient.

Is malice a necessary element?

While malice is not a necessary element, a degree of deliberateness or intention is required —“mere negligent interference is not actionable”. The scope of this element and the requisite directness is an area of jurisprudential uncertainty. In a series of British cases in the second half of the twentieth century, liability was significantly expanded to the extent that the tort could be established with indirect interference with a contract’s performance. In 2008, the House of Lords reversed this trend and emphasised the need for an intentional procurement of the breach.

Cooley on Torts, 4th Ed. (1932) p. 360; Hartman v. Green, 190 So. 391 (La. 1939). The cases are numerous, however, which held that if such an inducement be malicious if it is made with knowledge of the contractual relations between the parties, and if it is without justification, an action in tort will lie. The principal case, Wilkinson v. Powe, supra, is in accord with this ruling. The malice necessary for the maintenance of an action in such cases is not actual malice or ill will, but rather the intentional doing of an act without justification or excuse. Thus it is of no consequence whether the motive of the one who induced the breach was to gratify spite by doing harm to another or to benefit himself.

In a case where the plaintiff and the defendant submitted competitive bids to furnish 5 Black No. 1 for ink, the plaintiff’s sample having the highest rating and the lowest price, and the ink maker who tested all samples submitted advised the Bureau of Engraving and Printing to reject all bids on that type of ink, to order correspondingly larger quantities of No. 7 Hard Black, and to accept the defendant’s bid on that type of black, the court held that since the defendant had a contract with the ink maker to produce No. 7 Hard Black according to a process formulated by the ink maker and to pay him for the use of such process as long as it was found to be commercially advantageous, the jury might find that the ink maker’s motive in rejecting the plaintiff’s bid was to benefit himself, and that such motive was induced by the acts of the defendant. The court said that the word “malicious” did not necessarily mean personal ill will, “but merely a wrongful purpose to injure, or to gain some advantage at the plaintiff’s expense.” It is to be noted that the action, in this case, was for malicious prevention of entrance into a contract rather than malicious interference with an already existing contract.

In Wade v. Culp, 23 N.E. (2d) 615 (Ind. 1939) the court held that action for maliciously inducing breach of contract as based on the intentional interference without justification rather than on the intent to injure.

In the minority by far are cases such as Caskie v. Philadelphia Rapid Transit Co., 344 Pa. 33, 5 A. (2d) 368 (1939) which hold that malice necessarily implies a wanton disregard for the rights of another; and that there can be no recovery in an action of this type against one who is seeking simply to enforce what he regards as his own rights. The court in the Caskie case defined malice as “that spirit of evil which sometimes grips individuals and nations and motivates those who delight in doing harm to others.”

A similar decision was reached in United States v. Newbury Mfg. Co., 36 F. Supp. 602 (Mass. 1941) where the plaintiff was not permitted to recover in the absence of fraud or deceit. Fraud or other tortious act was also held necessary to maintain the action in Guida v. Pontrelli, 186 N.Y. Supp. 147, 114 Misc. Rep. 181 (1921) and Turner v. Fulcher, 165 N.Y. Supp. 282 (1917)

Damage

Damage must be proven or inferred, although it is sufficient for the plaintiff to demonstrate “the likelihood of more than nominal damage resulting” from the complained of conduct. There must also be a minimal nexus between the defendant’s conduct and the damage — in one case, the damage would have been sustained in any event, so the action failed.

What is Fraudulent Inducement?

If one party in an agreement convinces another to sign a contract based on false information, this is called fraudulent inducement. When fraudulent inducement causes some form of injury to the party that signed based on a lie, they have the right to pursue legal action.

Usually, this type of inducement takes place before the contract is signed. In the case that fraudulent inducement is proven, the injured party can rescind the agreement or seek damages after the contract has been completed.

Fraudulent inducement is very important in contracts like loan agreements, employment contracts, and others. It usually happens when one side of the contract convinces the other to sign using lies or trickery. This can be done with threats as well. If a bank tells someone that they have to sign a mortgage contract or they will lose their car, this is considered fraudulent inducement if that consequence is false.

Contract lawyers are a great resource when considering signing a contract or forming one of your own. They can help avoid illegal forms of inducement, whether intended or accidental. Contract law is complicated, so it’s better to enlist the help of a lawyer than trying to handle it yourself.

How to prove Fraudulent Inducement?

It can be tough to prove fraudulent inducement for the following reasons:

  • To be considered fraud, the fraudulent statements must have been presented as facts and not opinions.
  • There must be proof that the injured party relied on the false statements.
  • Integrated contracts make it even more complicated to prove fraud.
  • The court must be provided with a persuasive record of the contract and its fraudulent statements.

Note: An agreement is integrated when the parties adopt the writing or writings as the final and complete expression of the agreement.

Does Misrepresentation amount to Inducement?

The misled party must show that he relied on the misstatement and was induced into the contract by it.

In Attwood v Small, Small, the seller, made false claims about the capabilities of his mines and steelworks. The buyer, Attwood, said he would verify the claims before he bought, and he employed agents who declared that Small’s claims were true. The House of Lords held that Attwood could not rescind the contract, as he did not rely on Small but instead relied on his agents. Edgington v Fitzmaurice confirmed further that a misrepresentation need not be the sole cause of entering a contract, for a remedy to be available, so long as it is an influence.

A party induced by a misrepresentation is not obliged to check its veracity. In Redgrave v Hurd  Redgrave, an elderly solicitor told Hurd, a potential buyer, that the practice earned £300 pa. Redgrave said Hurd could inspect the accounts to check the claim, but Hurd did not do so. Later, having signed a contract to join Redgrave as a partner, Hurd discovered the practice generated only £200 pa, and the accounts verified this figure. Lord Jessel MR held that the contract could be rescinded for misrepresentation, because Redgrave had made a misrepresentation, adding that Hurd was entitled to rely on the £300 statement.

By contrast, in Leaf v International Galleries, where a gallery sold painting after wrongly saying it was a Constable, Lord Denning held that while there was neither breach of contract nor operative mistake, there WAS a misrepresentation; but, five years have passed, the buyer’s right to rescind had lapsed. This suggests that having relied on a misrepresentation, the misled party has the onus to discover the truth “within a reasonable time”. In Doyle v Olby [1969], a party misled by a fraudulent misrepresentation was deemed NOT to have affirmed even after more than a year.

What are the defences to this tort?

There is only one defence to the tort — justification — and its boundaries are ill-defined. The defence is circumscribed — “in a society which values the rule of law, occasions, when a legal right may be violated with impunity, ought not to be frequent” — and highly fact-specific. Relevant factors may include the nature of the breached contract, the position of the parties, the grounds for the breach and the method in which the breach was procured. In one eye-catching case, the defence succeeded where union officials persuaded a theatre manager to breach his contract because the company’s salaries were so low “some chorus girls were compelled to resort to prostitution”. The High Court delivered an extensive consideration of the defence in 2004 in Zhu v Treasurer of New South Wales. A company contracted with the appellant to market the 2000 Sydney Olympics in China but was then induced by the local organising committee to breach the contract on the grounds that it was inconsistent with overarching contractual undertakings relating to the Games’ hosting. The Court rejected the defence, holding an inconsistent contractual obligation is insufficient, although proprietary or statutory rights may satisfy the justification test.

What are the remedies to this tort?

There are two available remedies if the tort is proven:

  • damages
  • injunctions.

Although a contract claim would generally also lie against the infringing party, the outcome via tort can be more appealing — for both practical reasons (the third party may be wealthier than the infringing party) and legal considerations. Damages in tort “may be more extensive” than their contractual equivalent, with a much more liberal remoteness test and the absence of a strict duty to mitigate. In an extreme case, exceptional damage may even be available through the tort. Additionally or alternatively, an injunction may issue to prevent the respondent from continuing to induce non-performance of the contract. The usual equitable requirements are applicable where an injunction is sought.

Conclusion

The growth of business and commercial relations in the twentieth century has caused common law and civil law jurisdictions to recognize a cause of action to induce breach of contract, thereby providing better security for contracts.

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