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© Lionel Wirth

Whilst every effort is made to ensure that the content of this blog is accurate, it should not be taken as legal advice. Liability limited by a scheme approved under Professional Standards Legislation

  • Lionel Wirth

What is the tort of interference with contractual relations?


This little corner of the law is in a state of flux. Unfortunately, it is unlikely to be authoritatively resolved by the High Court any time soon, as it tends to come up relatively rarely in the decided cases. I think this is because many claims that might be capable of being pleaded as claims of interference with contractual relations are equally capable of being dealt with by the simpler and more familiar law of misleading or deceptive conduct. Not only is it simpler, but misleading or deceptive conduct does not depend on proving any intention to be misleading or deceptive.

Until 2007, the cases were relatively clear that there was a single tort, whose elements were set out by Lord Denning MR in Torquay Hotel Co Ltd v Cousins [1969] 2 Ch 10, 138-9 (original emphasis) as follows:

The principle can be subdivided into three elements:

First, there must be interference in the execution of a contract. The interference is not confined to the procurement of a breach of contract. It extends to a case where a third person prevents or hinders one party from performing his contract, even though it be not a breach.

Second, the interference must be deliberate. The person must know of the contract or, at any rate, turn a blind eye to it and intend to interfere with it …

Third, the interference must be direct. Indirect interference will not do. Thus, a man who “corners the market” in a commodity may well know that it may prevent others from performing their contracts, but he is not liable to an action for so doing. A trade union official, who calls a strike on proper notice, may well know that it will prevent the employers from performing their contracts to deliver goods, but he is not liable in damages for calling it. Indirect interference is only unlawful if unlawful means are used. …

I must say a word about unlawful means, because that brings in another principle. I have always understood that if one person deliberately interferes with the trade or business of another, and does so by unlawful means, that is, by an act which he is not at liberty to commit, then he is acting unlawfully, even though he does not procure or induce any actual breach of contract. If the means are unlawful, that is enough.

This statement of the law, as it was understood in the English Court of Appeal in 1969, reflects the theory of a single-genus tort of two species: see F Bonollo, “Seeds, Weeds and Unlawful Means: Negligent Infliction of Economic Loss and Interference with Trade and Business”, (2005) 31(2) Monash University Law Review 322, 356ff. In 2000, Finkelstein J in the Federal Court accepted that this unified tort formed part of the Australian common law: Root Quality Pty Ltd v Root Control Technologies Pty Ltd (2000) 177 ALR 231.

But then in 2007, the House of Lords had a root-and-branch review of this area of the law in OBG Ltd v Allan [2008] 1 AC 1. Their Lordships decided that the law as understood in the Torquay Hotel line of authority was misconceived. Lord Hoffman said ([2008] 1 AC 1, 29, [38]):

the distinction between direct and indirect interference is unsatisfactory and it is time for the unnatural union between the Lumley v Gye tort and the tort of causing loss by unlawful means to be dissolved. They should be restored to the independence which they enjoyed at the time of Allen v Flood.

Law students (and those of us who used to be law students) will remember Lumley v Gye (1853) 2 E & B 216. That case concerned the singer Johanna Wagner (a niece of the composer Richard Wagner). Lumley had engaged her to perform at his theatre, but Gye persuaded to sing at his theatre instead. Wagner breached her contract with Lumley, but Gye induced her to do so.

Inducing breach of contract

Of Lumley v Gye, Lord Hoffmann said ([2008] 1 AC 1, 18-19, [3], [5]):

Liability for inducing breach of contract was established by the famous case of Lumley v Gye …. The court based its decision on the general principle that a person who procures another to commit a wrong incurs liability as an accessory. As Erle J put it, at p 232:

“It is clear that the procurement of the violation of a right is a cause of action in all instances where the violation is an actionable wrong, as in violations of a right to property, whether real or personal, or to personal security: he who procures the wrong is a joint wrongdoer, and may be sued, either alone or jointly with the agent, in the appropriate action for the wrong complained of.”

… [T]he important point to bear in mind about Lumley v Gye is that the person procuring the breach of contract was held liable as accessory to the liability of the contracting party. Liability depended upon the contracting party having committed an actionable wrong. Wightman J made this clear when he said, at p 238:

“It was undoubtedly prima facie an unlawful act on the part of Miss Wagner to break her contract, and therefore a tortious act of the defendant maliciously to procure her to do so …”

His Lordship also said ([2008] 1 AC 1, 28, [36]) that “the real question which has to be asked” is:

did the defendant’s acts of encouragement, threat, persuasion and so forth have a sufficient causal connection with the breach by the contracting party to attract accessory liability?

In my view, that’s a question about causation. But the terms of the question presume proof of “acts of encouragement, threat, persuasion and so forth”. Usually, that’s referred to as either “inducing” or “procuring”. There’s some old NSW Supreme Court authority on what that concept means. In Short v City Bank of Sydney (1912) 12 SR(NSW) 186 (affirmed in the High Court, (1912) 15 CLR 148), Street J said:

The words “induce” and “procure” in their ordinary significance, I think, convey the idea of persuasion or contrivance, and I think that a person complaining of a breach of contractual relations brought about by these means must show that the person whose actions are complained of did something in the nature of effectually persuading or prevailing upon the other party to the contract to violate his obligations under it. The persuasion may take the form of advice or friendly solicitation, or it may take the form of intimidation or molestation, but in every case I think that it must be shown that the defendant deliberately intervened between the contracting parties, either with the express design of depriving the plaintiff of the benefit of his contract, or under such circumstances that he must have known that the effect of his intervention would be to deprive the plaintiff of that benefit.

It’s in the last part of that passage that the kicker lies. In proving the act of persuasion, it is necessary to show that the object of the persuasion – the intention behind it – “of depriving the plaintiff of the benefit of his contract”, or knowing that that would be the outcome. Lord Hoffman said ([2008] 1 AC 1, 29, [39]) of the knowledge element:

To be liable for inducing breach of contract, you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realize that it will have this effect. Nor does it matter that you ought reasonably to have done so.

His Lordship also quoted ([2008] 1 AC 1, 29-39, [40]-[41]) the following passage of Lord Denning MR in Emerald Construction Co Ltd v Lowthian [1966] 1 WLR 691, 700-1 with approval:

Even if they did not know the actual terms of the contract, but had the means of knowledge – which they deliberately disregarded – that would be enough. Like the man who turns a blind eye. So here, if the officers deliberately sought to get this contract terminated, heedless of its terms, regardless whether it was terminated by breach of not, they would do wrong. For it is unlawful for a third person to procure a breach of contract knowingly, or recklessly, indifferent whether it is a breach or not.

See also Allstate Life Insurance Co v ANZ (1995) 58 FCR 26, 484-6 (Lindgren J, with whom Lockhart and Tamberlin JJ agreed): the gravamen of the tort is intention and “sufficient knowledge of the contract” is required to ground an intention to interfere.

So, the elements of the Lumley v Gye tort would appear to be:

  1. An act of persuasion or inducement (etc) directed to a third party contracting with the plaintiff;

  2. An intention or actual knowledge that the plaintiff would lose the benefit of his contract;

  3. Loss as a result of that (successful) procurement of the breach of contract.

(As to loss, remember this is a tort, so the measurement of damages is not necessarily the same as breach of contract damages – the test is the tortious test of damages.)

It appears that, on this tort at least, OBG has been tacitly followed: Donaldson v Natural Springs Australia Ltd [2015] FCA 498, [206] (Beach J) (applied in Talacko v Talacko [2015] VSC 287, [220] (McDonald J)), where his Honour said:

First, there must be a contract. Second, the defendant must know that such a contract exists. Third, the defendant must know that if one of the contracting parties does or fails to do a particular act, that conduct would be a breach of contract. Fourth, the defendant must intend to induce or procure that contracting party to breach the contract by doing or failing to do that particular act. Fifth, the breach must cause a loss or damage to the plaintiff. Sixth, no defence of justification should be applicable.

Causing loss by unlawful means

The other separate tort that, according to the House of Lords, had been impermissibly bound up in the cases with inducing breach of contract was the tort of causing loss by unlawful means. For a variety of policy reasons, this is a more controversial tort. In the Torquay Hotel line of authority, it was bound up in the alternative scenario of a breach of contract being “indirectly” procured. What that meant in a practical sense was difficult to understand. But now the House of Lords has, at least for the English, definitively cast this as a separate tort. As will be seen, the Australian authorities on this are sparse and inconclusive.

Lord Hoffmann said of this tort ([2008] 1 AC 1, 32, [48]): “In principle, … intentionally causing someone loss by interfering with the liberty of a third party in breach of a contract with him is unlawful.”

Lord Hoffmann drew four distinctions between the Lymley v Gye tort and this second tort, which he called “causing loss by unlawful means”. It is pertinent to quote his Lordship at some length ([2008] 1 AC 1, 20-1, [8] (emphasis added for ease of navigation)):

The tort of causing loss by unlawful means differs from the Lumley v Gye principle, as originally formulated, in at least four respects. First, unlawful means is a tort of primary liability, not requiring a wrongful act by anyone else, while Lumley v Gye created accessory liability, dependent upon the primary wrongful act of the contracting party. Secondly, unlawful means requires the use of means which are unlawful under some other rule (“independently unlawful”) whereas liability under Lumley v Gye … requires only the degree of participation in the breach of contract which satisfies the general requirements of accessory liability for the wrongful act of another person …. Thirdly, liability for unlawful means does not depend upon the existence of contractual relations. It is sufficient that the intended consequence of the wrongful act is damage in any form; for example, to the claimant’s economic expectations. If the African canoeists had been delivering palm oil under a concluded contract of which notice had been given to the master of the Othello, Lord Kenyon would no doubt have considered that an a fortiori reason for granting relief but not as making a difference of principle. Under Lumley v Gye, on the other hand, the breach of contract is of the essence. If there is no primary liability, there can be no accessory liability. Fourthly, although both are described as torts of intention …, the results which the defendant must have intended are different. In unlawful means the defendant must have intended to cause damage to the claimant (although usually this will be, as in Tarleton v M’Gawley Peake 270, a means of enhancing his own economic position). Because damage to economic expectations is sufficient to found a claim, there need not have been any intention to cause a breach of contract or interfere with contractual rights. Under Lumley v Gye, on the other hand, an intention to cause a breach of contract is both necessary and sufficient. Necessary, because this is essential for liability as accessory to the breach. Sufficient, because the fact that the defendant did not intend to cause damage, or even thought that the breach of contract would make the claimant better off, is irrelevant. In South Wales Miners’ Federation v Glamorgan Coal Co Ltd [1905] AC 239 the miners’ union said that their intention in calling a strike (inducing miners to break their contracts of employment) was, OPEC-like, to restrict production of coal and thereby raise its price. So far from wishing to cause the mine owners loss, they intended to make both owners and miners better off. The House of Lords said that this made no difference. It was sufficient that the union intended the employment contracts to be broken. It was no defence, as Lord Macnaghten put it, at p 246, that “if the masters had only known their own interest they would have welcomed the interference of the federation”.

His Lordship also defined unlawful means in the following terms:

Unlawful means therefore consists of act intended to cause loss to the claimant by interfering with the freedom of a third party in a way which is unlawful as against that third party …. It does not in my opinion include acts which may be unlawful against a third party but which do not affect his freedom to deal with the claimant.

This was a controversial point in the House of Lords. Lord Nicholls disagreed with Lord Hoffmann on this point (that the unlawful interfering conduct be actionable by the third party), but was in a minority, and he thought that criminal conduct also constituted sufficient unlawful means: [2008] 1 AC 1, 53-6, [164]-[167]. Lord Nicholls was also explicit about the level intention needed: an intention to harm the plaintiff, whether as an end in itself or as a means to an end: [2008] 1 AC 1, 57-8, [164]-[167].

Now we’re in controversial territory. The House of Lords split on the elements of this tort. The High Court of Australia has historically paid little or no attention to it (at least its historical antecedents), no Australian intermediate appellate court has applied or followed OBG, and single judges have split on the question.

The High Court cases are Beaudesert Shire Council v Smith (1966) 120 CLR 145 (Taylor, Menzies and Owen JJ), Northern Territory v Mengel (1995) 185 CLR 307 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) and Sanders v Snell (1998) 196 CLR 329 (Gleeson CJ, Gaudron, Kirby, Hayne and Callinan JJ).

In Beaudesert, the High Court said:

independently of trespass, negligence or nuisance but by an action for damages upon the case, a person who suffers harm or loss as the inevitable consequence of the unlawful, intentional and positive acts of another is entitled to recover damages from that other.

In Mengel, a majority of the High Court held that the principle should be overruled.

In Sanders, the High Court left open whether the tort of causing loss by unlawful means should be recognised as part of the common law of Australia.

In Deepcliffe Pty Ltd v Council of the City of Gold Coast [2001] QCA 342 (McMurdo P, Williams JA and Helman J), the Queensland Court of Appeal declined to recognise the tort.

In CFMEU v Boral Resources (Vic) Pty Ltd [2014] VSCA 348 (Maxwell P, Neave, Redlich and Beach JJA and Kaye AJA), the Victorian Court of Appeal was asked to decide whether the tort of intimidation continues to form part of the Australian common law. In holding that it did, the Court noted ([43]-[44]) that OBG did not cast any doubt on the existence of the tort, and that, on the contrary, the tort of intimidation was “but an instance of a broader tort, defined more widely than in Australian law”.

In Hardie Finance Corporation Pty Ltd v Ahern (No 3) [2010] WASC 403, Pritchard J of the WA Supreme Court concluded that “the unlawful means tort should now be accepted as part of the Australian common law”. (Her Honour deals with in some detail the concerns that such a tort carries with it.)

However, not long after that decision, a Federal Court judge decided the other way. Moore J in Qantas Airways Ltd v Transport Workers’ Union of Australia (2011) 280 ALR 503 decided to follow the Queensland Court of Appeal in Deepcliffe and not recognise the tort (even though Deepcliffe predated OBG). (Note that the decision was appealed, but this aspect of Moore J's decision was not addressed: Transport Workers Union of Australia v Qantas Airways Ltd [2012] FCAFC 10, especially [28]-[29].)

In Victoria, apart from CFMEU v Boral in the Court of Appeal, the leading single-judge authority is Ansett Transport Industries (Operations) Pty Ltd v Australian Federation of Air Pilots [1991] 1 VR 637, where Brooking J said ([1991] 1 VR 637, 666):

The plaintiffs say that there is a tort that may be very compendiously described as unlawful interference with trade or business. The defendants deny this. It is not, I think, for me as a judge sitting at first instance to consider the matter from the standpoint of principle or to review the earlier authorities or to discuss the authorities at length, if I am able to find in recent decisions either binding authority for the view that the tort exists or persuasive authority which it would be wrong for me not to follow.

Interestingly, Beach J of the Federal Court said in Donaldson (a case in which I appeared) ([2015] FCA 498, [222]) that he was unable to decide whether or not the “tort of interference with trade or business interests by an unlawful act performed with the requisite intent to harm exists under Australian law” and that he did not need to decide the point. He did however accept ([2015] FCA 498, [223]) that “there is an economic tort of interference with contractual relations, where the interference can be either direct or indirect” – ie, it seems, the Torquay Hotel tort.

Conclusion

The logic and taxonomical clarity of OBG have a certain attractiveness. But the decision is obviously controversial, and the law in Australia remains unsettled. For the time being, I would suggest that claims be pleaded in accordance with bothTorquay Hotel and, in the alternative, OBG . The right case will eventually find its way to an intermediate appellate court and the application of OBG will hopefully provide that “special” quality for special leave to appeal to the High Court.

#tort #contract #contractualrelations #breachofcontract

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