Inducing a breach of contract: Court of Appeal considers necessary degree of participation in a third party's breach to establish tort of inducement

The Court of Appeal has found that a company was liable for inducing a third party's breach of an exclusivity agreement where it bought products from the third party, knowing that the sales would put the third party in breach of the agreement: Northamber Plc v Genee World Ltd [2024] EWCA Civ 428.

The decision is interesting as it considers what degree of participation in a third party's breach of contract is necessary to establish liability for the tort of inducing the breach. It suggests that, while mere facilitation of the breach may not be sufficient, the defendant may be considered to have induced the breach if its involvement was necessary for the breach to take place (so long as the requisite elements of knowledge and intention are established). It does not matter that the third party was a willing participant in the breach and therefore needed no active encouragement or persuasion.

The decision is also of interest in considering when a director may be personally liable for procuring a breach of contract by their company, on the basis that they have not acted bona fide within the scope of their authority. The decision suggests that not just any breach of duty will be sufficient, though a finding of dishonesty or conspiracy is not necessarily required. Here, where the director caused the company to act not only in breach of contract but also in breach of an injunction, that was sufficient to justify personal liability.

Background

The claimant, a distributor of information technology equipment, entered into a distribution agreement and exclusive supply agreement (the "Exclusivity Agreement") with the first defendant ("Genee"), under which it was to be the sole source of Genee's products in the UK (save for four excluded resellers). The second defendant ("Mr Singh") was the sole director of Genee. His wife ("Mrs Kaur") had previously also been a director of Genee. Genee was dissolved in April 2024.

In August 2018, the claimant commenced proceedings against Genee for breach of the Exclusivity Agreement including through sales from 31 March 2018 onwards to the third defendant ("IES"), a company of which Mrs Kaur was the sole director. The claimant also brought claims against Mr Singh and IES for inducing a breach of contract.

In September 2018, the claimant obtained an injunction preventing Genee from supplying goods within the UK to anyone other than the claimant (save for the excluded resellers).

In January 2023, the High Court gave judgment in which it found that Genee had breached the Exclusivity Agreement, and that Mr Singh had induced those breaches but was liable only from 11 September 2018 (ie the date of the injunction). From that date onwards, Mr Singh had not acted bona fide within the scope of his authority as a director of Genee in causing Genee to act in this way.

The High Court dismissed the claim against IES for inducing the breaches of contract. The trial judge held that the claimants had satisfied the test for the tort of inducing a breach of contract (set out below) save for the second limb, as there was no evidence that IES had persuaded, encouraged or assisted Genee to breach the contract.

The High Court held that the placing of orders by IES with Genee was not sufficient to satisfy the second limb of the test because Genee had already supplied a substantial amount of products to other entities in the UK prior to 31 March 2018. It was difficult to see that the IES orders had induced or persuaded Genee to breach the agreement, when Genee was already in breach by supplying other entities prior to IES placing orders. The judge commented that inducement or persuasion amounts to much more than merely giving Genee the opportunity to breach the agreement by placing purchase orders.

The claimant appealed against the finding in respect of IES and the finding that Mr Singh was not liable for the period before 11 September 2018. Mr Singh appealed in respect of the finding that he was liable after that date.  

Decision

The Court of Appeal allowed the claimant's appeal in respect of IES, finding that IES had induced Genee to breach the Exclusivity Agreement by placing orders for Genee's products where those orders resulted in the supply of goods in breach of the Exclusivity Agreement. It dismissed both parties' appeals in respect of Mr Singh. Arnold LJ gave the leading judgment, with which Phillips and Lewison LJJ agreed.

Appeal in respect of IES

The Court of Appeal reiterated the requirements set out in Kawasaki Kisen Kaisha Ltd v James Kemball Ltd [2021] EWCA Civ 33 that a claimant must prove when alleging that A induced B to breach a contract with C:

• There must be a breach of contract by B;
• A must induce B to breach the contract by persuading, encouraging or assisting B to do so;
• A must know of the contract and know that their conduct will have that effect;
• A must intend to induce the breach of contract by either as an end in itself or as the means to achieving some further end; and
• A must have no lawful justification for that conduct.

The question for the Court of Appeal to determine was whether IES, by placing orders for the supply of goods with Genee, persuaded, encouraged or assisted Genee to breach the contract.

The court noted that the tort of inducing a breach of contract was established in Lumley v Gye (1853) 2 El & BI 216. As explained by the House of Lords in OBG Ltd v Allan [2007] UKHL 21, the tort amounts to accessory liability for breach of contract. In deciding whether the alleged inducer had the degree of participation in the breach of contract which is needed to satisfy the requirements of accessory liability (in addition to the necessary intention), it said the real question to ask is whether the alleged inducer's encouragement, threat or persuasion had a "sufficient causal connection" with the breach.

In British Motor Trade Association (BMTA) v Salvadori [1949] Ch 556, in finding the defendants liable for inducing a breach of contract, the judge said that any active step taken by a defendant who has knowledge of a covenant which facilitates a breach of that covenant is enough to establish liability. That case concerned the sale of new cars to the defendants by persons who had covenanted with the claimant, an association of British motorcar manufacturers, not to resell the cars within 12 months of purchase. The claimant successfully sued the defendants for inducing the breach of contract.

IES argued that the judge in BMTA was wrong to say that facilitating a breach of contract was enough to establish liability for inducement. The Court of Appeal noted that the dividing line between mere facilitation of an infringing act and procuring an infringing act had caused some difficulty in cases on joint tortfeasance, but said it was not necessary to consider that line of cases for present purposes.

This is because the Court of Appeal said it was plain that IES went beyond merely facilitating the relevant breaches. Its involvement was necessary for Genee to breach the Exclusivity Agreement because breach of an exclusivity clause requires a counterparty. Just like in BMTA, IES did not merely place orders with Genee. It was willing to pay, and did pay, the price for the products supplied by Genee, thereby inducing Genee to breach the agreement. As described in OBG Limited v Allan, IES had a "sufficient causal connection" with Genee's breaches. The outcome would have been different if IES had no knowledge of the Exclusivity Agreement. However, since it had the relevant knowledge and intention, IES was held liable as an accessory to Genee's breaches.

The Court of Appeal rejected IES's arguments that: (i) it held a genuine belief that its purchases from Genee were lawful; and (ii) its actions were justified because the claimant had refused to supply Genee products to IES on credit which meant that IES would breach certain consumer contracts if it didn't buy products from Genee. As for (i), the Court of Appeal said that since the trial judge found that IES knew and intended Genee should breach the Exclusivity Agreement, there couldn’t be a genuine belief that its actions were lawful. As for (ii), avoidance of a breach of contract with its own customers was not a lawful justification for inducing another to breach an Exclusivity Agreement.

Mr Singh's appeal

The Court of Appeal explained that the appeal in respect of Mr Singh concerned the rule in Said v Butt [1920] 3 KB 497, ie that an employee is not liable for the tort of procuring a breach of a contract between their employer and a third party if the employee has acted bona fide within the scope of their authority. The principle extends to company directors.

In respect of the period before 11 September 2018, the Court of Appeal held that the judge was entitled to reject the claim against Mr Singh, because it had not been put to him in cross-examination that he had not acted bona fide within his authority as a director of Genee. As recently confirmed in Griffiths v TUI (UK) Ltd [2023] UKSC 48 (considered here), the general rule in civil cases is that a witness's evidence must be challenged by cross-examination if it is argued that the evidence should not be accepted. This rule is particularly important when the witness is accused of dishonesty or bad faith.

In respect of the period after that date, Mr Singh argued that the judge had applied the wrong test in law, as a director should only be liable for inducing breach of contract where they have acted dishonestly or as part of a conspiracy, or in any event it is not sufficient to show that they have breached any duty owed to the company.

The Court of Appeal rejected the argument that only a finding of dishonesty or conspiracy is sufficient to remove the protection of Said v Butt and establish liability on the part of a director. While the judge could be understood as having found that any breach of a director's duties under the Companies Act 2006 would suffice, in fact the Court of Appeal did not accept that the judge took that approach.

The Court of Appeal said it was not necessary for present purposes to explore the limits of the rule in Said v Butt. A director who causes their company not merely to breach a contract, but also to act in breach of an injunction as Mr Singh had done in this case, is plainly in breach of their duty under s.172 of the Companies Act to act in the way that they consider, acting in good faith, is most likely to promote the success of the company. Even if not every breach of s.172 would suffice to deprive the director of protection, this was a serious breach of duty and justified the judge's finding that Mr Singh was liable for the relevant period.

(Two weeks after this judgment was handed down, in Lifestyle Equities CV v Ahmed [2024] UKSC17, considered here, the Supreme Court considered whether the rule in Said v Butt applies in the context of a claim for accessory liability in tort. It found there is good reason to distinguish between an agent who procures a breach of contract by the principal and one who procures the commission of a tort, and the rule in Said v Butt does not apply to the latter, at least where the tort does not depend on any contract or voluntary arrangement between the parties.)

Note: The Supreme Court refused permission to appeal in this case on 7 October 2024.