If a person breaches a contract and is sued for it by another,
then it may be possible for the suing party to also take a
case against a third party involved in that breach. The issue is
raised when a company 'poaches' an employee, causing that person to
breach the terms of their contract. The original employer may
consider suing the new company, claiming inducement to breach of
contract.
The House of Lords ruling, though, means that a case can only be
brought when it can be shown that the third party knowingly and
deliberately induced a person to breach their contract. It is not
possible to sue someone for carelessly or negligently inducing a
breach, since the act must be deliberate.
The case ruled on by the Lords involved a property development
company called Mainstream and two employees, one a director and one
a manager. The employees diverted a development opportunity to
their own joint venture and away from Mainstream in a plan funded
by a Mr De Winter.
Mainstream successfully sued the two employees for breach of
contract and was suing De Winter for inducing the pair to breach
their contract.
All five of the Law Lords ruling on the case said that De Winter
did not commit an unlawful act because although the breach could
not have happened without his funding, he did not deliberately seek
to cause the pair to breach their contract.
"The [original trial] judge found that Mr Young and Mr Broad
could not have acquired the property without Mr De Winter’s
financial assistance," said Lord Hoffman in his ruling. "His
participation was therefore causative. He also knew that they were
employed by Mainstream and that there was an obvious potential
conflict between their duties to Mainstream and their participation
in the joint venture. But the judge found that Mr De Winter was a
cautious man who had raised the question of conflict of interest
with Mr Young and Mr Broad and had received an assurance that there
was no conflict because Mainstream had been offered the site but
refused it."
"This was untrue but Mr De Winter genuinely believed it. He had
been given a similar (and more truthful) assurance concerning
another project which Mr Young and Mr Broad had brought to him in
the previous year and that", said the judge, “was now proceeding
smoothly without objection”.
"On these findings of fact the judge found that Mr
De Winter did not intend to procure a breach of the contracts
of employment or otherwise interfere with their performance," said
Hoffman. The Court of Appeal backed the original trial judge.
The ruling means that a third party company cannot be held
responsible for breaches which it could not have known were
breaches, or cannot be held responsible if it attempted to ensure
that no contract was being breached.
"A stranger to a contract may know nothing of the contract.
Quite unknowingly and unintentionally he may procure a breach of
the contract by offering an inconsistent deal to a contracting
party which persuades the latter to default on his contractual
obligations," wrote Lord Nicholls of Birkenhead in his ruling. "The
stranger is not liable in such a case. Nor is he liable if he acts
carelessly. He owes no duty of care to the victim of the breach of
contract. Negligent interference is not actionable."
The ruling could have significant implications for employment
law. Many contracts, particularly those of senior employees, have
conditions governing how they can leave a company. They commonly
include controls on the length of notice that must be given,
restrictions on how quickly they can work for a competitor and on
their taking clients and staff with them.
Companies can sue the new employer over breaches of these terms,
but they can now only do that if they show that the breach is
deliberate.
"It is highly likely that the case will be relied upon by any
third party seeking to defend such a claim, as the test of not
'knowingly or deliberately' inducing the breach of contract may not
be a particularly difficult one to meet in some circumstances,"
said Ashley Graham, an employment specialist at Pinsent Masons, the
law firm behind OUT-LAW.COM.
Employers seeking to acquire new staff must still be careful
though, said Graham. "'New' employers should not rely on this case
as authority that it will now be easier to poach employees or
encourage them to breach restrictions in their contracts," she
said. "Employers can continue to protect themselves by including
robust contractual provisions and post-termination restrictions if
applicable. 'Old' employers will still be able to pursue claims for
breach of these provisions against the individual concerned and
against third parties if there has been inducement and it will be
for the third party to show that their involvement was genuinely
not knowing or deliberate."
