In law school we study contract law and we study torts. We don’t study contracts and torts as a single subject (e.g., “contorts”). Why? Because they are generally regarded as fundamentally different areas of the law. They involve different issues – contracts is all about consent while torts is all about the lack of consent. There are also significant differences in the measure of damages. But there is one cause of action that bridges the twain – intentional interference with a contract.
The California Supreme Court has held that to sustain a cause of action for intentional interference with a contract, a plaintiff must plead the following five elements:
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A valid contract between plaintiff and a third party;
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Defendant’s knowledge of this contract;
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Defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship;
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Actual breach or disruption of the contractual relationship; and
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Resulting damage.
Pacific Gas & Electric Co. v. Bear Stearns & Co., 50 Cal. 3d 1118, 1126 (1990). But what if the defendant has a legitimate interest in the contract? One might argue that because the contracting party can’t be liable in tort for breach, the same rule apply to persons with a legitimate interest in a party or the contract. Adoption of such a rule would allow for efficient breaches and would help forestall the “tortification” of contract law. One might even point to the following statement by the Ninth Circuit Court of Appeals:
“California law has long recognized that the core of intentional interference business torts is interference with an economic relationship by a third party stranger to that relationship, so that an entity with a direct interest or involvement in that relationship is not usually liable for harm caused by pursuit of its interests.”
Marin Tug & Barge, Inc. v. Westport Petroleum, Inc., 271 F.3d 825, 832 (9th Cir. 2001). These all may appear to be good dogs, but according to the Ninth Circuit they simply don’t hunt.
In United Nat’l Maint. v. Ajb Jma San Diego Convention Ctr., 2014 U.S. App. LEXIS 8973 (9th Cir. 2014), a panel of the Ninth Circuit Court of Appeals held that persons with legitimate interests in a contract can be liable just as much as a Gershom:
“To shield parties with an economic interest in the contract from potential liability would create an undesirable lacuna in the law between the respective domains of tort and contract. A party with an economic interest in a contractual relationship could interfere without risk of facing either tort or contract liability. This result is particularly perverse as it is those parties with some type of economic interest in a contract whom would have the greatest incentive to interfere with it.”
I fear, however, that some will find that filling (or bridging) this lacuna may be more undesirable than the lacuna itself. For example, a wholly-owned subsidiary may breach a contract and only face contract damages while its owner and its owners officers could face tort damages, including punitive damages. In one recent case, the Court of Appeal upheld an award of hundreds of millions of dollars against an acquiring company and its executives for interfering with a contract entered into by the acquired company. See For Executives, This May Have Been The Most Frightening Holding Of 2013. Even minority shareholders might find themselves liable. See Woods v. Fox Broadcasting Sub., Inc., 129 Cal. App. 4th 344 (2005). In light of these decisions, some shareholders may hope that corporations don’t heed their urgings to violate compensation, severance or indemnification agreements with executives.
Last Chance!
Tomorrow is the 2014 Annual Delaware & California Law Update Symposium (fka The Glendon Tremaine Symposium). This is an excellent opportunity to hear the latest on corporate law developments in Delaware and California.
