Procuring a breach of contract: industry experience relevant to knowledge of contract

by Allen & Overy LLP
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Goods produced by a foreign supplier (the supplier) were shipped to the UK by agents (the agents) of the respondent, Trinity, to the Fielding Group (TFG) of which the appellant, Mr Wolff, was a director. In breach of the agency agreement between the respondent and the agents (the agency agreement), the goods were released by the agents without TFG producing the original bill of lading or air waybill indorsed by TFG’s bank evidencing payment by TFG to the supplier as is standard practice in relation to carriage of goods by sea or air. The agents had offered to TFG to release the shipments early in return for prompt payment of their fees. As the respondent was liable to the supplier, it successfully brought a High Court claim against Mr Wolff (TFG having become insolvent) for procuring the breach of the agency agreement.  Mr Wolff appealed.

Elements required for the tort of procuring a breach of contract: a reminder

The tort of procuring a breach of contract is an accessory liability, dependent upon the primary wrong of a third party breaching its contract with the claimant: without primary liability, there can be no accessory liability. The necessary elements are: (i) breach of contract between the claimant and a third party; (ii) an act which amounts to intentional inducement/procurement of the breach; and (iii) proof that the defendant knew it was inducing/procuring an act that was a breach of contract and that it intended to procure that breach.  Knowledge includes “reckless indifference”.

Appeal

Mr Wolff relied on three grounds of appeal: (i) his arrangement with the agents did not amount to an act of inducement; (ii) the High Court’s decision that he “must have known” of the agency agreement and its terms was insufficient to prove the mental element of the tort which had to be actual knowledge or blind-eye recklessness; and (iii) the agency agreement only came into existence after the alleged acts of procurement.

Acts of inducement/procurement

The court decided Mr Wolff’s arrangement with the agents amounted to an act of inducement. The agents were not acting “benevolently” when they agreed to release the goods early; this was a business decision because, as a result, they received continued business from TFG and were paid promptly. The “bounty” offered by Mr Wolff was clearly an important, if not the most important, incentive for the agents’ willingness to breach the agency agreement. That the initial offer came from the agents was also not relevant: Mr Wolff had offered a sufficiently enticing incentive (prompt payment of the fees) and it was that “final step” which had induced the agents to breach the agency agreement.

Degree of knowledge required

The judge at first instance emphasised Mr Wolff’s familiarity with contracts (and their customary terms) with freight forwarders; he was aware of other parties in the supply chain and had many years’ experience of importing goods.  The tenor of his emails indicated he “well understood” his arrangement with the respondent’s agents was “outside the contractual structure” and would lead to later claims.  These facts, together, meant he "must have known" of the existence of the agency agreement and its terms and that the agents were acting in breach of it. This contrasted with TFG’s shipping manager who did not have training in the business or mechanisms of international trade, and only acted in a “ministerial” capacity; he may have had some awareness of the existence of the agency agreement and that it precluded early release, but did not have the critical extra degree of knowledge to carry him into the “must have known” category.

On appeal, Mr Wolff submitted that the High Court’s decision that he “must have known” amounted to a finding of deemed (rather than actual) knowledge, but that only actual knowledge or reckless indifference would suffice. The Court of Appeal disagreed: the first instance court had made a finding of actual knowledge.  It would “fly in the face of reality” that Mr Wolff “well understood” the agents were acting outside the contractual structure in a way that could lead to later claims and then say he should not be fixed with that knowledge. At the very least he was recklessly indifferent as to whether the agents were acting in breach: this was the whole point of the arrangement.

Relevance of date of contract

Mr Wolff submitted that there was no relevant breach of contract as the acts of procurement had preceded the coming into existence of the agency agreement. The court rejected this argument: the inducement continued thereafter and occurred every time the goods were released early.

Comment

The case is a cautionary tale about the personal liability of directors for the commission of a tort. A director can be sued in his personal capacity if he was sufficiently bound up in the company’s acts to make him personally liable.  In considering Mr Wolff’s knowledge and intention, the court relied on several emails which clearly demonstrated he was the driving force behind the arrangement with the agents.

Whilst a defendant’s subjective knowledge and intention is a question of fact, this ruling shows that, in certain industries, a defendant’s knowledge and experience in that industry is a relevant consideration when deciding whether a director has the requisite knowledge, for the tort of inducing a breach of contract, of the existence and terms of a contract. Directors should therefore be wary of closing their eyes to the obvious. There are various reasons why a claimant may sue the party who procured the breach, either instead of or in addition to the contracting party, including the latter’s impecuniosity or because damages recoverable from the procurer may exceed those recoverable for the actual breach.  Had TFG not become insolvent, one can assume that the respondent would also have sued it as a joint tortfeasor.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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