12 May 2020
Introduction
1. INTRODUCTION
Interference with a contract between two parties by a third party, has been neglected by most jurisdictions, as courts as well as the public at large remain aloof regarding the tort of Tortious Interference in contractual matters.
An important economic tort relating to breach of contractual obligations between parties is that of Tortious Interference. When a third party intentionally or negligently jeopardizes the economic interest of either of the two parties having contractual relations by way of certain acts it is known as Tortious Interference (“Tortious Interference”).
This article seeks to give an insight into the tort of Tortious Interference, its roots in common law systems, interpretation by American jurists and the recognition given by Indian courts to the tort. The authors analyse the position of the jurisprudence on this subject in India and suggest legislative reforms required to assist the courts in adjudicating upon interference claims as well as act to encourage parties to treat contractual obligations as sacrosanct.
2. WHAT IS TORTIOUS INTERFERENCE?
A tort is a civil wrong and is understood to be a violation of a right that you would expect to arise, being a part of a civilized society. As such torts do not find remedies in legislations across the world, but have been developed and understood over time through jurisprudence. As the country’s sense of rights and obligations, vis-à-vis its citizens develops, the duties that one bears to another has been observed to be extrapolated, understood, refined and given the blanket cover of “torts”.
There are various types of Tortious Interference as evolved in the American jurisprudence.1 The tort is said to be intentional when the alleged harm, loss or injury caused is deliberate and the party causing such injury preempted the consequences thereof. On the other hand, it is said to be negligent when a party is in breach of care and duty that it ought to have normally exercised.
Another categorization is by the degree of interference and the time at which the causal effect i.e injury took place. Therefore, it may be futuristic, affecting a positive economic outcome that is yet to happen. Where a party despite knowledge of an economic relationship acted without care and duty that it ought to have exercised. Or it may be in praesenti, affecting an existing contractual relationship, characterized by wrongful intentional conduct of a party causing detriment to a pre-existing economic relationship which would otherwise have caused benefit to the parties in the relationship inter se.
The restatement of torts,2 defines liability under Tortious Interference of a contract as, “One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract is subject to liability for pecuniary loss”. Thus, the intentional and deliberate act by a third party of interfering in a contract between two parties is the tort of Tortious Interference. Such an interference must necessarily result in a breach of the contract which otherwise in the ordinary course of such dealings would not have occurred.
The following aspects are considered crucial when examining a case for Tortious Interference:
(a) an existing and valid contractual relationship between two parties;
(b) knowledge by a third party of the pre-existing contractual relationship between two parties;
(c) unjustified intentional interference by the third party with the contractual relationship; and
(d) damage to the contractual relationship or either parties due to such interference.
The most imperative aspect of the tort is inducing the breach of a contract, inasmuch as an offence of Tortious Interference is only made out if there is a deliberate and conscious act of inducement by a third party to cause a breach by one of the parties to the contract. It must be proved that the conduct was intentional, deliberate and with such intention that the breach/termination/repudiation of the contract was the likely outcome.3 Basically, it is the act of the third party to induce in some manner one of the parties to the contract to breach the contract to the detriment and loss of the other party. From our daily lives a common example of the tort is when market competitors induce best employees from rival organisation to terminate their employments and join the competitors. The history of development of this tort reveals that the very act of inducing employees to terminate their employments is how this tort came to be in the first place.
It goes without saying that this tort is extremely subjective in nature and would depend on the facts and circumstances of a particular case. There is no established threshold for degree of intention of a party to cause damage since there cannot be a set metric to judge what actions or conduct can or ultimately do cause inducement. The effect and reaction of a party is extremely subjective; hence inducement is required to be gauged according to the circumstances. Therefore usually if a prima facie case is made out and a party has suffered injury it would be construed as inducement.
Tortious Interference emanates from law of master servant relationships. Common law judges in the late 18th Century took note of third parties attempting to disrupt the control of the master on the servant and found it to be actionable. Over the course of time around the 19th Century this protection was not limited only to master servant relationships but also got extended to contractual obligations between parties.4 The first jurisprudential breakthrough was the case of Lumley v. Gye5 in 1853 (“Lumey Case”), wherein giving a dissenting judgment (2:1), J. Coleridge noted that the mere inducement by a party to breach a contract constituted a tortious act. Later on, as law was crystallized the tort commonly came to be known as ‘unlawful interference’.
Eventually, in the case of Greig v. Insole6 , the fundamental aspects of Tortious Interference were clearly laid down. It was held that five conditions were required to be fulfilled by a plaintiff in a suit for interference, in order to prove a case of unlawful interference:
(a) first, there must be either direct interference with performance of the contract or indirect interference with performance coupled with the use of unlawful means;
(b) secondly, the defendant must be shown to have knowledge of the relevant contract whether of the exact contract or in part;
(c) thirdly, the intent to interfere with the relevant contract;
(d) fourthly, damage to the Plaintiff which is more than nominal damage; and
(e) fifthly, so far as is necessary, the plaintiff must successfully rebut any defence based on justification which the defendant may put forward.
A third party can also be held liable for inducing a contracting party to suspend the contract if such an inducement brings about a breach in the contract. Testing the waters, the Court of Appeals in England in The Daily Mirror Newspapers Lts. v. Gardner & Ors.7 upheld tort of inducement. Facts were such that when a popular newspaper Daily Mirror (“Daily Mirror”) tried to cut the margins of their wholesalers and retailers due to increase in production cost, the National Federation of Retail Newsagents, Bookseller and Stationers (the “Federation”) saw it as an attempt by the newspaper to increase profits. The Federation in pursuance of this view called to boycott Daily Mirror for one week in March 1968 by issuing stop notices to their retailers. As a reaction to this Daily mirror instituted a suit on the ground of inducement to wholesalers and use of unlawful means to injure the trade of the Daily Mirror contrary to anti-trust laws. The Court found the defendants guilty of inducing the wholesalers to breach their contract with Daily Mirror and granted an injunction in favour of the Plaintiff.
It has been held that the essential ingredients of the tort are knowledge and intention; and an act of inducement is not by itself actionable, in the absence of knowledge that such inducement may cause a party to breach a contract. 8 Thus, merely stating or doing things which may cause a party to breach a contract, without actual knowledge of the existence of the contract and without the intention of causing a breach in the contract, by itself is not a wrongful act. In this manner, this particular tort can be distinguished from other tortious actions such as absolute liability, wherein the intention of a party is not a key aspect in examining liability. The main aim in the tort of Tortious Interference is to cause damage, knowingly and intentionally and not by accident. The plaintiff must show that there was intentional invasion of its contractual rights and breach of contract was an end in itself or the means to an end.
There is no tort governing the act of wrongfully inducing a person not to enter into a contract.10 The tort only arises on the wrongful breach of a contract. However, while the purpose or intention of inflicting injury on a party is an essential element of the tort, it is not necessary to prove that this was the third party’s predominant purpose; it is sufficient that the unlawful act was in some sense directed against or intended to harm the party.11 The defendant must be shown to have knowledge of the existence of a contract, however in many cases a third party may be deemed to know of the near certain existence of a contract and some of its likely terms.12 Furthermore, the third party must have knowledge of the consequences of the inducement. The knowledge that a breach is being procured is required to be specific.13
It is also important to note that in case a contract is determinable, the defendant incurs no liability merely by inducing the contracting party to determine the contract lawfully.14 The act must cause a damage which was otherwise not a legal recourse that a party to the contract could have adopted. Thus, the tort shall not come into operation if there is a justification for interfering with the legal right which can be reasoned in law.
4. POSITION IN INDIA
The law in India with regard to the tort of interference with contractual relations has not particularly evolved. Torts not being a legislative subject matter can only be strengthened in its applicability and interpretation through judicial precedent, however, the cases with respect to Tortious Interference are very few and do not provide ample clarity of the Indian courts’ view on this aspect. As on date only a handful of High Courts of the country, have been seized with questions regarding Tortious Interference and such a question till date has not been placed before the Apex Court. Even for the said matters, the issues are very fact specific and do not provide an adequate overview of jurisprudence on Tortious Interference vis-à-vis Indian law.
The Calcutta High court in Lindsay International Pvt. Ltd. and Ors. vs. Laxmi Niwas Mittal and Ors.15 has adjudicated upon the matter wherein an allegation was made by the Plaintiffs that the Defendant had colluded and conspired to ensure that a third party does not; procure goods from the Plaintiff, breach contracts and interfere with trade and business by unlawful means. It was one of the first cases in India to delve upon jurisprudence relating to Tortious Interference. Upon institution of the plaint, the defendants filed an application for rejection of plaint on the ground of non-disclosure of cause of action. The defendants pleaded that the contract which formed the basis of the plaint did not exist and neither was it brought on record by the plaintiffs. J. Soumen Sen opined that the ingredients of Tortious Interference are; an identifiable contract, knowledge by defendant of such contract, breach of contract by unlawful means and lastly, damages to the plaintiff. The judgment also laboriously traced the development of English law on Tortious Interference, the Lumey Case in particular as an authority on the subject. It held that interference with the performance of a contract is an actionable wrong unless there is a justification for interfering with a party’s legal right. Three different types of interference that may be actionable under the tort were enumerated as;
(a) interference that is not restricted simply to procuring a breach of contract but also with the performance of the contract i.e. preventing or hindering one party from performing his contract even though it may not be a breach of the contract. This may be in the form of direct intervention by persuasion whether by himself or his agents or by words or other acts of communication that are intended to influence the breach of contract thereby constituting a cause of action in favour of the plaintiff;
(b) cases where the intervener does some unlawful acts on a person or property which disables him in performing his contract; and
(c) cases where intervener persuades the third party to do some unlawful acts which interferes with the due performance of the contract as it was intended.
It was opined that the Court was only required to find out if the necessary ingredients constituting the cause of action were present in the plaint and not to assess the evidentiary value of such averments. Therefore, holding that essential element of ‘adopting unlawful means so as to interfere with an existing contract with third party with an intention to cause loss thereby resulting damage’ were present in the plaint the defendant’s application for rejection of the plaint was dismissed.
In this environment where one person’s free market competition is another’s Tortious Interference it has become increasingly important for all commercial enterprises to recognise the difference between fair competition and tortious conduct that could subject the offending party liability for interference with a contract or prospective business relation16. A similar and interesting factual scenario was adjudicated upon by the Delhi High Court in Pepsi Foods Ltd. and Ors. vs. Bharat Coca-Cola Holdings Pvt. Ltd. and Ors.17 a suit filed by the plaintiffs for declaration and permanent injunction on account of the fact the that defendants were allegedly indulging in inducement of employees of the plaintiff to join the defendant thereby deliberately causing loss and damage to the plaintiff. The plaintiff demonstrated to the court various instances on which the defendant, deliberately and intentionally induced the business of the plaintiff to make it their own. The amongst many technical grounds submitted that the suit was founded on incorrect and misleading facts and ought to be rejected at the outset. J. Bhandari in his wisdom held that it was difficult to hold that the defendants resorted to business practices which are unethical, illegal and constituted Tortious Interference in the business of the plaintiffs. Since the Plaintiff failed to satisfy the court on the principles of injunction, the suit failed on technical grounds and an injunction could not be granted in their favour. This also highlighted another crucial aspect on adjudicating such issues, i.e. what proof can a party provide of a third party’s interference in its contracts.
With growing competition between million dollar enterprises, the tendency of organisations to indulge in anti-competitive practices amounting to Tortious Interference has increased manifold. Claims of Tortious Interference between competing enterprises or with third parties who have existing relations with a competing enterprise have also seen a steep rise. One such case of contemporary importance on the anticompetitive practices of e-commerce websites often amounting to Tortious interference is Amway India Enterprises Pvt. Ltd. & Ors. v. 1MG Technologies Pvt. Ltd. & Ors. J. Pratibha M Singh, of the Delhi High Court held that the tort is well recognised. The suit was filed by the plaintiffs alleging that the defendants had maliciously displayed, tampered and sold the plaintiffs good which were unique in nature amounting to Tortious Interference. It was opined that the applicability of the tort in the Indian context must evolve with the changing socio-economic scenario. The display of the plaintiff products on the defendants e-commerce market space, without consent or due authorization of the plaintiff constituted inducement of breach of contract, it was held that the acts of the defendant did not uphold the integrity of the commercial contract, making in nugatory.
A newer facet of Tortious Interference that is commonly seen in India is the role of trade associations causing interference in contractual obligations between parties. In Oravel Stays Pvt. Ltd. v. Kota Hotels Federation through its President and Ors18 . the Delhi High Court granted an Injunction in favour of the plaintiff against the defendant for causing Tortious Interference. The plaintiff also commonly known as Oyo (“Oyo”), is a popular aggregator in the hospitality industry, known for standardizing unbranded hotels through their website and making it available to the public at large. The plaintiff entered into agreements with various hotels owners to sell their rooms under the Oyo brand name. The defendant on the other hand was a federation alleging to represent interest of hotel owners in a few Indian states. The acts of interference as alleged in the suit were that the defendants were inducing the hotel owners to cancel bookings made through the Oyo platform thereby causing injury to the plaintiff. The court held that this act amounted to interference in contractual obligations between the plaintiff and the hotel owners by the defendant, being a stranger to the contract.
5. CONCLUSION
The law on torts is non actionable in India and therefore lesser recognised by the public at large. It is for this reason that we find lesser jurisprudence on tortious liability in India in the form of precedence or literature. With the business environment in India being predatory, it is essential that a robust and comprehensive law relating to economic torts is promulgated recognising that contractual obligations are sacrosanct and cannot be skewed to a party’s advantage. While the courts in India have recognised that parties have a right with respect to Tortious Interference in cases discussed above, due to the lacuna in the law, the rights have not been enforced by the courts.
A shortcoming in cases of Tortious Interference is that most often not all requirements that are prescribed to hold a party liable for tortious acts are met by the factual scenario of a case. Therefore, though the courts recognise the principle, they refrain from taking affirmative action. This is also due to lack of any authority on the subject thereby making the outcome of the cases vague and unsatisfactory to set precedent. Another procedural shortcoming is that there is no threshold to decide what level of interference will be actionable, thereby making the adjudicatory process more complex. There is an urgent need for the legislature to enact newer laws in this regard or make relevant amendments thereby better recognising the tort of Tortious Interference.
For further information, please contact:
Mohit Chadha, Induslaw
