The Scope of Permissible Interference With Contractual Relations
| Publication year | 1989 |
| Pages | 627 |
| Citation | Vol. 04 No. 1989 Pg. 627 |
1989, April, Pg. 627. The Scope of Permissible Interference With Contractual Relations
Since contractual relations are present in virtually all human endeavors, the issue of tortious interference with contracts can arise in many areas of an attorney's practice. Interference with existing and prospective contractual relations of third parties is permissible under certain conditions and actionable under other conditions.
Relevant factors include whether the contractual relation concerns a matter in the competition between a contracting party and the interfering party, whether the contract is terminable at will and whether wrongful means or intent are involved in the inducement to breach the contract.(fn1)
This article addresses the actions that can constitute tortious interference with existing contractual relations. It focuses on (1) the potential liability of corporate officers, agents and employees who cause the corporation to breach its contract; (2) the circumstances where business competition permits interference; and (3) the measure of damages. In addition, the article discusses the companion tort of tortious interference with prospective business advantages, which has also been recognized in Colorado.
The Colorado Supreme Court has cited, with approval, the definition of the tort of intentional interference with contractual relations from the Restatement (Second) of Torts:
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 to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.(fn2)
What is notable about the Colorado Supreme Court's first in-depth examination of the tort in Memorial Gardens, Inc. v. Olympian Sales & Management, Inc.(fn3) is that the court adopted the approach of the Restatement, rather than the "older rule" followed by the Colorado Court of Appeals and the U.S. District Court.(fn4)
Prior to Memorial Gardens, the Court of Appeals and the U.S. District Court for the District of Colorado delineated five elements of proof: (1) existence of a valid contract between plaintiff and a third party; (2) knowledge by the defendant of the contract; (3) intent by the defendant to induce a breach of contract by the third party; (4) action by the defendant which induces a breach of the contract; and (5) damage to the plaintiff.(fn5) The Restatement approach adopted in Memorial Gardens adds improper conduct as an essential element of proof.
The addition of the improper conduct element shifts the burden of proof when competition is involved. Under the older rule, business competition was considered a privilege which justified the otherwise tortious conduct and was pled and proved as an affirmative defense. Under the Restatement approach, competition is a factor in determining whether the action is improper, and it is the plaintiff's burden to prove improper conduct. However, the Colorado Jury Instructions continue to provide for the affirmative defense of privilege. As noted by a recent case, the instructions have not been revised to reflect the court's opinion in Memorial Gardens.(fn6)
What conduct is improper and what constitutes inducement and interference are key concerns in evaluating a potential or actual interference. The Restatement identifies seven factors to be considered in determining impropriety:
1) the nature of the actor's conduct;
2) the actor's motive;
3) the interests of the other with which the actor's conduct interferes;
4) the interests sought to be advanced by the actor;
5) the social interests in protecting the freedom of action of the actor and the contractual interests of the other;
6) the proximity or remoteness of the actor's conduct to the interferences; and
7) the relations between the parties.(fn7) Colorado courts have examined, in several cases, whether the actor's conduct
interfered with the contract and induced a breach by one of the contracting parties. The holding has been that negotiating with one of the contracting parties on the subject matter of the contract is not actionable interference with the contract. Entering into an agreement with one of the parties to an existing contract, regarding the subject matter of that contract, when the second contract is subject to the terms of the first contract, also is not actionable.(fn8) When the contract has not been breached, when conditions precedent have not been performed or when the contract has been voluntarily terminated, the issue of tortious interference does not arise.(fn9)
However, an action for tortious interference can be brought even though the contract is not enforceable. Unless a party to the contract has raised a defense to the enforceability of the contract which may make the contract voidable (such as statute of frauds or minority), the contractual relation exists for the purposes of an action for tortious interference. Void contracts are not actionable, however.(fn10)
Although a corporation can not be held liable for inducing its own breach of contract, the corporation's officers, employees or agents can be held liable for intentionally causing or inducing the corporation to breach its contract. The officers, directors and employees are considered agents of the corporation...
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