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."
