The economic tort of inducing breach of contract

Redmans Solicitors
September 14, 2015

Economic torts under the law of England and Wales refer to the group of causes of actions that protect people from unlawful interference with their trade or business. There are five main sub-types of economic tort (although there are others): knowing inducement of breach of contract; causing loss by unlawful means; conspiracy; dishonest assistance in breach of fiduciary duty; and breach of confidence. In this article we will examine the economic tort of ‘knowing inducement of breach of contract’.

The economic tort of knowing inducement of breach of contract intends to prevent the knowing violation of the rights of an employer (or former employer) by a third party by that third party interfering with its lawful contractual arrangements without just cause. Liability relating to this cause of action centres upon three main issues, which we will examine in turn:

Whether a breach of contract has occurred;
Whether a third-party has induced this breach of contract; and
Whether this third-party knowingly induced this breach of contract

Whether a breach of contract has occurred

A breach of contract will not occur if an employee complies with his contractual terms upon leaving – by, for example, serving the correct period of notice, maintaining confidentiality, or complying with the relevant post-termination restrictive covenants. There will not therefore be a cause of action against a prospective employer of that employee if the prospective employer induces the employee to leave but the employee complies with all relevant contractual obligations.

Whether a third-party has induced this breach of contract

If an employee leaves their employment upon inducement by a prospective employer then, as above, if there has been no breach of contract then there is no potential cause of action.

If there has been a breach of contract by the employee (for example, the employee has breached a restrictive covenant in their contract of employment with their former employer (“OldCo”) by joining a prospective employer(“NewCo”)) and this breach has been induced by NewCo then liability will depend upon whether this inducement was innocent or not. If the inducement by NewCo was innocent (i.e. NewCo did not have knowledge that employing the employee would breach a term of their contract) then liability only accrues once NewCo obtains knowledge that employing the employee breaches a term of the contract with OldCo. If NewCo continued to employ that employee once they have knowledge of the breach of contract then there would be a cause of action against NeCo for knowing inducement of breach of contract (Jones Brothers (Hunstanton) Ltd v Stevens [1954] 3 All ER 677 (CA)).

Whether this third-party knowingly induced this breach of contract

In order for a prospective employer to accrue liability for the economic tort of knowing inducement of breach of contract the inducement does, of course, have to be “knowing”. In OBG Limited v Allan [2008] 1 AC 1 Lord Hoffman stated: “To be liable for inducing breach of contract, you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realize that it will have this effect. Nor does it matter that you ought reasonably to have done so.” (“Employment Covenants and Confidential Information“, K Brearly and S Bloch QC, 3rd Edition). As also per Lord Hoffman, if the breach of contract is not an end in itself nor a means to an end, but merely a foreseeable consequence of actions undertaken, then it cannot be said that the breach of contract was intended. However, turning a “blind eye” to the possible outcomes of one’s actions may be treated as equivalent to knowledge of that fact. It is therefore extremely important for prospective employers to make enquiries of senior employees they are recruiting to determine whether employing them would potentially render them liable for breach of any restrictive covenants.

Conclusion

As stated above, it is extremely important for employers to interrogate potential recruits as to whether employing them would breach any contractual obligations that they owe to their (former) employer. A failure to do so can have potentially onerous and embarrassing consequences as it may lay the employer open to litigation for knowing inducement of breach of contract. Undertaking due diligence on recruits is therefore key.

Redmans Solicitors are litigators & employment solicitors in Chiswick