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August 01, 2012

Advance Sheet: The Rise and Possible Fall Of Tortious Interference

Contracts used to be a solemn and sactionable agreement--what happened?

Robert E. Shapiro

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Contract claims seem so yesterday, don’t they? It wasn’t always so. Once upon a time, say 600 years ago or more, contracts were all the rage, the coming thing. Having emerged slowly from their dark origins in trespass law, they became the darling of the common lawyers under the guise of assumpsit. And not just the common lawyers. Political theorists saw great merit in the idea that a society already becoming dominated by transactions strictly commercial could itself be understood as a kind of bargain, where people would agree not to tread on each other’s rights. This became a social contract enforced by a supreme power that, while not a party to the bargain itself, could, like God himself, have a near monopoly of force and apply heavy sanctions for departure from the contract terms. In this way, man had a means to emerge from his natural condition—characterized by the war of every man against every man—and escape a life that, in Thomas Hobbes's memorable phrase, would otherwise be “solitary, poor, nasty, brutish and short.”

The next 400 years or so were the heyday of the solemn and sanctionable agreement, featuring day-to-day promises that were nevertheless taken very seriously, often sealed or sworn to for that purpose, as well as the more fearsome, near-permanent social contract itself. It was no coincidence that a society understood as a collection of bargains or agreements lent itself to, if it was not caused by, the mercantile expansion of these ensuing centuries. Adam Smith was thus able to play a leading role in the drama created by such thinkers as Hobbes and John Locke, who had perhaps taken some of their own cues from the common lawyers themselves.

But a further revolution was yet to come. Ultimately, the strict rules of contract proved too confining. Instead of fostering commercial activity, they began to burden it, holding people to agreements that were inefficient. Something more needed to be done. And so, during the nineteenth century, the solemnity of contracts was drained out of them. Largely as a result of his highly influential Origins of the Common Law, Oliver Wendell Holmes famously made contracts a “choice” between performance and damages.

Pure Financial Calculation

This made contracts efficient. No longer did a party have to continue performance of a contract at any cost for fear of some elevated sanction, moral or otherwise, that might follow from choosing not to honor it. After Holmes, a contracting party yet to perform could always choose to do something different, if that were the more desirable alternative, after factoring in the damages that would have to be paid for non-performance. The choice presented no sacred, moral, or other non-monetary dilemma. It became pure financial calculation. Economic systems that did not immediately have the benefit of this innovation, as was the case in many civil law countries, had trouble staying up with a booming America that benefited from this hyper-efficient aid to modern capitalism.

But perhaps this is what also began the process leading to the demise of contract claims as a legal matter. No longer completely dispositive, let alone solemn, contracts became more routine. For a while, given that litigation was viewed as a somewhat scandalous stepchild of the legal profession, a breach-of-contract claim was exotic enough, particularly as some of the moral negatives continued to linger around the other party’s breach. But as these other negatives evaporated, and the litigator gained increasing legitimacy, claims based on other issues became more interesting and desirable.

In effect, contracts, and the claims they can spawn, center on such a narrow group of issues, they are largely dull, pedestrian, unimaginative. They dominate commercial life, and facilitate it, for exactly that reason. And so, very few litigators these days will describe themselves as a “contract law” specialist, or one concentrating on contract claims. They have re-invented themselves as “commercial trial lawyers,” engaged in the consideration of complex arrangements gone bad. Or they add some exotic specialty too. They still do contract law, but no one wants to acknowledge it as such. No one’s talking.

Holmes’s dictum accounts for this in another way. If a party breaches a contract, it is liable for damages. And nothing more. There’s nothing sexy about contract damages. Clients in particular are seldom satisfied with them. They are too limited, too simple, too small. There’s no indignation in them. And so, it is the embarrassed commercial trial lawyer who has to tell his client that the only relief he can get is what he’s lost. Where’s the good in that, particularly if the client has to spend on the lawyer a lot of what he might recover in the process? The other side was malicious, was deceptive, was dishonest. Can’t we sue her for something more?

Questions like these have led commercial trial lawyers to go looking for something more creative and lucrative. For a while, the creative claim of choice was the “intentional breach,” which litigators tried to make look like a misrepresentation and therefore a tort claim, where the damages might be less confined. Misrepresentations also sometimes have the sniff of exemplary damages about them. But all breaches are intentional in some sense of the word. Indeed, Holmes’s direction wants them to be so. And, conversely, a representation doesn’t quite fit what’s happened. It is a misstatement of fact. A contract is a promise. If the fact is false, you have a misrepresentation, made intentionally or otherwise, present now. But a broken promise does not misrepresent anything. It is in the future and just nonperformance.

Pish, tosh, said the lawyers. You are misrepresenting that you are going to perform. But the courts have not been buying. In most states in the country, this attempt to turn a promise of future performance into a misrepresentation of current fact has been a failure. Pretty uniformly the courts have ruled out tort or misrepresentation claims that are not external to the contract. To survive a motion to dismiss, the misrepresentation must have procured the contract, and not been made part of it. Think fraud. The misrepresentation at issue got the party to make an agreement. It is not part of what the parties agreed to.

There are some exceptions to this niggardly approach to the intentional breach idea. Some states will allow the claim if you allege—and, importantly, prove—that at no time did the other side ever intend to perform, but the courts still look at this with a gimlet eye. Another group of states may allow a claim that a broken promise is actionable like a tort if, but only if, it can be shown to be part of a much larger fraudulent scheme, of which the non-performance of the contract was a key constituent part. But the burden of proving this larger scheme, which ordinarily must have other misrepresentations be part of it, is a daunting one.

Recent Practice

So what’s a creative litigator to do? In recent years, the best way to make someone pay big-time for a failure of performance is the claim of tortious interference. If you have a contract that’s been broken, find someone other than the breaching party you can pin it on, who interfered with the contract, causing the breaching party not to perform. This is a genuine tort, replete with a right to punitive damages. It does not suffer from the defects of the other devices as it seems to refer to conduct that is not part of the contract itself, nor does it require some vast scheme or conspiracy to make it viable.

Tortious interference does not exactly have deep roots in the law, being virtually unknown before the twentieth century. But it has logic, not to say lucre, to support it. What it lacks in heritage, it makes up for in financial oomph. It has therefore thrust itself into the limelight as the torment of choice for litigators trying to meet their clients’ expectations not just for damages, but revenge.

One good or valuable idea often breeds another, and so the tortious interference claim has spawned other progeny. There are now essentially two interference claims: tortious interference with contract and tortious interference with business expectancy. Sometimes there is no contract exactly, merely a relationship or a reasonable expectancy of further dealings. In that event, there can be an interference too, where a third party takes steps to cause an irruption in the relationship or to foreclose any later business. As a general matter, the courts are more reluctant to accept the latter claim than they are to acknowledge tortious interference with a contract. Contracts are, after all, far more concrete than a “relationship” or an “expectancy,” which could consist of nothing more than a wing and a prayer. As a consequence, they routinely require a higher degree of proof when entertaining claims of the latter.

But the emergence of tortious interference with contract has not exactly itself been a cakewalk, for there are some troubling issues relating to the idea of a third party “interfering” with a contract or an expectancy. Who is this third party exactly? Obviously, he, she, or it must have had some reason to be interested in the contract or relationship. As a result, the interfering party usually is connected in some way to the party whose contract has been interfered with. On the other hand, the interferer cannot be the contracting party itself. For otherwise, the claim evaporates, returning the parties to the confines of the very contract claim that tortious interference is designed to circumvent.

Rather than try to specify who or what this third party might be, which would necessarily descend into an endless range of possibilities, the mechanism the courts have chosen is the idea of “privilege.” The third party must be one that is not “privileged” to interfere, who has no right to kill the contract or disrupt the relationship. Sometimes this idea is expressed in terms of “justification.” The interfering party must not have had any right or justification to intervene. In either case, this is in some respects a comment about distance. The nearer one is to the source or execution of the contract, without participating oneself, the more privileged one is likely to be. The more remote, the less so. The notion remains prevalent in tortious interference law, though the courts differ, sometimes even with themselves, about exactly whose burden it is to prove that the interfering party acted without justification or excuse.

The Merits and Problems of Privilege

A recent decision by the Seventh Circuit Court of Appeals nicely captures the privilege idea and shows its merits, and problems. In Nation v. American Capital, Ltd., 2012 U.S. App. LEXIS 11214, (7th Cir., June 4, 2012), a former CEO of a corporation brought suit for tortious interference against the majority shareholder of that company for having interfered in the corporation’s payment of certain deferred compensation to him. The shareholder, American Capital, refused to allow the corporation to pay the compensation because the corporation was facing a liquidity crisis that made any such payment unaffordable. The former CEO at first sued his former employer on a breach of contract claim, seeking merely to get what he was owed. But because of the impecunious character of that defendant, not to mention the greater value in suing in tort the still-solvent American Capital, he shifted his claim to the interference rubric.

The parties filed cross-motions for summary judgment. Presumably the CEO believed his claim was a no-brainer. The corporation had refused to pay; clearly the majority shareholder had had it not do so. Contract + (interference by someone not the party) + breach = tortious interference. For reasons unclear in the decision, he seemed not to predict the predictable, which is a claim by the majority shareholder that it had a right or privilege to interfere given its role within the corporation, including a controlling representation on the board of directors. Too much a part of the original company, it argued. Too much the corporation itself. Its conduct was really the corporation’s conduct or at least conduct that was appropriately determined in the corporation’s interest. It therefore was privileged; it did not act “without justification.”

The trial court and the court of appeals each agreed that summary judgment for the majority shareholder was warranted, determining that the majority shareholder acted with the privilege to do so. American Capital was just too close for comfort, or rather interference. Essentially it was not really a third party at all, but almost the corporation itself, particularly given its dominant role on the board of directors. In a seeming inconsequential aside, however, the court of appeals offered an out, unfortunately too late for Nation to do anything. He could have survived summary judgment had he had “evidence that [the majority shareholder] induced the breach of contract for the specific purpose of injuring him or to further its own personal goals and that it acted against the best interests of the corporation.” But nothing of any kind, according to the court, had been offered along these lines.

What’s the gist of this exception? It’s a kind of “two hat” theory. Which hat was it wearing; and in whose interest was American Capital acting; its own or the corporation’s? If its own interest were predominant, tortious interference might still exist. If the corporation’s, then not. How exactly it would be possible to distinguish these two or what injuring the plaintiff personally has to do with this, the court did not say.

In fact, however, Nation had offered some evidence that American Capital was wearing its rogue hat, which shows the limits of the court’s analysis. He stressed that he was not the sole former officer not to receive his compensation, but the corporation had resumed paying others but never him. The court noted that Nation had, in the interim, joined another company in apparent violation of a non-competition agreement. Without actually saying so, it seemed to conclude that this meant that Nation could not meet his burden of showing a specific purpose of injuring him or that the American Capital had acted for its own personal goals and acted against the best interests of the original corporation. This seems questionable at best, particularly at the summary judgment stage. Had not Nation at least created an issue of material fact? Whether the court was right not to think so is, however, less interesting as a practical matter than it is as a doctrinal one.

How could the CEO prove that the majority shareholder acted to injure him? Surely the non-payment of the compensation harmed Nation personally, at least in the old breach-of-contract sense. Had not the majority shareholder intended to do this? On the other hand, why should this harm make a difference if there was a true overlap between majority shareholder and corporation? How might Nation show American Capital was acting for its own personal goals and against the best interests of the corporation? Would anything work? Couldn’t the majority shareholder, because of its confluence of interest with the corporation, describe almost everything done by the corporation at its behest as somehow in the corporation’s interests as well? What was good for the majority shareholder would be anything that would salvage the value in the corporation it owned, no? What would be a truly “personal” interest? And what not?

In the end, it appears that the exception is purely tautological. A related party will be deemed not to interfere unless it is doing so for itself. But what it is doing for itself includes what it is doing by and through the contracting party to maintain an “efficient choice” by that party. There’s seldom any clearly defined difference between the related party’s interest and that of the contracting party, precisely because the third party is related. In the end, while the exception seems to say something about how related a party must be, it really doesn’t. Or rather, it does but in a seemingly meaningless way.

That summary judgment was granted in light of these concerns tells us that perhaps the tide has turned with respect to tortious interference now too. The uncertainties mentioned could just as easily have led to a denial of summary judgment, rather than its entry, particularly in light of the evidence Nation did provide to rebut the privilege claim. Under such circumstances, it is not all that unreasonable to wonder whether the courts are on the brink of allowing the privilege exception to swallow the rule. In which case, tortious interference may find itself joining the other attempts to add spice to the contract stew, leaving again the bland contract claim as the sole remedy. Until some “commercial trial lawyer” thinks up something else clever.


Robert E. Shapiro

The author, an associate editor of Litigation, is with Barack Ferrazzano Kirschbaum & Nagelberg LLP, Chicago.