Breach Of Contract: When Third Parties Induce The Breach

A breach of a business contract can cause significant problems for the innocent party and their business. The fall out can be particularly challenging where a third party is involved in the breach.

The specialist commercial dispute lawyers at ParrisWhittaker advise and support businesses across all sectors on contract matters including breach of contract.

Third party liability

The vast majority of businesses have commercial relationships with many parties in the course of their operations. The range of third parties includes suppliers, service providers, distributors, brokers, agents and so on.

Usually, separate commercial agreements between the main company and a third party would regulate their particular business relationships, rights and obligations.

But what if things go wrong?

‘Privity of contract’ is the common law principle that only the parties to a contract can derive benefits under the contract, or be held liable for a breach of it. But the position is more complicated if a third party induces or encourages a contractual party to commit a breach. Can they be held responsible in any way?

In tort, the general principle is that someone who procures another person (including a legal entity) to commit a wrong – such as a contract breach – is liable as an ‘accessory’.   Circumstances where a third party could be liable as an accessory to a breach include unlawful dishonesty, fraud and conduct in relation to restraint of trade.

How this principle applies in practice has recently been demonstrated in an important appeal court ruling¹ from the UK, particularly what degree of third party participation is needed for them to be liable as an accessory for inducing a breach of contract.  The ruling has persuasive authority on the courts in the Bahamas.

Liable as accessory

A company breached an exclusive agreement with the claimant by supplying other customers with tech equipment. The third party – a company that supplies technology and IT equipment to educational establishments – appealed a decision that they were liability as accessories to the breach for inducing it.

The appeal judge sets out the required elements for third party liability in tort (by ‘A’) for inducing a breach of a contract between two parties (‘B’ and ‘C’):

• There must be a breach of contract by B
• A must induce B to break the contract with C by persuading, encouraging or assisting them to do so
• A must know of the contract and know that their conduct will have that effect
• A must intend to induce the breach of contract either as an end in itself or as the means to achieving some further end; and
• A must have no lawful justification for that conduct

Further, any active step taken by the third party, having knowledge of the covenant by which they facilitate a breach of that covenant, is enough. Active steps include inducement, ‘direct persuasion’ or ‘procurement’.

There was, of course, the potential difficulty with the  “dividing line between mere facilitation of an infringing act and procuring an infringing act”. But if the third party’s involvement is necessary for the breach to occur, they will clearly be liable for inducing it.

In this case, the third party company had induced the breaches; it knew of the agreement; it had the necessary intention – and were therefore liable as an accessory.

Knowledge of such a covenant or agreement is crucial: the appeal court made clear that

The outcome would have been different had the third party not known of the exclusivity agreement.

Key takeaways

Breach of contract can involve third party conduct; and can in fact be induced by a third party.

The law provides an important route by which they can be pursued as an accessory to a breach, as well as the contractual party itself.

This ruling is an important restatement of how the rules apply in practice – and a salutary reminder to any business or individual whose conduct could be construed in law as inducing another to breach a contract to which they are party.

If you have any concerns relating to breach of contract, including conduct of a third party, contact the specialist commercial litigation lawyers at ParrisWhittaker on info@parriswhittaker.com

¹Northamber PLC v Genee World Ltd & Ors (Rev1) [2024] EWCA Civ 428