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Declare towards mum or dad firm in tort for inducing breach of contract by subsidiary has no actual prospect of success | Allen & Overy LLP

Fulfillment of the subsidiary’s obligations that depend on the parent company’s business

The plaintiff (KKK) is the Japanese parent company of an international transport and shipping company (the K-Line Group). The K-Line Group ceased operating its own container line business in 2018 after KKK decided to merge that business through a joint venture (the Joint Venture). This meant that KKK no longer required transportation services from K-Euro (its indirectly held UK subsidiary). K-Euro, on the other hand, was no longer able to provide the defendant (JKL) with the minimum number of transport orders that it had outsourced to it as part of a service contract.

JKL is suing: (i) K-Euro for breach of contract under the service contract; and (ii) KKK from tort, because K-Euro caused a breach of contract.

That decision concerned JKL’s attempt to prove that its lawsuit against KKK met the merits test to obtain permission to serve proceedings against KKK in Japan.

A reminder – unauthorized act to cause a breach of contract

The four main elements of the breach of contract are:

  1. Breach of contract: B must break his contract with C;
  2. Incentive: A must get B to break this contract with C by persuading, encouraging or supporting B to do so;
  3. Knowledge: A must know the contract between B and C and know that his behavior will cause B to break this contract; and
  4. Intention: A must intend to procure B’s breach of contract either as an end in itself or as a means to achieve another end.

In order to pass the eligibility test for service outside of jurisdiction, a plaintiff must demonstrate that a serious matter needs to be examined. In other words, the case must have a real as opposed to fanciful chance of success.

Incentive and intent

The second and fourth elements, namely cause and intention, were particularly controversial.

Lord Justice Popplewell (with whom David Richards LJ and Henderson LJ agreed) emphasized three key aspects of the elements of the tort relevant to the case:

  1. A behavior cannot be considered an incentive if it merely prevents B from fulfilling the contract with C as one of its consequences. There must be behavior by A that amounts to persuading, encouraging, or supporting B to break the contract with C.
  2. A’s involvement in B’s injury must work on B’s mind and will in order to qualify as a causal involvement in B’s injury. A’s behavior cannot constitute an incentive if it is not capable of influencing B’s decision whether or not to break the contract.
  3. The intellectual element of the illegal act presupposes that the intention is that the breach of contract must at least be the means to an end and not just the foreseen or intended consequence of the illegal act.

No incentive to break the contract

JKL was unable to convince the appellate court that a serious matter had to be brought up in connection with the allegation that KKK had induced K-Euro to breach the service contract.

The appeals court found that K-Euro had no choice as to whether it had violated the service contract; it was completely dependent on KKK for its performance or non-performance. The breach of the service contract by K-Euro was merely a consequence of the establishment of the joint venture, which KKK had released in its own economic interest.

JKL was also unable to convince the court that there was encouragement or persuasion based on KKK. Although K-Euro was a subsidiary of KKK, they shared certain directorships and KKK knew about the service agreement and that the joint venture would cause K-Euro to hurt them, but this failed to overcome the obstacle that K-Euro into Reality had no choice as to whether or not the service agreement was violated. In order for KKK to have done something that could constitute an incentive, “it must do something that is able to influence whether or not K-Euro has violated the service contract in order to act according to its will and will”. This was not the case. K-Euro was completely dependent on what KKK had to do in relation to the joint venture and had no choice as to whether to breach the service agreement.

JKL also failed with the argument that KKK’s withdrawal from the container transport business to K-Euro was inconsistent behavior and that this was sufficient as an incentive. The court found that not only was the behavior in question unable to influence the will or will of K-Euro, but there was also no “business”. On the contrary, it was criticized that KKK K-Euro did not do any business, but was also not obliged to do so. Popplewell LJ did not accept that lawful inactivity was behavior that could result in incidental liability.

No intention of causing a breach of contract

JKL was unable to meet the required performance threshold that KKK intended to cause K-Euro to breach the service contract. Popplewell LJ stated that the breach of the service agreement was neither the purpose KKK pursued in establishing the joint venture nor a means to its end (namely the commercial and economic benefits of restructuring the container liner business). KKK was able to set up the joint venture according to the wishes of K-Euro and JKL. The breach of the service contract is only the result of it, “no end or means”.

Performance test not passed

The appellate court therefore granted the appeal and reversed the decision that the JKL rescinded the service of the action on KKK outside of the jurisdiction on the grounds that the plaintiff had not reached the necessary threshold, that the action was really promising.

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The judgment is a helpful reminder of the legal principles that apply to a tortious claim to cause a breach of contract. Liability arising from this tort presupposes conduct equivalent to persuasion, encouragement or assistance in order to induce the breach of contract to breach the contract and the intention that the breach of contract is at least a means to an end and not just the foreseen or intended result the behavior. In order to establish the incentive element of the tort, the behavior must be done in the spirit or will of the contract breaker to influence the choice of whether or not to violate the contract. The mere prevention of the fulfillment of a contractual obligation is not enough.

The judgment makes it clear that the circumstances under which a parent company will be liable under this tort for decisions affecting the contractual relationships of its subsidiary are limited, even if the breach of contract by a subsidiary is the known and inevitable consequence of the parent company’s business decision is. This is a risk to be considered when entering into contracts with a subsidiary whose ability to fulfill its contractual obligations depends on the actions of other companies within the group.

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