Interference with Economic Relations

William J. Tucker Law > Blog > Contracts > Interference with Economic Relations

Interference with economic relations can take two forms — interference with a contract, and interference with a business relationship which has not yet ripened into a contract. As noted below, the law provides greater protection to a party whose contract is interfered with, than to one who has only a prospect of a forthcoming contract based on his business relationship with a third party.  

  1. Intentional Interference with a Contractual Relationship

A plaintiff may assert a cause of action against a defendant who induces a third-party to breach the plaintiff’s contract with that third party.  The essential elements of a claim of interference with contract are: (1) the existence of a valid contract between the plaintiff and a third party; (2) the defendant’s knowledge of the existence of the contract; (3) intentional acts by the defendant designed to disrupt the contractual relationship;  (4) actual disruption of the contractual relationship (i.e., a breach of the contract); and (5) damages suffered by the plaintiff proximately caused by the defendant’s interference with the contract.

The defendant’s conduct need not be unlawful in order for the defendant to be liable for interference with another’s contract. 

Only a “stranger to the contract” may be liable for intentional interference with contractual relations.  A party to the contract cannot be liable for interference with his own contract, even if he conspires with a third-party to breach the contract. If a party to a contract breaches the contract, the other party to the contract is limited to his remedies for breach of contract; he may not avail himself of the tort remedy of interference with contract, which typically provides for different and greater remedies than the remedies for breach of contract.  That is especially true, since interference with a contract is a tort, and punitive damages may be obtained for tortious conduct when it is accompanied by fraud, oppression or malice. 

In order for one to be liable for interference with contract, the contract must be valid. In other words, it cannot be illegal or violative of public policy, or otherwise void. However, if one interferes with a contract that is voidable, for instance, a contract which must be in writing to be enforceable, but which is only oral, a defendant’s interference with that contract will nevertheless render him liable to the party to the contract who was damaged by the interference. That is because enforceability is not an essential element of a claim of breach of contract. Rather, it is an affirmative defense that may only be asserted by a party to the contract.

Generally speaking, interference with an at-will contract is not viewed as an interference with contract, since the contract may be terminated at any time. Rather, it is viewed as interference with prospective economic advantage, because the expectation of such a contract is a future relationship between the parties to the contract.

Issues of interference with contract often arise in the case of a party luring an employee away from a competitor. So long as the defendant competitor does not apply illegal or otherwise unlawful means to induce the employee to leave the other employer, the public policy of promoting employee mobility precludes a finding of interference with contract. 

A defendant’s interference with a contract may be accomplished by means that are lawful but which lack sufficient justification. However, lack of justification is not an essential element of a claim of interference with contract; rather, it is an affirmative defense, and the burden is on the defendant to prove his conduct was justified.

The defendant may establish that his conduct was justified only if he can prove that there are societal benefits of his conduct which outweigh the harm to the plaintiff whose contract he interfered with

  1. Intentional Interference with Economic Relationship

The gravamen of the claim of interference with an economic relationship, sometimes referred to as interference with prospective economic advantage, is the wrongful interference with a business relationship containing the probability of future benefits accruing to the plaintiff.  The essential elements of a claim of intentional interference with an economic relationship are very similar to the elements of a claim for interference with contract:  (1) the existence of an economic relationship between the plaintiff and a third party which contains the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of that relationship; (3) intentional, wrongful acts by the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) damages to the plaintiff proximately resulting from the defendant’s conduct.

An important feature of the cause of action for interference with economic relationship is the requirement that the economic benefit the plaintiff expects from the relationship must be “probable,” and not simply possible, speculative or a mere hope or desire.  For example, in one case, the court ruled that a bidder on a public works contract did not have a claim against a competitor who obtained the bid by illegally paying his employees less than the statutory minimum wage.  That is because the law prohibits public agencies from having existing relationships with bidders, and it was not clear that any bidder would have been accepted, and if one was, it was not clear it would have been the plaintiff.  

In contract, the court found that a plaintiff freelance reporter who had an existing relationship with a newspaper had stated a valid claim for interference with economic relationship by alleging that the defendant unlawfully caused the newspaper to cease accepting articles from the plaintiff.  The fact the plaintiff had an existing relationship with the newspaper, and had previously benefitted economically from articles he had sold to the newspaper, made his economic loss “probable.”  

In addition to proving the defendant intentionally interfered with plaintiff’s prospective economic advantage, a plaintiff must prove that the defendant’s conduct was wrongful by some measure other than the fact of the interference itself.  As an example, if a defendant interferes with a plaintiff’s economic relationship by defaming the plaintiff, the defamation would satisfy the requirement that the conduct be unlawful. 

  1. Negligent Interference with Economic Relationship

Until the California Supreme Court case J’Aire Corp. v. Gregory (1979) 24 Cal. 3d 799, California courts did not recognize a cause of action for negligent interference with economic relations.  In J’Aire, the Court accepted a claim by a restaurant operator who leased the premises from the owner, against the contractor who had contracted with the owner to build out certain improvements to be used in the restaurant, for losses suffered as a result of delays in completing the improvements. 

The court in J’aire analyzed the claim under general negligence principles, with particular attention to the issue of foreseeability of the risk to plaintiff from carelessness in completing the improvements.  The elements of a claim of negligence are:  (1) a legal duty to use due care; (2) breach of that duty; (3) proximately causing damages. 

The court in J’aire explained that the factors to be considered in analyzing a claim of negligent interference with economic relationship are:  (1) the extent to which the transaction was intended to benefit the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant’s conduct and the harm suffered by the plaintiff; (5) the moral blame attached to the defendant’s conduct; and (6) the policy of preventing future harm.

The Law Office of William J. Tucker is familiar with contract and tort principles, including issues involving interference with contract and economic relationships, and provides free initial phone consultations to individuals and companies dealing with such issues.  Feel free to Schedule an Appointment