Altering Risk Allocation and Creating Windfalls: Abolish Intentional Interference with Contract

Introduction

Intentional interference with contract is a unique cause of action that stands at the intersection of tort and contract law. It provides security by offering the promise of damages to actors whose contracts are intentionally interfered with by third parties. Tort law traditionally views a contract as a quasi-property right meriting the protection of the law, but does this not violate some of the basic tenants of the contracts field? Contracts are tools to allocate risk among willing parties who may sue for damages if the other party breaches, but are not an absolute guarantee of income. By providing an extra source of compensation beyond compensatory damages, the tort alters the balance of risks that were originally bargained for and creates the potential for windfalls.

Historical Development

Liability for intentional interference with contract originally came from an expansion of the tort of intentional interference with prospective economic relations (Restatement Second of Torts). In its earliest stages, intentional interference with contract required that the defendant induce breach through an independently tortious act, but Lumley v. Gye extended the cause of action to non-tortious conduct. This modification exposed third parties to liability for dealings that previously would have been non-actionable, but were now tortious because of a contract. Thus, whereas contracts had previously only given the parties rights against each other, the common law now recognized rights against the world at large.

Current State

Modern courts have recognized that some interference with contracts may be beneficial, and allow third parties to assert affirmative defenses. Although there is no specific standard, these defenses traditionally apply to individuals who have a privileged relationship with one of the contracting parties, or actors who interfere to further their own economic interests. In recognition of the tort’s historical roots, however, parties acting maliciously may not assert an affirmative defense. (Restatement Second of Torts)

Rationales for the Tort

The most cited rationale for recognizing intentional interference as a tort is that it offers security to parties who have entered into contracts. Under this reasoning, a contract creates quasi-property rights that, when violated under certain circumstances, establish a cause of action. The existence of affirmative defenses, however, questions this logic. If the parties gain rights based upon the existence of the contract, then courts should enforce those rights equally, regardless of the way in which they are violated.

A second justification for the tort is that it increases the stability of contracts, thereby allowing other parties to have more faith in the integrity of contracts and plan their own economic activity accordingly. In an economy lacking central planning, this will supposedly lead to a more efficient allocation of resources. This claim stands in stark contrast to the efficient breach theory’s principle that “repudiation of obligations should be encouraged where the promisor is able to profit from his default after placing his promisee in as good a position as he would have occupied had performance been rendered.” (24 Rutgers L.Rev. 273, 284) While neither approach should be accepted dogmatically, an empirical study of the affects of tortious interference liability upon the market might reveal that it inhibits free maneuvering.

Finally, the tort is sometimes justified as punishing third parties for inexcusable interference with contracts. However, courts award most damages for intentional interference as compensatory damages, not punitive damages, which casts doubt upon this line of reasoning. Even if courts were inclined to grant large judgments for punitive damages, damages arising out of contract breach are supposed to be compensatory, not punitive, and this principle should extend to third party liability.

Violations of Contract and Tort Principles

Courts should reconsider the concept of a contract as a quasi-property right. Parties freely enter into contracts to allocate risk. Completion of the contract indicates that the risk has been allocated in the manner the parties intended. Breach of the contract shows that one party was either incapable of completing the contract, or that it decided that the contract’s allocation of the risk was no longer beneficial. In such a scenario, the other party will be compensated for that choice, unless the contract is terminable at will (in which case, both parties will have taken a risk that the other party could terminate and should not reap any further benefits from the contract). Contracts do have value – which is sometimes indicative of a property right – but no more value than an already compensable allocation of risk. Tort liability for a third party should play no role in the private relations between two freely contracting parties.

An award for intentional interference also creates the potential for windfalls, which the contracts field seeks to eliminate. As noted above, when breach occurs, the breaching party is liable for damages to compensate for its actions. If the other party is not able to mitigate the damages by finding replacement sellers or buyers, compensatory damages will equal the remaining value of the contract. If the party is able to mitigate, then through a combination of the new contract and compensatory damages for breach of the old contract, the party will get the same value had the breaching party not breached. Further damages awarded in tort add to the amount of money that the breached party earns and have the potential to exceed the total expected value of the original contract. Granted courts award these extra damages in tort, and not in contract, but they nonetheless create windfalls.

Conclusion

The tort subfield of intentional interference encompasses a number of actions. Unique among them is intentional interference with contract, which offers an opportunity to seek compensatory damages from multiple parties. Instead of providing compensation for an otherwise uncompensated lost source of income, intentional interference with contract allows a party to capitalize on breach in multiple ways. This goes beyond the idea of contracts as allocation of risk and creates the potential for windfalls, and courts should no longer recognize this cause of action.