Altering Risks and Creating Windfalls: the Case to Abolish Intentional Interference with Contract

revisions under progress!

Nathan, I've modified wording and sentence structure in several places, which I think adds to clarity and readability, but feel free to revert to the previous version if you disagree. I've also added some questions and suggestions in blue, which may be helpful as this evolves. Your argument is well-structured and well-written, and I learned something new from reading it. For me, the most difficult aspect of your paper (and its biggest area for improvement) is the fact that it is divorced from facts/social context. Your argument is very abstract and theoretical. I would like to see a concrete example of how these areas of law intersect. Some idea of where intentional interference comes into play today would be excellent (and it would also be great if this example could illustrate succinctly why you think the rule should be abolished). As I was reading, I felt like you must have some particularly egregious application of this rule in mind, and I wish you'd say what it is. I would be much more persuaded to abolish if I had a better sense of what's happening on the ground.

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 damages to actors whose contracts are intentionally interfered with by third parties. However, tort law's view of a contract as a quasi-property right meriting the protection of the law violates some of the basic tenants of contract law. Contracts are not an absolute guarantee of income; they are tools to allocate risk among willing parties who may sue for damages if the other party breaches. 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 possibility that a party may recover twice for the same breach, which would constitute an unfair windfall.

Basics of the Tort

While contracts give the parties rights against each other in case of breach, the tort of intentional interference creates additional rights for the parties against the world at large. As established by Lumley v. Gye, as long as the actions of third parties lead to breach, they need not be tortious to create a cause of action. Courts, however, have recognized that some interference with contracts may be beneficial, and in certain cases may allow third parties to assert affirmative defenses. Although there is no specific standard for such a defense, it is available to individuals who have a privileged relationship with one of the contracting parties or who interfere to further their own economic interests, but never to individuals who act maliciously.

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, contracts create quasi-property rights that, when violated under certain circumstances, establish a cause of action. The existence of affirmative defenses, however, undermines this logic. If the parties gain rights based upon the existence of the contract, then courts should enforce those rights equally. A party who interferes to promote his own economic interest and a party who interferes out of malice can both have the same effect upon the contract, regardless of motive. If courts have allowed one party to interfere, they should not deny the ability to others.

A second justification for the tort is that it increases the stability of contracts, which leads to a more efficient allocation of resources, because faith in the integrity of contracts allows parties to plan their economic activity accordingly. This claim stands in stark contrast to the efficient breach theory’s principle of encouraging repudiation when the promisor is able to profit from his default after placing the promisee in as good a position as he would have occupied had performance occurred. (24 Rutgers L.Rev. 273, 284). If the efficient breach theory is correct, tortious interference liability creates inefficiency by inhibiting opportunities for breach. The tort doesn't constrain a contracting party from breaching, but third parties may be less likely to induce breach out of fear of liability (even if they could assert an affirmative defense).

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

The Tort Violates Basic Contract Principles

Courts should reconsider the concept of a contract as a quasi-property right. Parties freely enter into contracts to allocate risk. Breach of the contract occurs when one party is incapable of completing the contract or decides that the contract’s allocation of the risk is 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, each party agreed to bear the risk of the other's termination without compensation). 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 contract law seeks to eliminate. As noted above, when breach occurs, the breaching party is liable for damages to compensate for its actions. If the non-breaching party is unable to mitigate the damages, compensatory damages will equal the remaining value of the contract. If the party is able to mitigate, then the new contract plus compensatory damages for breach of the old contract will make the party as well off as if the contract had been performed. 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. Although courts award these extra damages in tort, and not in contract, 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 the breached party to a contract an opportunity to seek compensatory damages from multiple parties. This provides the opportunity for compensation in excess of lost income and allows a party to capitalize on breach in multiple ways. Because intentional interference with a extends goes beyond the idea of contracts as allocations of risk and creates the potential for windfalls, courts should no longer recognize this cause of action.