Altering Risks and Creating Windfalls: the Case to 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 damages to actors whose contracts are intentionally interfered with by third parties. However, 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 undeserved windfall.

Basics of the Tort

While contracts give the parties rights against each other in case of breach, 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 the defense, it is available to individuals who have a privileged relationship with a contracting party 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 entering into contracts. Under this reasoning, contracts create quasi-property rights that, when violated, can 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 is that it increases the stability of contracts, which leads to a more efficient allocation of resources. 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.

A Case Study: Don King v. Douglas

Don King sued boxer James Douglas for breaching a contract that gave King exclusive rights to promote Douglas’ fights. At the same time, King also sued the Mirage Hotel for interfering with the contract and inducing Douglas to breach it. The court rejected motions for summary judgment by Douglas and the Mirage, allowing King to proceed with his claims against both parties. While the parties likely settled privately (there was no published trial record), the fact that the court sustained King's multiple claims for breach of a single multi-million dollar contract illustrates how the tort can create windfalls. King undoubtedly deserved compensation for the breach of the allocation of risk, but not from both Douglas and the Mirage.

Conclusion

Intentional interference with contract 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 extends beyond the idea of contracts as allocations of risk and creates the potential for windfalls, courts should no longer recognize this cause of action.