In Rouge Resto-bar Inc. v. Zoom Media Inc., 2013 QCCA 443, the issue before the Quebec Court of Appeal was whether a permanent injunction could be granted  to stop “knowing participation in a contractual breach” where, as a result, the defendant’s co-contractant would be deprived of the benefit of its contract with the defendant without being a party to the case. The contract between the defendant and its co-contractant allegedly constituted a breach of the contract between the latter and the claimant.

The Court of Appeal decided that an injunction to prevent one party from performing a contract without impleading its co-contractant would contravene the fundamental principle audi alteram partem in that it would deprive the latter of rights without giving it an opportunity to be heard. An exception may arise, however, where the defendant’s co-contractant commits a “flagrant violation” of its distinct contractual obligations towards the claimant by contracting with the defendant such that the latter knowingly participates in the breach.

Zoom Media had contracts under which it paid to install advertising panels in 39 restaurants. It then sold advertising space on the panels to third parties. Subsequently, Rouge contracted with the same clients on a similar basis to install advertising panels of a different size in different areas of the same restaurants. Claiming its contracts gave it an exclusive right throughout its clients’ premises and that Rouge had knowingly participated in the breach of Zoom’s contracts with the restaurants, Zoom obtained an injunction from the Superior Court ordering Rouge to withdraw its panels. None of the restaurants, the common clients who would lose the revenues from their contracts with Rouge, were parties to the case.

The Court of Appeal first noted that the Quebec cases awarding damages against a third party for knowing participation in a breach of contract generally involved a simultaneous condemnation of the claimant’s co-contractant, as a party to the case. The court then examined the cases cited by Zoom, including Trudel v. Clairol Inc. of Canada, [1975] 2 S.C.R. 236, considered to be the basis for a recourse against third party interference with contractual rights under Quebec law. In these cases, an injunction or damage award was granted against the third party without impleading the claimant’s co-contractant. The Court of Appeal found that the common element in these cases was the fact that the conduct of the claimant’s co-contractant, who was not a party to the litigation, was a “flagrant violation” of its contract with the claimant.

The court states that all  the authorities relied upon by the first instance judge involved a party to a contract pursuing its co-contractant without impleading or obtaining an order against a third party. Based on one of these authorities, the Court of Appeal states that litigation between the parties to a contract could result in an injunction which would respect audi alteram partem even if the order affected the rights of a third party who was not impleaded.

The Court of Appeal concluded that the judicial dispute as to the exclusivity clause in the contracts between Zoom and the restaurants and as to the resulting validity of the contracts between Rouge and the restaurants could not be resolved without hearing or impleading the restaurants which were parties to both contracts- presumably all 39 restaurants- as required by audi alteram partem. On this basis, the permanent injunction was refused.

The Court of Appeal went on to state that if the Clairol line of cases creates an exception to the above, the exception is limited to circumstances in which the co-contractant’s breach is a “flagrant violation” such that the third party knowingly participates in it. In this circumstance, it may be possible to order injunctive relief against the third party despite the fact that the co-contractant of the claimant, who may be affected by the order,  is not a party to the proceedings.

In the instant case, the Court of Appeal stated that the terms of the exclusivity clauses in the various contracts between Zoom and the restaurants varied so much that the breach by the restaurants was not “flagrant” with the result that Rouge did not “knowingly” participate in the breach.

The Rouge decision seems to raise more questions than it resolves.

Under Quebec law, a third party is liable for participation in a contractual breach only if the third party “knowingly” participates in the breach. The wrongful conduct arises in commercial contexts particularly in relation to non-competition and exclusivity clauses. The Court of Appeal seems to make the flagrant violation by the co-contractant a pre-condition for the third party to knowingly participate in the breach which would mean that the flagrant violation is a new and additional element of the wrongful conduct.

Other than a reference to the dictionary definition of “flagrant”, the Court of Appeal provides no guidance as to its meaning.

The decision is not clear in its application of audi alteram partem. The court states that the dispute related to the exclusivity clauses between Zoom and its clients and their impact on the contracts with Rouge cannot be decided without impleading the clients.  It is not clear whether Rouge must have been a party. In this regard, the court indicates that injunctive relief can be ordered in litigation between the parties to a contract even if the order affects a third party who may have contracted separately with one of the litigants but is not impleaded. It is not clear why this is consistent with the Latin maxim, whereas the instant case is not. It may be that the court is conflating injunctive relief with specific performance.

The Court of Appeal does not indicate whether the exception based on a flagrant violation actually applies. The court posits the exception only if the Clairol line of cases creates the exception without determining the issue. Other than to reconcile earlier decisions, the Court of Appeal does not explain why a flagrant violation permits or might permit an exception to audi alteram partem. In addition, where the exception applies, the court would be determining whether the co-contractant’s breach is flagrant without necessarily impleading or hearing the co-contractant.

The scope of the decision is not clear. The holding is broadly stated without limiting its application to injunctive, as opposed to monetary, relief. It is also not clear whether the decision applies to injunctive relief to prevent participation in a contractual breach before the fact or merely to stop a breach that has already occurred and is on-going.

Finally, none of the issues raised by the Rouge decision is addressed within the context of the judicial discretion applicable to injunctions.

The lesson to be taken from the Rouge decision is that a claim based on knowing participation in a breach of contract in Quebec should be pursued at the very least against the claimant’s co-contractant and, if in doubt, against all of the relevant parties.