On March 13, 2013, the Court of Appeal of Québec rendered a decision clarifying the state of the law regarding the extra-contractual liability conditions that apply to third parties that induce a person to breach their contractual obligations.[1] More specifically, the question answered was whether a third party accomplice can be convicted where there is no simultaneous suit against the delinquent co-contractor. In their ruling, the justices of the Court of Appeal set the framework for suits brought directly by injured co-contractors against third parties.

The Facts

Zoom Média Inc. ("Zoom") is an interior advertising business that specializes in advertising displays for the toilets and cloakrooms of resto-bars. In 2006, its former vice-president of sales founded Rouge Resto Bar Inc. ("Rouge") and started working on advertising displays for resto-bars. Rouge offers giant banners that can be placed on the walls of establishments.

Essentially, Zoom accused Rouge of soliciting its clients or entering into contracts with them, conduct in breach of the various exclusivity clauses binding Zoom to its clients. It thus invoked the well-established principle that a third party is at fault if it knowingly violates a contract.[2]

Zoom was seeking a permanent injunction compelling Rouge to stop inducing its clients to breach their obligations. It also asked that Rouge remove its signage products from establishments where Zoom already held exclusivity rights.

The Ruling

Although the Superior Court had allowed Zoom's motion, the Court of Appeal allowed Rouge's motion to stay the injunction's execution. Justice Dufresne, J.A., explained that even though an action against a third party was underway, the "[TRANSLATION] burden of proof is on the applicant to demonstrate the scope of the clause in dispute, whether that clause was valid and known to the third party, and whether the latter had been induced by the contracting party to breach that clause."[3]

The Court of Appeal then reversed the trial judge's decision and dismissed the action for an injunction, mainly on the grounds that contrary to the audi alteram partem principle, Zoom had failed to involve the business owners themselves in the action.

Indeed, proceedings were only brought against Rouge; not one of the owners of the 39 resto-bars that allegedly breached their contractual obligations were sued as co-defendants or involved as impleaded parties. If the injunction had been executed as per the trial judge's ruling, the owners would have been deprived of the revenues generated by these signs.

According to the audi alteram partem principle, the owners must be given a chance to argue their point of view regarding the alleged breach of their obligations, especially given that the scope of the many types of exclusivity clauses might be subject to interpretation.

Still, there are a number of cases where a motion for injunction or action for damages was allowed to be validly brought even though the delinquent co-contractor was not involved in the proceedings.[4] The justices of the Court of Appeal analyzed these decisions one by one, differentiating them based on their particular circumstances.[5] In those decisions that were invoked by Zoom, the audi alteram partem principle was not really being negated. In Trudel v. Clairol Inc. of Canada,[6] the identity of the co-contractors was unknown, while in Théâtre des Variétés v. Union des artistes,[7] it was the third party itself that prevented the co-contractor from executing its obligations. In Corp. Centers Canada Ltd. v. Copiscope Inc.,[8] the conclusions sought in the proceedings in no way interfered with the rights and obligations of the co-contractors.

What is more, the Court of Appeal pointed to another element that distinguishes the decisions invoked by Zoom: all of them contain a flagrant breach of contract. According to the Court of Appeal, "flagrant breach" must be the cornerstone of any analysis conducted to determine whether an action brought directly against a delinquent third party can be valid, since it is precisely under such circumstances that the third party is knowingly participating in the breach. Flagrant breach of contractual obligations would therefore be an acceptable reason, if reason there may be, to allow for an exception to the audi alteram partem principle.[9]

In this particular case, the justices ruled that there is no evidence the co-contractors' defaults constituted "flagrant breaches". In fact, the obligations associated with the exclusivity clauses are not core services rendered under the agreement,[10] and a reading of the various types of clauses raises doubts over these ancillary obligations.[11] Where the scope is unclear, an obligation of exclusivity cannot give rise to a flagrant breach of contract. Rather, this situation reaffirms the importance of the audi alteram partem procedural requirement.[12]

To summarize, the Court of Appeal has confirmed a co-contractor's "flagrant" breach and a third party's "knowing" participation in that breach are but two sides of the same reality.  In the absence of the first, it is impossible for a party to claim any right or damages from a third party without also bringing its action against the delinquent co-contractor.