Nitej Davda and Neil Emerson reflect on Court of Appeal decisions on inducement to breach a contract and conspiracy to injure by lawful or unlawful means.

Parties are entitled to protect their own interests by lawful means, even if doing so causes an unavoidable breach of contract. While economic torts can most simply be described as acts which interfere with rights and thereby cause financial loss. Unlike other torts, most commonly negligence and nuisance, the interference has to be coupled with an intention to cause harm. The most significant economic torts are inducement to breach a contract and conspiracy to injure by lawful or unlawful means

The recent decision of the Court of Appeal in Meretz Investments NV v ACP Limited [2007] EWCA Civ 1303 is the first opportunity for the Court of Appeal to consider the guidance laid down by the House of Lords in the conjoined appeals of OBG Limited v Allan, Douglas v Hello! Limited and Mainstream Properties Limited v Young [2007] UKHL 21 on establishing the intention required to be held by tortfeasors in economic tort cases.

Complex cases

Britel (the second appellant and sister company of Meretz, the first appellant) granted to the first respondent, ACP, a development lease over roofspace of an existing block of flats overlooking the Royal Albert Hall. Consideration and rent were £1 respectively but ACP was obliged to complete the development by a specified date and, if it failed, to grant a development sublease back to Britel if it called for one. ACP was a special purpose vehicle. FP, the second respondent, was its parent company and charged with constructing the penthouses. FP was funding the development on behalf of ACP and took a charge over the development lease as security.

The lease was supplemented by a series of agreements, one of which provided that ACP would make payments to Britel from the net proceeds of sale of the individual penthouses as deferred consideration for the lease. These payments were secured by another legal charge over the development lease. Meretz had a further legal charge securing a slice of the net proceeds of sale of the penthouses for introducing ACP to Britel.

A deed of priority was then entered into by the parties to regulate the priority of interests between, in order, FP, Britel and Meretz.

Towards the end of 2001 the development ran into financial difficulties. At this time Mr Tamimi, the third respondent, was negotiating to buy one of the penthouses. He agreed to fund the balance of the development in return for an assignment of the development lease and a share of the profits. FP took legal advice and then exercised its power of sale, as first chargeholder, by making the transfer; Mr Tamimi then proceeded to appoint FP as developer. The legal advice given to all parties was that the transaction was lawful and that it would over-reach both the substantive financial interests of Britel and Meretz under the agreements and Britel’s right to call for a development sub-lease. Britel and Meretz subsequently issued proceedings for, among other things, damages for inducing a breach of contract and conspiracy to injure.

Intention

For there to be inducement to breach contract, the alleged tortfeasors must have an intention to cause a breach of contract. For conspiracy to injure, whether by lawful or unlawful means, the alleged tortfeasors must intend to inflict harm, but in a case of lawful means the intention to injure must be the predominant purpose.

By the time that Meretz came before Lewison J at first instance ([2006] EWHC Ch 74), the Court of Appeal had given judgment in two economic tort cases, Douglas v Hello Limited [2005] 3 WLR 881 and Mainstream Properties Limited v Young [2005] EWCA Civ 861 and had set out the various ways in which the necessary intention could be established. Meretz was concerned with the distinction between (1) an intention to cause harm because it is a necessary consequence of achieving an ulterior motive and (2) simple knowledge that a necessary by-product of conduct undertaken will be a loss to a third party (para 159 of the CA Douglas judgment ): the Court of Appeal held that the former would satisfy the test of intention whereas the latter would not (para 223). The intention to cause harm was a key issue in Meretz. The legal advice given to the respondents was that the assignment of the lease was sound, would not cause actionable loss and would produce a benefit to them. Importantly, the respondents in Meretz waived legal advice privilege.

Legal advice

First instance in Meretz

While in related litigation Lightman J agreed with the legal advice given, Lewison J in Meretz disagreed with it ([2006] EWHC 74, para 389). He did, however, hold that the legal advice was reasonable advice to give. As a result it was entirely proper for the respondents to rely upon it, and in so doing any intention to injure or intention to induce a breach of contract was negated (paras 367-373), an application of the Court of Appeal decision in Mainstream. In Mainstream Arden LJ had considered whether the issue of a mistaken understanding as to law could negate the intention of a third party.

When giving judgment in Mainstream, Arden LJ determined that it could, as it was not a question of illegality or unlawfulness of conduct being made legal or lawful by mistake, but rather the effect of the mistake on one’s state of mind (compare with the scenario in Belmont Finance Corporation v Williams Furniture Limited (No 2) [1980] 1 All ER 393). The necessary ingredient of intention to induce a breach of contract was absent, notwithstanding that detriment had been suffered. Legal advice negated any intention to harm and placed it outside the tests for intention set down by the Court of Appeal in Douglas.

The House of Lords’ view

It is very rare for detriment to be the intended outcome of a commercial transaction. Much more common is harm occurring as a means to an end which is financial gain. Inthe conjoined Mainstream / Douglas appeals, Lord Nicholls considered whether intentionally harming a business as a means to an end constitutes intention to injure, even if it were preferable that harm were not caused; in the example of companies competing for a contract, A’s gain and B’s loss are inextricably linked – does this mean that there is intention to cause injury to B?

Lord Nicholls said yes. He introduced a metaphor of the obverse side of the same coin. When gain to one means loss to another and a party proceeds knowing this inevitable consequence, his state of mind will satisfy the necessary mental ingredient of the tort.

In Meretz, could it be said therefore that the respondent’s gain and the appellant’s loss are inextricably linked? How does this sit with the more detailed methods of establishing intention to injure in Douglas, relied upon by Lewison J at first instance? If Lord Nicholls’ metaphor could be interpreted in this way, then arguably it would inadvertently serve to widen the net of intention beyond that identified in Douglas.

The Court of Appeal in Meretz

The respondents, having taken legal advice first, the appellants could not avoid the impact of Mainstream, the House of Lords having affirmed the Court of Appeal decision.

The key here was that the parties believed that they were entitled to do the thing that would result in a breach. The cause of that belief was the legal advice given; it was the driver and in those circumstances the case was indistinguishable from that of the financier in Mainstream.

Could Lord Nicholls’ coin metaphor dilute the clear impact of Mainstream? The respondents knew that by the very nature of what they were doing (which would secure them a gain) the appellants would suffer a loss, irrespective of whether the legal advice on overreaching was sound; crucially, Britel would lose its right to call for a sub-lease. In Meretz, Arden LJ addressed this. In her judgment she explained the metaphor as being illustrative of a different, negative, proposition: ‘Namely the mere fact that by injuring a third party a person intends to further his own business interests does not mean that he does not have the intent to injure that party’ (para 126 of her judgment).

The obverse side of the coin metaphor is only relevant in circumstances where the causative act is believed to be unlawful and it should be limited to such circumstances. It has no place in circumstances where the trigger event – inthis case FP exercising a power of sale – is lawful and legal advice has been received and acted on.

It is submitted that Arden LJ must be right. The Mainstream decision would otherwise be otiose. The economic tort landscape would be treacherous, as something approaching strict liability would exist which would negate the benefit to parties of seeking professional advice before setting out on a course of action. This is an unattractive outcome. It cannot have been intended by the House of Lords when reviewing the development of 100 years of economic torts in the hope that the lower courts would have a clear path forward.

This article first appeared in the Solicitors Journal 08/01/2008