Procuring a breach of contract and the principles surrounding this are worth revisiting in the wider context of taking security.
Albeit that its factual matrix is firmly fixed in the world of trade finance and the carriage of goods, a recent Court of Appeal decision, Wolff v Trinity Logistics USA, helpfully restates the elements of the tort.
The Fielding Group Limited (Fielding) imported clothing from Bangladesh into the UK. Michael Wolff was a company director of Fielding.
Trinity USA was a forwarding agent, responsible for arranging the shipment of manufactured garments from various Bangladeshi suppliers to Fielding. Its agent in relation to freight business from Bangladesh was Trinity Logistics (Bangladesh) Ltd (Trinity Bangladesh).
On 30 May 2013, Dart Global Logistics Ltd (Dart) entered into an agreement with Trinity Bangladesh to handle those Bangladeshi shipments which were coming into the UK. Under the terms of that agreement, Dart agreed not to release any shipment, either totally or partially, until:
"…any and all written authorisation required by bank is received; and
Any and all written instructions and/or terms of release by other documents are satisfied".
Contractual arrangements regarding the process of shipment; payment of the supplier; and release of the goods were as one would expect, ie:
- on shipment, Trinity Bangladesh would issue a bill of lading; the supplier of the goods would send an invoice plus the bill of lading to Fielding's bank
- the bank would let Fielding know that these documents had arrived, and Fielding would in turn advise the bank to transfer payment to the supplier's bank
- once payment had been made, the bank would endorse the bill of lading and post this to Fielding
- Fielding would present the endorsed bill to Trinity Europe, to secure release of the goods.
On October 2013, Trinity Bangladesh moved its business from Dart to the newly-incorporated Trinity Europe, on the same terms. Trinity USA was an undisclosed principal to the agency agreement.
It was the practice of Dart, and then Trinity Europe, to release the goods to Fielding without production of the bill of lading ie before they had been paid for. This practice was facilitated by the movement of a key employee of Dart, Mr Goonewardena, to Trinity Europe.
By 2013, Fielding was in financial difficulties and in 2014, the company went into administration. At this time, 11 shipments had not been paid for. Trinity USA, the undisclosed principal of Dart and Trinity Europe, was liable to the suppliers of the goods for the quantum of the goods.
It commenced proceedings against Wolff in the High Court, alleging inter alia that he had procured a breach of the terms of the agency agreement.
Elements of the Tort
In order to claim successfully, Trinity USA had to show:
- the existence of a breach of contract between itself and a third party (ie breach of the terms of the agency agreement)
- Wolff's knowledge of the breach of contract and his intention to procure that breach
- actions on the part of Wolff which amounted to inducement/procurement of the breach.
In the High Court, the deputy judge took the view that "knowledge of the likelihood of a breach is not enough.But once knowledge of a contract is established knowledge of the terms may be said to be established if the person must have known the terms or was recklessly indifferent to a means of discovering the truth".
- Wolff was obtaining the goods without presenting the necessary papers. This breached the terms of the agency agreements between Trinity USA and Dart/Trinity Europe.
- Wolff was very experienced and understood the way things worked with regard to the shipment and payment of goods. An honest belief on Wolff's part that Trinity USA had agreed to the goods being released without the usual documentation would probably have been a sufficient defence (see OBG v Allen, para 39). However, the High Court judge did not accept Wolff's factual case in this respect and this line of defence was not therefore put before the Court of Appeal. The Court of Appeal found that he was, "at the very least, recklessly indifferent to the question whether Mr Goonewardena was acting in breach of contract".
- Wolff induced/procured the breach because he (via Fielding) had agreed to give business to Dart and also to Trinity Europe if those companies were prepared to hand over the goods without sight of the relevant documentation."That seems to me to be just the sort of conduct which procures or induces a breach of contract and did so in this case" (Longmore LJJ).
What is the position of a lender who is considering taking security from a company in the knowledge that it has already given a negative pledge in favour of a prior lender?
It is best for the potential subsequent lender to negotiate priority arrangements with the incumbent secured lender prior to making an advance, agreeing terms concerning enforcement decisions; priority of repayment; subsequent advances etc.
Otherwise, its position will be very vulnerable. If the first lender has an "all monies" debenture, further monies advanced by it will be covered by that debenture, and the subsequent lender may well find itself more out-of-pocket on enforcement day than it first anticipated.
Secondly, as in this case, it may be liable for procuring a breach of contract on the part of the borrower.
Finally, the case is also a reminder that a director may be personally sued for the commission of a tort. Trinity USA commenced proceedings against Wolff because Fielding had by this point gone into insolvency. It was successful because the Court of Appeal found from the evidence that Wolff was the prime mover in the arrangements with Dart and then Trinity Europe.