Court of Appeal judgment highlights key points to consider in claims for inducing a breach of contract

11 minute read
19 June 2024

The Court of Appeal's decision in the case of Northamber PLC v Genee World Limited & Ors addresses a number of points, including some interesting practical issues relating to claims for inducing a breach of contract. The judgment confirms that where a party has knowledge of an exclusivity agreement, places an order and pays for that order in breach of the exclusivity agreement, then liability for the tort of inducing a breach of contract will follow. It will not matter if the party in breach had already breached the exclusivity agreement by selling to other customers.

In addition, it confirms that:

  • acting in breach of an injunction will be evidence that a director has not acted bona fide within the scope of his authority; and
  • silence in the face of an offer to mediate will be regarded as unreasonable and will likely result in cost penalties.

Our Commercial Disputes team take a look at the judgment and highlight the key points you need to know.



Background

The Claimant (Northamber) was a distributor of information technology equipment. The first defendant (Genee) was an importer of audio/visual (AV) displays, and the second defendant (RS) was its sole director. The third defendant (IES) supplied IT equipment to schools and colleges.

In March 2016, Northamber and Genee entered into a distribution agreement (DA) and then in July 2017 an exclusive supply agreement (the ESA), which made Northamber the sole source of Genee's products in the UK.

By late 2017/early 2018, Northamber became aware that Genee was supplying products directly to resellers, in breach of the ESA. In August 2018, Northamber brought proceedings against Genee for breach of the ESA - and against RS and IES for inducing breach of contract (by causing Genee to act in breach of the ESA).

In September 2018, Northamber obtained an injunction restraining Genee from supplying its goods within the UK to other resellers, but Genee continued to act in breach of the ESA. Genee was placed into a creditors voluntary liquidation on 12 November 2018.

First instance decision

The judge found that Genee had breached the exclusivity agreement between July 2017 and November 2018, including by selling directly to IES from 31 March 2018 onwards.

In deciding whether RS had acted bona fide within the scope of his authority as a director of Genee, the trial judge concluded:

(a) the general rule or starting point is that a director will not be liable for the tort of inducing the company of which they are a director to breach a contract;

(b) RS would not be liable for inducing Genee to breach the ESA if, in doing so, he was acting bona fide within the scope of his authority as sole director of Genee;

(c) whether RS was acting bona fide and within the scope of his authority had to be decided after taking into account all the relevant circumstances, including his motivation for inducing Genee to breach the ESA and the nature of the duties owed by RS to Genee which he is said to have breached. The focus was on RS' duties to Genee as its director and not on matters related to the other party to the contract (i.e. Northamber); and

(d) RS would not be acting bona fide if he acted in breach of his duty to promote the success of Genee for the benefit of its members under the Companies Act 2006 (the CA 2006), in particular Section 172.

The judge found that RS had not acted bona fide within the scope of his authority as a director of Genee once the injunction was in place, because procuring the breach of the ESA by Genee after the injunction had been granted was entirely inconsistent with his duty under CA 2006, Section 172 (i.e. to act in the way that he considered, acting in good faith, would be most likely to promote the success of Genee for the benefit of its members as a whole). By causing Genee to breach the ESA (by supplying to other resellers), RS also caused it to breach the injunction. That put Genee in contempt of court, at risk of having a fine imposed upon it, having its assets sequestrated and suffering reputational damage - none of which could be said to promote the success of Genee for the benefit of its members as a whole.

Northamber's claim against IES for inducing breach of contract was dismissed. The judge accepted that IES knew about the ESA and intended that Genee should supply goods directly to it in breach of the ESA. However, Genee had already breached the ESA by selling to others and did not require inducement or persuasion by IES as a result. By placing orders, IES simply gave Genee the opportunity to breach the ESA.

The judge awarded damages to Northamber and ordered RS to pay 70% of Northamber's costs. However, the judge did not accept the fact that RS and IES had failed to respond to an invitation to mediate from Northamber as sufficient to warrant a cost penalty being applied.

The appeals

Both Northamber and RS appealed to the Court of Appeal.

Northamber appealed on the grounds that the judge was wrong on a number of points, including;

  1. in dismissing its claim against IES for inducing breach of contract on the grounds that there had been no act of inducement by IES;
  2. in holding that RS had acted bona fide within the scope of his authority as a director of Genee from July 2017 until September 2018; and
  3. in rejecting its submission that RS and IES' failure to mediate should be reflected in the costs award.

RS appealed on grounds that the findings against him were unjust and erroneous as a matter of law.

Court of Appeal decision

The Court of Appeal held (overturning the decision at first instance) that IES had induced Genee to breach the ESA. Its involvement was necessary for the breaches to occur - breach of an exclusivity clause in a contract required a counterparty (in order for Genee to breach its exclusivity obligations to Northamber, it required a willing purchaser (or purchasers) to sell to). IES (through its director) knew of the existence of the ESA and the fact that Genee would be in breach of that agreement in selling directly to it. That knowledge, coupled with the action of entering into an agreement to acquire goods from Genee and paying for those goods, was sufficient for a finding that IES induced Genee to commit the relevant breaches. It did not matter that Genee had already breached the ESA by selling to a different reseller - to say that others have already trodden the path was not a defence.

The burden was on Northamber to prove that RS had not acted bona fide within the scope of his authority as a director of Genee in the period July 2017 to September 2018. The judge at first instance confirmed the starting point was that a director will not be liable for the tort of inducing the company of which they are a director to breach a contract. For the period before the injunction was in place, Northamber had failed to put forward any evidence to overturn that starting position.

The Court of Appeal did, however, accept the judge's reasoning as "unimpeachable" that a director who causes his company not merely to breach its contract, but also to act in breach of an injunction is plainly in breach of his duty under section 172 of the CA 2006.

On the issue of costs, the Court of Appeal confirmed that an unreasonable refusal to participate in alternative dispute resolution (ADR) constituted a form of unreasonable litigation conduct, to which the court might properly respond by applying a costs sanction. A Case Management Order made by a District Judge early in the proceedings contained a provision that "at all stages the parties must consider settling this litigation by means of alternative dispute resolution" (which is not uncommon) and required reasons to be given in a witness statement if a party refused to engage in ADR.

Northamber invited the defendants to consider mediation by letter in February 2022. IES' solicitors confirmed they were taking instructions and did not respond further. RS' solicitors did not respond at all. No party gave a witness statement confirming reasons for their failure to engage. The judge at first instance rejected Northamber's contention that this failure to engage should be reflected in his order for costs, placing emphasis on Northamber's failure to chase for a reply to its invitation in doing so. The Court of Appeal held that the judge was wrong in this regard.

RS and IES had been silent in the face of an offer to mediate from Northamber. That was in itself unreasonable, as was their breach of a court order requiring them to explain their failure to agree to mediation. The correct response was to increase Northamber's costs recovery by 5% to 75% as a result.

Key points to consider from the decision

This Court of Appeal judgment did not include any new law, but it did provide some helpful clarification and practical points for consideration. In particular: (1) where a contractual exclusivity provision has been breached, it may be possible to successfully claim against both the director(s) of the company in breach and the third party involved in the breach; and (2) if a director is responsible for the actions of a company in breaching an injunction ordered by the court, that will be clear evidence the director has not acted bona fide within the scope of their authority as a director of that company (thereby depriving them of protection and opening them up to personal liability). These actions can be a useful tool, particularly in situations where direct recovery options against the party actually in breach are practically limited (e.g. by an insolvency event).

The decision is also yet another reminder that a party really cannot ignore a request to mediate. It has long been the case that ignoring a mediation proposal is unreasonable, not just actually refusing to mediate. This decision also makes it clear that once an invitation to mediate has been made, there is no need to chase. The ball will then be in the recipient's court and the fact the party making the offer does not chase for a response should not impact on cost penalties that may follow, if the recipient fails to respond.

Our earlier article on the case of James Churchill -v- Merthyr Tydfil County Borough Council - Do you have to mediate? Almost certainly... yes highlighted the fact that Courts can order parties to engage in mediation, if appropriate - acting in breach of a court order will make it even easier for cost penalties to be imposed.

To discuss any of the points raised here further, or any general commercial dispute issues, please contact Sean Adams, Emma Carr or Katie Malloy.


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