OBG Ltd and another v Allan and others; Douglas and others v Hello! Ltd and others (No. 3); Mainstream Properties Ltd. v Young [2007] UKHL 21, [2007] 2 W.L.R. 920
The House of Lords’ 2 May decision in OBG Limited v Allan [2007] UK HL 21 was one of the most important decisions regarding the economic torts since Thomas Francis Allen v William Cridge Flood and Walter Taylor [1898] AC 1 (HL) and Quinn v Leathem [1901] AC 495. “Economic tort” refers to “inducing breach of contract” and “unlawful interference with trade” (otherwise referred to as “causing loss by unlawful means”).
The majority of the leading cases on the economic torts have arisen from master/servant relationships and from trade union activity. By way of example, Lumley v Gye (1854) 3 E & B 114 concerned an opera singer (Johanna Wagner) being persuaded into performing for another theatre. Allen v Flood (supra) arose from a demarcation dispute between shipwrights (carpenters) and boilermakers (“ironmen”) at Regent Dock in Millwall. Quinn v Leathem concerned an attempt to force a meat trader’s employees out of work in revenge for their earlier refusal to join a union. D. C. Thomson & Co. v Deakin & Others [1952] 2 All ER 361 arose from an attempt to cut off paper supplies to printers and publishers of periodicals employing non-union labour. Emerald Construction Co. Ltd. v Lowthian and Others [1966] 1 W.L.R. 691 arose from a trade union dispute impacting upon a contract of employment to undertake brickwork on a site. Torquay Hotel Co. Ltd. v. Cousins and Others [1969] 1 All ER 522 (CA) arose from the prevention of a Torquay hotel’s oil supplies by a trade union’s threats of “serious repercussions” in revenge for careless remarks made to the Press by the hotel’s Managing Director. And the House of Lords’ decision in Merkur Island Shipping Corporation v Laughton and Others [1983] 2 All ER 189 (HL) arose from a union recognition dispute with shipowners, itself arising from those shipowners’ dispute with a ship’s crew regarding low wages.
There are indeed few leading economic tort cases arising from the wider commercial context. However, as OBG (supra) highlights, in the last few years there have been increasing numbers of non-labour cases in which the boundaries of economic tort liability have been tested, albeit unsuccessfully. Many recent economic tort cases have failed, if not at first instance, then on appeal.
An example of the role of the economic torts in wider modern commercial litigation was provided by Stocznia Gdanska S.A. v Latvian Shipping Co., Latreefer Inc. and Others [2002] 2 Lloyd’s Rep. 436. The facts of that case and the reasoning of the Court of Appeal were as follows:
The Buyers failed to pay instalments pursuant to contracts for the construction and acquisition of six reefer vessels by Stocznia Gdanska S.A. (the shipbuilders). The shipbuilders terminated the contracts and brought an action against the Buyers for damages. A number of issues arose in relation to the entitlement of the shipbuilders to terminate those contracts, and the consequences of their termination.
The shipbuilders advanced a claim that the Buyers’ parent company had induced the Buyers to breach their contracts with the shipbuilders. At first instance, Thomas J. found that the parent company had not committed the tort of inducement of breach of contract in its direct form on the basis that it had not directed the Buyers to breach their contracts with the shipbuilders. Nor was the parent company liable in the tort of conspiracy. However, Thomas J. did find that the parent company was liable to the yard for the indirect inducement by unlawful means and the “unlawful means” consisted in its failure, in breach of its contract with the service company, to keep the Buyers in funds in order to enable the Buyers to meet their responsibilities to the shipbuilders.
The Court of Appeal refused to interfere with the finding of Thomas J. that there had been no inducement by the parent company for the purposes of the direct form of the tort. However, it may be that this issue turned on a matter of pleading: the shipbuilders’ pleaded case was that the parent company had issued an instruction to the Buyers to break their contract but Thomas J. found that no such instruction had been given. There did not appear to have been a “submission that a mere request amounted to the requisite persuasion or inducement”. Nevertheless, the appeal may have appeared attractive because it was common ground that the Buyers “could not undertake the contract without loan finance procured with the assistance of [the parent company].” In the circumstances, the question arising was whether a request to a subsidiary by a parent company to omit to act might amount to an inducement of breach of contract.
In relation to the indirect form of the tort, the Court of Appeal upheld the finding of Thomas J. that the parent company had been in breach of its contract with the service company by failing to finance the Buyers’ contract with the yard. Thomas J. had found that the parent company’s breach of its contract with the service company was intended by the parent company to prevent the Buyers performing their contracts with the yard and that that was the “primary objective of the decision not to fund” and that the parent company, by its actions must “have intended to injure the yard” even if that was not its “predominant” intention. The Court of Appeal upheld the finding of Thomas J. and held that the requisite intent had been proved on the part of the parent company. Its actions were directed against the yard as well as its subsidiary. It did not want its subsidiary to fulfill its contract with the yard and this was sufficient to found a claim that the parent company was “responsible in tort for the indirect inducement by unlawful means of [the Buyers’] breaches of contract with the yard”.
In OBG Limited and Another v Allan and Others [2005] 2 All ER 602 (CA), the defendants were appointed administrative receivers over a company. Their appointment was invalid, however, and they had no right to take control of the company. In good faith, nevertheless, they acted as if they were validly appointed and realised the company’s assets over a period of years. The question arose as to what claims the company could pursue against them. It was accepted that the receivers were liable for trespass to the company’s land, conversion of its chattels and had a duty to account. The real issue was whether the receivers were liable as claimed in damages for the value of the company’s contractual claims assessed from back on the date of their invalid appointment.
In Douglas v Hello! [2005] 4 All ER 128, the magazine Okay! had the exclusive rights by contract to publish photographs of the wedding of Michael Douglas and Catherine Zeta-Jones. Hello! published unauthorised photographs taken secretly at the wedding. The Judge held this caused £1 million of loss to Okay!. The issue was whether Okay! had a cause of action in confidence and/or in economic tort (for damages).
In Mainstream Properties v Young [2005] All ER (D) 148 (Jul) directors of the claimant company diverted a development to their own company and obtained finance from the defendant, falsely informing him that the company was not interested in the project and had given its consent. The issue was whether the defendant was liable for inducing breach of contract even though he had acted in good faith on the information provided to him.
In OBG the majority held that there was a requirement of intention to breach contracts, and the receivers’ intention had only been to manage the contracts as best they could. In Douglas v. Hello!, the Court of Appeal adopted a “holistic approach” to economic tort generally and, after a detailed review of the authorities, held that Hello! had not had the necessary intention to cause damage - Hello! thought that its spoiler would increase Okay!’s circulation rather than decrease it. In Mainstream Properties v Young & Others 2005 WL 1630760 the Court of Appeal followed Douglas and held that the necessary intention had not been established because the Judge (at first instance) had held the defendant had acted “in good faith” - he had made “an honest mistake”.
In OBG it had been held by Judge Maddocks that the receivers had intentionally “interfered” in the management of the contracts and were, therefore, liable in economic tort even though they had not, at the time, known that their appointment had been invalid. The claimants argued that their “good faith” was entirely irrelevant because their conduct had been intentional - the receivers were liable in economic tort for interference with contractors as long as they had acted voluntarily. In Mainstream it was argued that the defendant’s “good faith” was irrelevant because he had been “reckless” about whether or not the directors broke their contracts and this recklessness was enough to found the necessary intention for liability, applying the majority decision of the Court of Appeal in Millar and Others v Bassey and Another [1994] E.M.L.R. 44.
If the appeals in OBG and/or Mainstream had succeeded, then liability in economic tort would have depended not upon proof of the subjective intention to break contracts, but upon some objectives similar to that applied under the law of negligence (including consideration as to the defendant’s recklessness). The Law Lords resisted this temptation.
The leading opinion on economic tort is now that of Lord Hoffman who, in OBG Limited v Allan [2007] UK HL 21, drew a clear distinction between two different economic torts, namely “inducing breach of contracts” (Lumley v Gye (supra)) and “unlawful interference with trade” - which he referred to as “causing loss by unlawful means”. Inducing breach of contract is a tort in which the defendant becomes liable as “an accessory” to the breach of contract of another. Ms Wagner broke her contract with Lumley because she was seduced by the offer of higher fees from Gye.
The essence of this tort is that the defendant has deliberately (i.e. with intent) induced or procured a breach of contract by persuading another to act in breach. It is not enough if, as in OBG, the receivers may have caused a breach of contract or prevented performance without intending to do so. Equally, it is not enough if the defendant has assisted another to break his contract without realising it - as in Mainstream.
Lord Hoffman traced the unlawful means tort back to Garret v Taylor (1620) Cro Jac 567 in which the defendants tried to drive customers away from the claimant’s business by threatening them with mayhem and vexatious suits. But a later example was provided by Tarleton v McGawley (1793) Peake 270 in which the defendant drove traders away from the claimant’s ship by firing cannons at them. In each case, the defendant did an unlawful act with the intention of causing harm thereby to the claimants’ business and was held liable in tort for the damage thus caused. This gives rise to “primary liability” and does not depend upon persuading another to break a contract; i.e. “accessory liability”.
Lord Hoffman further held that “acts against a third party count as unlawful means only if they are actionable by that third party” - the principal qualification to this general rule being where there is no cause of action only because that third party does not suffer any loss. Thus in intimidation cases in which the third party submits to the threat, that third party may have suffered no loss but the conduct would have been actionable if loss had in fact been suffered. In this regard, Lord Hoffman said that just as the tort of inducing breach of contract requires an intention to cause a breach, so the tort of wrongful interference with business requires an intention to cause loss:
“The concept of intention is in both cases the same. In both cases it is necessary to distinguish between ends, means and consequences. One intends to cause loss even though it is the means by which one achieved the end of enriching oneself. On the other hand, one is not liable for loss which is neither a desired end nor a means of attaining it but merely a foreseeable consequence of one’s actions.”
The judgments in Allen v Flood and Quinn v Leathem are problematic because of their length and the Lords’ disagreement in each case: it is possible to find authority in the majority of opinions in those cases which treat liability for “inducing breach of contract” as “unlawful interference with trade”. This muddling of the economic torts is referred to as “the unified theory”. Lord Hoffman, however, rejected “the unified theory” stating that the two forms of economic tort must be treated as separate, with different ingredients, because (as outlined above) inducing breach of contract is a form of “accessory liability” whereas unlawful interference with trade is a form of “primary liability”. He criticised the fact that these two torts had been mingled in some of the cases, referring in particular to GWK Limited v Dunlop Rubber (1926) 42 TLR 593 in which the defendant had unlawfully changed the tyres of a car at an exhibition so as to promote its own tyres. The defendant had been found liable (on the basis of Quinn v Leathem) for knowingly violating the claimant’s contractual rights. But Lord Hoffman specified that the true basis of that decision had not been inducing breach of contract but rather unlawful interference with trade.
Moreover, Lord Hoffman examined Thomson v Deakin and suggested that “the unified theory” had been adopted merely because the existence of the tort of unlawful interference with trade had not been sufficiently appreciated. This lead to a distinction between so-called “direct interference” (i.e. inducing breach of contracts) and “indirect interference” (i.e. using unlawful means to prevent performance of another person’s contracts) which underpinned a number of important decisions such as Torquay Hotel v Cousins. Lord Hoffman also disapproved the adoption (by Lord Diplock) of “the unified theory” in Merkur Island Shipping (supra).
Some practical implications of OBG Limited v. Allan [2007] UK HL 21 which are likely to have an impact upon shipping litigation are that:
- Liability for economic tort now arises where a person intends to do a wrongful act. The test to be applied is fundamentally subjective and depends upon showing that the defendant actually had the relevant intention.
- There should be fewer cases, such as OBG, in which the claimants select the most favourable features of each tort whilst ignoring their requisite limiting features.
- It will be easier to strike-out misconceived economic tort claims in respect of which the necessary knowledge and intention have not been pleaded.
With thanks to Rupert Talbot-Garman of Reed Smith Richards Butler for preparing this article. Gregory Mitchell QC, of 3 Verulam Buildings, was Counsel in the case of OBG v Allan & Ors [2007] UKHL 21 and wrote an article on the case which was published on 29 June 2007 in the New Law Journal, on which this article is largely based.
