Defence of justification in economic rivalry, Employment Bulletin, 21 Emp. Bul. No. 2 (April 2011)

04 Apr Defence of justification in economic rivalry, Employment Bulletin, 21 Emp. Bul. No. 2 (April 2011)

DEFENCE OF JUSTIFICATION IN ECONOMIC RIVALRY
By Nikolay Y. Chsherbinin

The area of economic torts is not comprehensible without a great deal of time and effort. The judiciary and practitioners across Canada consistently find themselves wading through elements and rationales of the two seemingly similar, yet fundamentally distinct, torts of inducing breach of contract and interference with contractual relations, confusing them in the process. Illustrative of such confusion is the Manitoba Court of Appeal decision in Johnson v. BFI Canada, 2010 MBCA, which involved rivals in the waste management business, where a long-time customer of one was enticed away by another. The rarely pleaded defence of justification, which allows a party to avoid liability for inducing breach of contract, was the nub of the appeal.

In this case, the plaintiff, Johnson, had been an executive with the defendant, BFI. He left, and after his non-competition obligation ended, established Johnson Waste Management (“JWM”), which immediately began to compete with BFI for customers. Top Line (“TL”) was BFI’s client for more than twenty years. Their business relationship was governed by BFI’s standard form of agreement, which had a rollover provision that automatically renewed the agreement, unless TL gave notice of termination at its conclusion. The agreement in question was for a three-year term and was signed on April 6, 2000.

On October 17, 2000, JWM called TL in order to solicit its business, after TL’s agreement with BFI ended. TL entered into an agreement with JWM, which required it to “deliver any notice required to terminate that other agreement in accordance with its terms”. Having received TL’s termination notice, BFI immediately sent its sales manager on a mission to retain its long-time client. The result was that BFI and TL renewed their contractual relationship until 2005.

As a consequence, JWM sued, alleging that BFI induced a breach of contract between JWM and TL, causing it damage. BFI defended, arguing that even if it had induced a breach, it was justified in doing so, because TL’s termination notice was invalid and therefore did not terminate the existing valid agreement with BFI.

The Court of Appeal found the fact that BFI had an existing agreement with TL to be a “critical factor” justifying BFI’s interference. In the court’s view, BFI was not motivated by a desire to harm JWM, but rather by protecting its own contractual rights, which were equal or superior to the rights of the JWM. Thus, the court confirmed that the defence of justification will serve to protect “equal or superior rights” of a complainant. The rights may be contractual or derived from property. Moreover, when the defence of justification is considered, the defendant’s motives become relevant and will be scrutinized.

But what if the defendant’s contract, though innocently entered into, is subsequent to the plaintiff’s prior contract? Would that innocence provide a defence, should the defendant exercise his contractual rights to the detriment of the plaintiff? In Drouillard v. Cogeco Cable Inc., 2007 ONCA 322, the Ontario Court of Appeal observed that: “the absence of malice or bad faith is insufficient to establish the defence”. Of course, it might be possible for the innocent defendant to insist on the superiority of his contractual rights by arguing that he merely prevented the performance of the plaintiff’s contract rather than induced its breach.

To fully appreciate the defence of justification, it is important to understand its realm. In Johnson, the trial judge mischaracterized the cause of action, since he described and dealt with the tort of intentional interference with contractual relations (“Interference Tort”), rather than the tort of inducing breach of contract (“Inducement Tort”). The scope, rationale and elements of these torts differ, as does the availability of the defence. The Inducement Tort is narrow in scope and addresses the issue of persuading a contractor to defect, while the Interference Tort is broader and designed to enforce basic standards of civilized behavior in economic rivalry. More specifically, these torts demand:

Inducement Tort 
The knowledge of contract
Intention to procure the breach of contract
Actual Breach of Contract
Damage
A Lack of justification

 

Interference Tort
Interference with the plaintiff’s business or livelihood by unlawful means
Intention to injure the plaintiff

Economic loss caused to the plaintiff

Despite Justice Aitken’s dictum in Alleslev-Krofchak v. Valcom Ltd., 2009 CanLII 30446 (ON S.C.J): “the law is unclear as to the extent to which justification is available as a defence to the tort of intentional interference with economic relations…” the defence of justification is only available under the Inducement Tort. Given that interference with the plaintiff’s business or livelihood by “unlawful means” is an essential element of the Interference Tort, the defence of justification is, arguably, unavailable to the defendant, because actions unlawful in themselves could not be justified. Significantly, since the Interference Tort does not require a pre-existing contract, the defence of justification is unavailable, simply because there could be no contract breach that can be justified.

To expand the realm of the defence into the Interference Tort would allow opportunistic complainants to impel courts into treating expectations as rights, which do not concur. Rights are legal and relate to liability (e.g. breach of contract), while expectations are factual and relate to damage (e.g. frustration of economic expectations). In Drouillard, the court made it clear that the defence “…has a narrow scope”. Therefore, if the defence is left broad, the law on it will be rendered unstable.

Exactly what is involved in the defence of justification is not clear, as is the range of conduct that will constitute lawful justification. In Drouillard, the Ontario Court of Appeal acknowledged that: “…there is little useful modern Canadian authority for this principle….” Mostly, in dicta, the courts outline what will not constitute justification. On analysis, case law reveals that the defence covers three areas:

  1. protecting private rights. The defence will be available, where there is a collision of contracts, as in Johnson. Specifically, where the contract between B and C, the breach of which has been induced by A, is inconsistent with a preceding contractual relationship between A and B, or if A might have achieved the same end, of bringing about the termination of the contract between B and C by the exercise of legal rights otherwise available to A;
  2. protecting private interests. The defence will be available where the breach of contract is induced by moral obligation. An example of this occurs when a doctor or lawyer gives medical or legal advice. Though the mere advice does not give rise to the Inducement Tort, there may be situations where that advice is deemed to be persuasion.
  3. protecting the public interests. A public body may induce a breach of contract and justify its bona fide actions. In Posluns v. Toronto (1966), 53 DLR (2d) 193, the Toronto Stock Exchange had withdrawn approval for the plaintiff’s continued employment, which had been subject to the Exchange’s control. They were justified in any consequent breach they induced.

Obviously, any defence of public interest has to be weighty enough to persuade the court that it is a social interest of greater public import than is the interest involved in protecting the plaintiff’s interest.

 

While it is clear that the defence of justification has a narrow scope, its precise limits remain obscure. The defendant may be justified in invading the plaintiff’s contractual right, if the interference is premised on a prior existing legal right, or in furtherance of the greater public’s, and not his/her own, interest. In order to determine this, requires an evaluation and balancing of the social import of conflicting interests of the respective parties, the public interest per se, the defendant’s motive, object and reason for inducing a breach of contract. Undoubtedly, the interests in life, health, reputation and the public interest are more fully protected from invasions than is the interest in contractual rights. Perhaps, in the fullness of time, the appropriate fact situation will allow for an enhancement of the guidelines describing this conceptually interesting defence.

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