Inducing a breach of contract – Court of Appeal clarifies components necessary
The recent case of Allen (t/a David Allen Chartered Accountants) v Dodd & Co Ltd  EWCA Civ 258, offers clarity on the test for liability of those who have induced a third party to breach their contract obligations, even though in this case the court did not accept the defendant was liable for any wrongdoing. The Court of Appeal held that anyone facing such a claim will not be held liable if they had an honest belief that their conduct had not caused the inducement.
The ruling in this case highlights the limitations of this tort in respect of legal advisers and confirms that no liability will be established if on reliance on legal advice there would not be an assumption that a breach of contract would take place.
This case involved two firms of accountants and an employee moving from one to the other. The previous employer, Allen (“A”), had included covenants in the employment contract which it believed were breached when he started work for Dodd & Co (“D”). D had been aware of the covenants and quite sensibly took legal advice on the issue, before offering a job and this advice had been that, on balance, the covenants were unenforceable. D had been told there was a risk that this opinion might not find agreement from the court but had no reason otherwise to doubt the pertinence of this advice and so offered the employee the position.
A then commenced a claim against the ex-employee but also against D for inducing a breach of contract. Despite the court finding the employee in breach of covenant, it dismissed the claim against D confirming it had been entitled to rely on the incorrect legal advice it had received. A clearly did not want to walk away from a score-draw and appealed contending that D was aware that the advice received was not firm and because there was a risk the covenants would prove enforceable, that was sufficient to find D liable to A.
The Court of Appeal dismissed A’s appeal , clarifying that:-
- To be liable, a defendant must know that it is actually inducing a breach of contract ( OBG Ltd v Allan  UKHL 21,  1 AC 1);
- If the defendant deliberately turned a blind eye and proceeded regardless it may be treated as having intentionally induced the breach of contract;
- An honest belief that its conduct will not involve breach means it will not be held responsible for the third party’s breach of contract;
- It is irrelevant that the defendant’s belief is mistaken in law. Nor does it matter that its belief is muddle-headed and illogical so long as it is honest.
Although in an employment context, the court confirmed this ruling applied to all sorts of commercial contracts procured in everyday dealings. The court reminds us that “to insist on definitive advice that no breach will be committed would have a chilling effect on legitimate commercial activity”. It is welcomed reassurance recognising that legal advice will not always be correct, one may rely on it and will not face increased risks of being successfully sued for doing so.