Most businesses depend on a web of contracts and other relationships with vendors, distributors, agents, insurers, lenders, and subcontractors, to name a few. If someone unfairly disrupts one of your business relationships, such as by enticing an essential supplier to renege on its agreement with you, you have a legal remedy in the form of an action for intentional interference with contractual relations, also known as tortious interference (we will use this shorter name).
No criminal law exists to punish a business competitor who harms your company by interfering with its business relations. Instead, your remedy in a case of tortious interference lies in your state’s contract and tort laws. Contract law applies to claims among parties to an agreement, while a tortious interference claim applies to acts of individuals and companies with whom you do not have an agreement. So even though a tortious interference claim involves an existing contract or another kind of business relationship, its focus is on remedying the wrongful conduct of a non-party to that agreement.
There are two kinds of business relationships subject to third party interference. The first is reliance on existing agreements. The second is anticipatory reliance on relationships that are not contractual, but could become so or otherwise create an expectation of economic advantage. Tortious interference reflects these two possibilities by existing in two variations: interference with existing contract relationships and interference with prospective economic advantage.
As its name implies, this cause of action requires the existence of a business contract, coupled with the claim that a third party has wrongfully interfered with it. Each state has its own requirements to prove tortious interference with an existing contract. Generally, you will need to prove all of the following:
Important business relationships do not always require formal contracts. For example, your company may be negotiating to acquire another business, which you expect would lead to increased revenues and other benefits for your company. If someone interferes with these negotiations or a prospective business relationship, you might have a claim against that party. The elements of this claim are similar to those for proving interference with an existing contract. You must show all of the following:
Possibly the most famous example of a case for interference with prospective economic advantage happened in 1984 when Pennzoil filed suit against Texaco, alleging that Texaco interfered with its purchase of part of Getty Oil. Pennzoil won its case, which resulted in the largest civil damages award in U.S. history (more than $10 billion in economic and punitive damages) and for a time the largest bankruptcy in American history. The parties eventually agreed to settle Pennzoil’s damages claim for $3 billion.
Some states make it more difficult to prove interference with prospective relationships compared to interference with existing contracts. Being able to establish interference with a prospective business relationship can depend on whether the third party’s interference involved improper conduct, whereas a claim that a third party intentionally interfered with an existing agreement can prevail even if the interference consisted of acts that were legal.
Some examples of improper conduct are the use of fraud or misrepresentation, economic pressure, initiating civil lawsuits or criminal prosecutions, or even physical violence. Some states focus on the following factors when deciding if a third party’s interference was improper:
Other states focus on whether the third party’s behavior amounted to tortious conduct independent of the alleged interference. Check your state laws to make sure you are applying the proper criteria.
In the state of California, a third type of tortious interference claim is possible: negligent interference with prospective economic advantage. The main difference between intentional and negligent interference with prospective economic advantage is that intentional interference requires that the interfering third party must purposefully and wrongfully do something to harm your economic interest. Negligent interference, on the other hand, happens when the interfering party knew about your existing business relationship and had a duty not to harm that relationship.
The failure of the interfering third party to act with care and avoid causing harm gives rise to the claim of negligence. You must still prove that the negligent interference caused harm by preventing or hindering an actual economic benefit that would otherwise have resulted from your relationship (that is, your damages must be real and not speculative).
If you have a successful claim against one party in tort (the interfering third party) and another party in contract (who broke its agreement with you because of the third party’s interference), you will need to pursue the appropriate remedies against each. A common legal tactic that lawyers use is to allege both interference with an existing contract and interference with prospective economic advantage as alternative causes of action, so if one fails the other might still prevail.
Not every instance of third party interference with a contract or prospective economic advantage will result in legal liability. One defense is that the interference amounted to legitimate competitive activity. For example, if the third party causes your contract partner to leave an agreement with you that is terminable at will, or if the third party is competing with you to secure its own economic advantage (that is, it is not acting solely to harm your business) and its activities do not constitute an illegal restraint of trade, society’s interest in preserving a competitive free market might trump your desire for certainty, stability, or exclusivity in your business relationship.