A disagreeable truth? Intention and knowledge in the tort of procuring a breach of contract

16 February 2012

The decision of the Full Court of the Federal Court of Australia in LED Technologies Pty Ltd v Roadvision Pty Ltd [2012] FCAFC 3 has provided guidance on the relationship between knowledge and intent when determining the liability of a third party accused of inducing or procuring a breach of contract.

This tort, also known as interference with contractual relations, occurs where a third party intentionally procures or induces one of the parties to a contract to breach it. In such circumstances, the wronged party to the contract can bring a claim for damages against the third party who procured the breach.

In the case before the Full Court, LED Technologies Pty Ltd (LED) entered into a contract whereby Valens Co Ltd (Valens) supplied automotive lamps based on moulds owned by LED. It contained a term that Valens would undertake not to sell or manufacture for sale lamps created from the moulds to others in Australia and New Zealand (the clause). Valens breached the clause by distributing lamps made from the same moulds to Roadvision Pty Ltd and Baxters Pty Ltd (the respondents).

Consequently, LED brought an action against the respondents for damages, alleging that the respondents had induced Valens to breach its contract with LED. One of the questions before the Full Court on appeal was whether the respondents were wilfully blind or recklessly indifferent as to whether their conduct procured the breach.

Besanko J of the Full Court observed that the substance of the tort is intention and that knowledge of the breach is an aspect of intention, rather than a separate element. It was irrelevant that Valens was a willing party to the breach; a third party will be liable if they possessed actual knowledge of the breach, or if they were wilfully blind or recklessly indifferent. Negligence, even gross negligence, is insufficient.

While the principals of the respondents were aware that LED claimed to be the beneficiary of the clause, their conduct did not demonstrate the required standard of knowledge. Even though they did not make reasonable enquiries about whether Valens was unlawfully using LED’s moulds, the “innocent and plausible reason” for a reduced price – that Valens wanted to secure business – was relied on to negate the claim that the principals had made a “conscious decision not to discover a disagreeable truth or simply did not care.”

The full decision can be viewed here.