Guard-Life Corp. v. S. Parker Hardware Manufacturing Corp.
Guard-Life Corp. v. S. Parker Hardware Manufacturing Corp.
Opinion of the Court
OPINION OF THE COURT
As a general rule, if no improper means have been employed, a competitor may not be held liable for intentional interference with a contract that is unenforceable for lack of mutuality.
In January, 1968 plaintiff Guard-Life Corporation entered into a contract with Kokusan, a Japanese manufacturer of locks, which provided that Guard-Life would be Kokusan’s exclusive distributor in the United States and Canada with respect to locks described in a schedule attached to the contract, production samples of which were to be subject to prior approval by Guard-Life. The contract had a stated term of five years and was thereafter "automatically [to] continue in force indefinitely” subject to the right of either party to terminate on one year’s prior written notice. Guard-Life immediately placed an order (No. 1001) with Kokusan for 12 monthly shipments of Segal and National Type Locks, with shipment to begin on Guard-Life’s approval of production samples. That approval was given on June 27, 1968, thus fixing the term of Order No. 1001 to expire on June 27, 1969. Order No. 1001 proved to be the only order ever to be placed by Guard-Life under its 1968 contract with Kokusan.
In the fall of 1968 defendant S. Parker Hardware Manufacturing Corp., a competitor of Guard-Life in the importation and wholesale distribution of various kinds of locks, initiated conversations with Katsura Company, Inc., of Japan, to establish a business relationship. (Solely for the purpose of the motion that is the subject of the present appeal, Parker accepts Guard-Life’s contention that Parker’s transactions with Katsura were the equivalent of doing business with Kokusan.) Parker was informed that Guard-Life’s contract
Deliveries to Guard-Life by Kokusan under Order No. 1001 ceased in April, 1969. In September, 1969 Guard-Life instituted an arbitration proceeding against Kokusan in Japan which ultimately culminated in an award dated November 30, 1976. The arbitrators awarded Guard-Life damages of $75,529 plus interest, representing lost profits, for nondelivery by Kokusan of locks under Order No. 1001. No relief was granted, however, on Guard-Life’s claim for alleged breach of the exclusive distributorship provisions of the 1968 contract, and the arbitrators further determined that the 1968 contract was not binding beyond Order No. 1001 because the parties had "an option of mutual cancellations” after the expiration of the term of that order on June 27, 1969. The motion papers do not disclose what part, if any, of the award has been collected by Guard-Life.
Guard-Life served the amended complaint in the present action against Parker in 1977, for willful interference by Parker with the 1968 contract between Guard-Life and Kokusan. After answer, Parker moved by order to show cause for a stay of trial and for complete and partial summary judgment. Supreme Court denied Parker’s motion and on reargument adhered to its decision. The Appellate Division modified to the extent of granting partial summary judgment dismissing Guard-Life’s claim for punitive damages (an issue not before us on this appeal) and as so modified affirmed the disposition of Supreme Court. It thereafter denied a motion for reargument but granted Parker leave to appeal to our court on a certified question as to the propriety of its order of modification. We now modify further to the extent of directing dis
Two closely related issues are posed on this appeal: May Parker be held liable to Guard-Life, on the theory of tortious interference with contract rights, first, for having induced Kokusan to cease deliveries on Order No. 1001 in April, 1969 (for which Kokusan was held liable to Guard-Life in the Japanese arbitration proceeding), and, second, for inducing Kokusan thereafter to terminate all contract relations with Guard-Life under their 1968 contract (for which Kokusan was not held liable to Guard-Life in the arbitration proceeding)? We conclude that, on the papers submitted on Parker’s motion for summary judgment, it is not entitled to a dismissal with respect to the alleged interference with Order No. 1001, but that it is entitled to summary judgment with respect to all other claims based on alleged interference with the 1968 contract (CPLR 3212, subd [e]). Additionally, an order should be entered limiting any recovery by Guard-Life to no more than $75,529.
Before proceeding to evaluation of the proof tendered on the motion for summary judgment, it is necessary to state the law applicable to the disposition of Guard-Life’s claims. With respect to the tort of interference with contract relations, it has been aptly said that "the law in this area has not fully congealed but is still in a formative stage” (Restatement, Torts 2d, ch 37, Introductory Note, p 5). That jurisdictions, and even courts within a single jurisdiction, have taken different views with respect to liability for interference with contract performance is demonstrated by the collection of cases appearing in a recent annotation treating only one aspect of the subject, interference with an invalid contract (Ann., 96 ALR3d 1294).
The American Law Institute in the Restatement of the Law of Torts 2d, adopted May, 1977, has stated the fundamental principle: "One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.” (§ 766.) The keystone of the statement is the adverb "improperly” — a term selected in preference to the phrase "without justification” appearing frequently in
Where the party claiming injury and the party charged with interference are business competitors — as are the parties to this action — there is presented a frequently encountered, particularized occasion for the application of the general principles as to liability for tortious interference with contract performance. Generalizations must be refined in this context to achieve a balancing of the protection of the interests of the one party in future enjoyment of contract performance and society’s interest in respect for the integrity of contractual relationships, on the one hand, and, on the other, the right to freedom of action on the part of the party interfering and society’s concern that competition not be unduly hampered. The Restatement in section 768 undertakes to articulate this balance. It differentiates between interference with an éxisting contract and interference with a prospective contractual relation (§ 768, Comment a). Although his status as a competitor does not protect the interferer from the consequences of
Critical to the determination of the second of the two issues in this case is whether a contract which is voidable for lack of mutuality is to be classified in the category of an existing contract or in that of a prospective contractual relation only. The Restatement (§ 768) expressly places a contract terminable at will in the latter category. Although the similarity
It is not sufficient, we suggest, to make the result hinge on the subjective expectation or state of mind of the parties, as the dissenters appear to think appropriate. They would distinguish between contracts which are terminable at will and those which are voidable. The internalized expectation of the party seeking to recover for an alleged tort, however, may well be the same whichever the form of the contract. Thus, under a contract in form terminable at will, other factors may
Nor, although the dissenters appear to suggest otherwise, should the state of mind of the interfering tort-feasor be determinative. While it must be established, as a threshold predicate for any claim of tortious interference, that the alleged tort-feasor knew that his competitor had a contract with the third party, as a practical matter he will usually be totally unaware of, and customarily indifferent to, the legal particulars of that contract (as distinguished, perhaps, from its economic or operational aspects). He will seldom if ever know whether the third party has a right to terminate or is entitled to avoid the contract. To the extent that ethical considerations are urged by the dissenters as having a bearing, we perceive no difference in the ethical culpability, if any there be, of the uninformed, intentional interferer, whether it later turns out that the contract he interfered with was terminable at will, voidable, or indeed unquestionably enforceable. Yet the dissenters would deny relief in the first instance (absent fraud or other misconduct) but grant it in the latter two.
In sum, the imposition of liability for intentional interference with performance of a contract to which the competitor is a party must depend on the worth and significance of the objective interest to be protected. The actual, legal interest under a contract which may be avoided by the other contracting party at his election is not materially different from that under a contract which the other contracting party may terminate at will. In both instances the party seeking to impose liability enjoys no legally enforceable right to performance; his interest is a mere expectancy — a hope of future contractual relations. Consequently, there having been no trespass or invasion of a substantial legal interest, there is no liability for interference with performance of a competitor’s
The principles embodied and the precepts set out in the Restatement and delineated above commend themselves in this developing area of the law and, in large measure, reflect prior case decisions in this jurisdiction. Thus, in Hornstein v Podwitz (254 NY 443) — a case involving a contract neither voidable nor terminable at will — this court upheld a verdict for plaintiff in an action for inducement of breach of the contract on proof of the existence of a valid contract, defendant’s intentional interference with performance and consequential damages suffered by plaintiff, a party to the contract. With respect to a contract for a definite term, persuasion to breach alone, as by an offer of better terms (Gold Medal Farms v Rutland County Co-op. Creamery, 9 AD2d 473), has been sufficient to impose liability on one who thereby interferes with performance (Gonzales v Reichenthaler, 233 NY 607).
Where contracts terminable at will have been involved, we have upheld complaints and recoveries in actions seeking damages for interference when the alleged means employed by the one interfering were wrongful, as consisting of fraudulent representations (Rice v Manley, 66 NY 82), or threats (Lurie v New Amsterdam Cas. Co., 270 NY 379) or as in violation of a duty of fidelity owed to the plaintiff by the defendant by reason of a relation of confidence existing between them -(A. S. Rampell, Inc. v Hyster Co., 3 NY2d 369; Duane Jones Co. v Burke, 306 NY 172). Absent some such misconduct, no liability has resulted to one whose actions have induced nonperformance of a contract deemed to be voidable and thus unenforceable (Livoti v Elston, 52 AD2d 444).
Against this background of the applicable principles of law, we proceed to consideration of Guard-Life’s claims in this case.
From the several extended affidavits and documentary proof submitted on the motion for summary judgment, Guard-Life has demonstrated that Kokusan ceased deliveries in April, 1969, prior to completion of its performance under Order No. 1001. It also appears undisputed that Parker, through Katsura, began communications with Kokusan as early as the fall of 1968 looking to its replacement of Guard-Life at least in part as Kokusan’s exclusive dealer in the United States and Canada. There is documentary and other evidence that Parker
The situation is otherwise, however, with respect to Guard-Life’s claim based on alleged tortious interference by Parker in inducing Kokusan to abandon all performance under the 1968 contract after expiration of the term of Order No. 1001. The legal status of Order No. 1001 and that of the 1968 contract for the remainder of the five-year term alluded to in the agreement are significantly and critically different. While the former was an enforceable contract for a definite term, the remainder of the 1968 contract was held to be unenforceable
Moreover, inasmuch as the alleged interference on this branch of the case was with respect to an unenforceable contract, there is no liability in tort unless the means employed to effect the interference was wrongful;
Finally, defendant Parker requests that it be granted partial summary judgment "limiting plaintiff’s monetary claim against defendant”. It contends that if plaintiff recovers at all its recovery should be limited either to $37,284, the amount of lost profits found by the arbitrators to have been sustained by reason of defendant’s actual purchases of front door locks of the type covered by plaintiff’s agreement with Kokusan, or to
There is no merit to the claim that recovery should be limited to the first figure tendered, for if it should be determined on the trial of the action that defendant improperly interfered with Kokusan’s performance with respect to Order No. 1001 then Guard-Life will be entitled not simply to lost profits attributable to the type of locks purchased by defendant Parker but to the full pecuniary loss of the benefits of the contract with which Parker interfered (Restatement, Torts 2d, § 774A, subd [1], par [a]). What other damages, if any, might be recovered in an action of this nature
For the reasons stated, the order of the Appellate Division should be modified, with costs, to the extent of remitting the case to Supreme Court, New York County, with directions to grant Parker’s motion for summary judgment dismissing the complaint except with respect to Guard-Life’s claim of tortious interference with Kokusan’s performance under Order No. 1001 and to order that damages awarded to Guard-Life on
. The Restatement recognizes that these two types of contracts present similar situations. In each there is a valid and subsisting relation until opposition to enforcement is raised or termination is effected (Restatement, Torts 2d, § 766, Comments f, g).
. Other factors include the motive and interests sought to be advanced by the one who interferes, the social interests in protecting the freedom of action of that person as well as the contractual interests of the party interfered with, and the proximity or remoteness to the interference of the conduct complained of.
. Section 768 of Restatement, Torts 2d, provides:
"§ 768 Competition as Proper or Improper Interference
"(1) One who intentionally causes a third person not to enter into a prospective contractual relation with another who is his competitor or not to continue an existing contract terminable at will does not interfere improperly with the other’s relation if "(a) The relation concerns a matter involved in the competition between the actor and the other and
"(b) the actor does not employ wrongful means and
"(c) his action does not create or continue an unlawful restraint of trade and "(d) his purpose is at least in part to advance his interest in competing with the other.
"(2) The fact that one is a competitor of another for the business of a third person does not prevent his causing a breach of an existing contract with the other from being an improper interference if the contract is not terminable at will.”
. See footnote 1, supra. To describe these contracts as "existing” in the sense that they are conceptually in esse and form the predicate for enforceable obligations unless and until terminated or avoided does not advance our present analysis. In this sense contracts terminable at will and contracts which are voidable at the election of the party concerned are indistinguishable. The Comments of the Restatement with respect to contracts terminable at will would appear to be equally applicable to voidable contracts: "If the third person is free to terminate his contractual relation with the plaintiff when he chooses, there is still a subsisting contract relation; but any interference with it that induces its termination is primarily an interference with the future relation between the parties, and the plaintiff has no legal assurance of them. As for the future hopes he has no legal right but only an expectancy; and when the contract is terminated by the choice of the third person there is no breach of it. The competitor is therefore free, for his own competitive advantage, to obtain the future benefits for himself by causing the termination. Thus he may offer better contract terms, as by offering an employee of the plaintiff more money to work for him or by offering a seller higher prices for goods, and he may make use of persuasion or other suitable means, all without liability.” (Op. tit., § 768, Comment i.)
. There is no suggestion that any of the other bases for liability as to an unenforceable contract set out in section 768 of the Restatement of Torts 2d — the relation concerns a matter not within the competition between the parties, the action complained of creates or continues an unlawful restraint of trade, or the purpose of the interference is other than to advance the competitive interest of the one interfering with performance of the contract — is applicable in the present case.
. On principle, the injured party in the action against the other contracting party for breach of contract would be limited to the elements of damage recoverable in a contract action. In an action against the third party for tortious interference, however, the elements of damages, including consequential damages, would be those recognized under the more liberal rules applicable to tort actions (Restatement, Torts 2d, § 774A, Comment c).
. Guard-Life concedes its willingness to give credit to Parker for whatever has been paid by Kokusan in satisfaction of the arbitration award. Whether Parker will assert any claim for additional credit for funds it may contend could have been collected by Guard-Life by recourse to reasonable collection methods remains to be seen when the action is tried.
Dissenting Opinion
(dissenting in part). I dissent in part and vote that the order of the Appellate Division be affirmed.
It is agreed that summary judgment should be denied to plaintiff in respect to the claim of tortious interference with the order for locks, denominated as "Order No. 1001”.
Issue, however, is taken with that portion of the majority’s determination which grants summary judgment to defendant dismissing that part of the complaint relating to claims of tortious interference in respect to the underlying 1968 contract (apart from said numbered order). It is agreed that if that contract, granting Guard-Life an exclusive distributorship, was terminable at will, defendant’s competitive interference would be justified (Restatement, Torts 2d, § 768; accord, e.g., Terry v Dairymen’s League Co-Op. Assn., 2 AD2d 494, 500-501). The fact, however, is that the contract, though voidable, was for a definite term and prior to defendant’s interference was being performed by the parties.
It is undisputable that where an agreement is terminable at will, a competitor of one of the parties is free to use proper and legal means to induce termination (e.g., Terry v Dairymen’s League Co-Op. Assn., 2 AD2d 494, supra; Restatement, Torts 2d, § 768; Prosser, Torts [4th ed], § 129, at p 946). This privilege of competition exists because the contracting parties have no contractual right to have their "relation continued, but only an expectancy” (Prosser, at p 946). Such an expectancy of future relations has, from early common-law days, always been subject to competitive interference (see, e.g., Mogul S. S. Co. v McGregor, Gow & Co., 23 QBD 598, affd [1892] AC 25).
But, for present purposes, a voidable contract with a prescribed duration simply is not akin to a contract terminable at
There are sound reasons supporting the distinction drawn by the drafters of the Restatement. Significantly, the expectations of the parties to a voidable contract, which is for a prescribed duration, differ substantially from the expectations of parties to a terminable at will agreement. The latter are usually aware, when they enter into the contract, that their relationship is to continue only so long as is mutually agreeable, and hence will refrain from relying on the agreement in planning future transactions. Parties to a voidable contract, on the other hand, believe that they have established a relationship which will span a period of time and may order their future conduct accordingly. Indeed, since the formal defect which renders the agreement voidable — such as a failure to comply with the Statute of Frauds or technical rules relating to mutuality — often does not surface except as a post hoc defense to an action for breach, the fact that the agreement is voidable is of little practical significance. From a pragmatic standpoint, then, parties to such a voidable contract are in a situation akin to parties to an enforceable agreement with a fixed duration.
Moreover, the nature of the conduct of one who interferes with a voidable contract does not differ from that of the person who interferes with an enforceable contract. In both cases, the wrongdoer is aware of the existing contractual relation, and chooses to intentionally interfere with it. In both cases, the contracting parties are performing their agreement, and expect the relationship to continue for a set period of
In fact, it is this ethical precept which, at bottom, is the raison d’etre of the law of interference with contractual relations. If society were interested only in fostering economic competition, the tort of contractual interference would never have developed. Rather, the law would have allowed business entities to engage in unfettered competition, and relegated injured parties to a breach of contract action. But this is not the path that has been followed.
Instead, the law has decided, long ago, that enforcement of certain market morals is a societal interest worthy of protection. When these fundamental precepts are violated, the law provides a remedy. And the remedy, in form a tort action, exceeds that which would be available in a contract action. One who induces a breach of contract is liable, not just for contractual damages, but for all damages legally caused by the wrong (Restatement, Torts 2d, § 774A, Comment c; majority opn, at p 197, n 6). The form of the action and the measure of damages signals that more than economic interests are being protected. Contrary to the majority opinion, then, the interests involved here are not solely protection of contract rights versus freedom to compete. Rather, society’s weighty interest in insuring a minimum level of ethical behavior in the marketplace is directly implicated.
It becomes clear why voidable contracts must be distinguished from contracts terminable at will. When a competitor induces termination of a contract terminable at will, he commits no ethical violation, and does not produce a result contrary to the expectations of the parties. In such a situation, there is no basis for prohibiting competitive interference. By contrast, where a competitor induces a breach of a voidable contract, which was being performed and which was for a designated period, he not only violates an important ethical precept himself, but he induces the contracting party to abandon his ethical obligation to carry out the promise contained in the technically unenforceable agreement. In addition, since the parties did not intend to create a voidable contract, and were likely unaware qf the defect, the interferer has upset their expectaticns.
Finally, the majerity’s suggesticn that neither the subjective
To uphold contracting parties expectations, and to protect the society’s interest in assuring a level of market morality, I would adopt the formulation of the Restatement, and hold that the privilege of competition only justifies interference with an at will and not a voidable contract.
Contrary to the implication of the majority, then, the wrongfulness of the act of the interferer in respect to a voidable contract need not rise above "intentional interference, without justification”, with the contractual rights of another, with knowledge of the contract (see, e.g., Campbell v Gates, 236 NY 457, 460). Accordingly, Guard-Life need only show that defendant intentionally interfered with its contractual rights, without justification and with knowledge of the contract to make out a cause of action. Having produced ample evidence in substantiation, but there being a true factual question as to the intentional interference, summary judgment should be denied in this respect.
Accordingly, affirmance is in order.
Judges Jasen, Wachtler and Meyer concur with Judge Jones; Chief Judge Cooke dissents in part and votes to affirm
Order modified, with costs to defendant, and the case remitted to Supreme Court, New York County, for further proceedings in accordance with the opinion herein and, as so modified, affirmed. Question certified answered in the negative.
The contract was found to lack mutuality in a Japanese arbitration proceeding and plaintiff Guard-Life is bound by that determination. A contract may be voidable because of lack of mutuality (Restatement, Torts 2d, § 766, Comment f). The question whether the contract would be enforceable in New York need not be reached (see Prosser, Torts [4th ed], § 129, p 932).
Reference
- Full Case Name
- Guard-Life Corporation, Respondent, v. S. Parker Hardware Manufacturing Corp., Appellant
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