Construction is a rough sport, and the competition is fierce. Money and emotions cloud judgment. What happens when a contractor or owner goes too far? The term “tortious interference” gets thrown around a lot – but when exactly does it come into play?
“Competition brings out the best in products, and the worst in people.” -David Sarnoff
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What’s a Tort?
Most construction lawsuits deal with contract law. Contract law is based on the intention and agreement entered into by the two parties. Any breach of contract results in damages that are meant to bring the parties to the position they would have been in had the contract been appropriately executed.
Tort law stems from state statutes intended to protect against personal wrongs being committed. Damages awarded for those harmed by a tort are based on losses suffered and can include punitive damages as well. Thus, if your construction business is being affected by actions outside of your contract, you might potentially rely on tort law for relief.
What Constitutes Tortious Interference with a Contract?
Tortious interference with a contract occurs when a third party intentionally damages the contractual between two parties. The rationale behind this is to balance two basic ideas. On one hand, there’s a need to promote healthy economic competition. On the other hand, it’s important to protect existing contractual relationships.
For the sports fans out there, this is essentially the business world version of an anti-tampering policy. If contracts aren’t given protection from outside interference, the incentive and certainty of conducting business with a contract are eliminated.
Tortious Interference Might Occur Even if There Isn’t an Actual Contract
Lots of construction work is performed without an official contract in place. Even in a situation where there isn’t necessarily a contract for work, if one party takes action in order to disrupt the business relationship between two other parties, tortious interference might take place. This can be a fine line though – and when there isn’t an actual contract in place, it’s easier to claim that the alleged interference is just good old fashioned competition.
Elements of Tortious Interference Claim
Tort laws vary by state to state. However, generally speaking, to successfully bring an action for tortious interference with a contract, the claimant must prove:
- A valid contract (or a reasonably certain business prospect) with another person or business;
- A third-party knew of the contract or business relationship existed between the two parties;
- The third-party intentionally and improperly interfered with the contractual or business relationship; and
- The interference caused harm to the contractual or business relationship.
Elements 1, 2, and 4 are pretty straightforward. Where proceedings hit a snag is determining whether the third party (a) improperly and (b) interfered with the contract.
Unfortunately, there is no bright-line definition of improper, but courts will take a number of factors into account. These include the nature of the conduct, the motivation for it, interests that were interfered with, the benefits sought by the interfering party, and the business relationship between the two parties.
Tortious Interference in Construction
The most common way interference occurs in construction is through what’s known as an “inducement to breach”. This can happen in many different ways: contractors that are offering below market prices, owners blackmailing or using threats, parties rendering performance impossible or initiating wrongful lawsuits, and so on. As long as the interference results in the parties’ contractual relationship being harmed, tortious interference might be in play.
Examples of Tortious Interference in the Construction Industry
Tortious interference might be present any time one party is aware of a contract between two other parties and then acts to break up that arrangement. Here are some situations where tortious interference with a contract might arise in the construction context. Remember – any given claim would need to satisfy all of the requirements for a claim in the state where the incident occurs.
Example 1: An architect conspires to have the general contractor on their project (who was hired directly by the owner) terminated and takes actions to make it happen, like issuing intentionally burdensome change orders. The owner fires the GC once the GC refuses to complete the architect’s change orders.
Example 2: A contractor and subcontractor have a written agreement to perform work. After the contract is signed, another subcontractor comes in and offers to undercut the price for some of the work. The GC reduces their original subcontractor’s scope of work, hiring the new subcontractor to perform the work instead.
Example 3: A subcontractor and a material supplier have a signed purchase order. Another material supplier approaches the subcontractor and offers a lower price if the sub will terminate the original supplier. The original supplier is terminated.
Example 4: An owner hires a contractor to perform work. Wanting the contract, another contractor reaches out to the owner to bad mouth the hired contractor. The contractor originally hired is terminated.
These are pretty broad examples, and as mentioned above, the specific circumstances of any given situation could move the needle one way or another. Regardless, in situations where a third party’s actions break up an existing contract or business relationship, it’s worth thinking “Does this constitute tortious interference?”
A contractor claiming tortious interference actually has two separate claims. The first, under tort law, is against the third party who interfered with the business relationship. The second, under contract law, against the other party who was induced to breach the contract.
As mentioned above, claims under tort law come with a different rationale for awarding damages than contract breaches do. Damages for the tort claim can include a number of things. One being, economic losses. What are the lost profits the claimant sustained by losing that construction contract? The claimant may also argue for loss of business if they missed out on offers for the same period.
Another option is equitable relief, which is meant to prevent the wrongdoer from benefiting from the interference. If the goal was to secure the contract for themselves, they would be barred from taking on that contract. And lastly, if there is any evidence of specific malice or hostility involved, a party who has tortiously interfered with a contract may be on the hook for punitive damages as well.
Construction is highly competitive. Every business has to look out for themselves to some degree. But there’s a difference between competition and taking action to disrupt the competition’s contracts or business relationships. The line can be hard to find at times, but by understanding the factors that go into a tortious interference claim, a construction business can make sure they’re on the right side of the issue. Plus, if a third party interferes with your business interests, knowing what elements you’ll have to prove can be helpful when plotting your next steps.