Contractor on phone in front of broken window

Since the money is coming from the property owner, it’s assumed that they can have ultimate control over a construction project — but that’s not necessarily the case. It’s not unheard of for an owner who has a problematic subcontractor to get involved in the project. However, if they direct a general contractor to terminate a subcontractor, they can open themselves up to liability for tortious interference with a contract.

Tortious Interference

Tortious interference, also known as intentional interference with contractual relations, is a legal remedy available when someone intentionally damages a party’s contractual relationship with a third party.

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Under California law (CACI No. 2201), proving a claim for intentional interference requires all of these five elements:

  1. A valid contract
  2. Knowledge of said contract
  3. Intentional act that induces a breach or disruption of that contract
  4. An actual breach or disruption of the contract
  5. Resulting damages

To boil this down to its most basic form, a third party (i.e. “a stranger to a contract”) can’t interfere with someone else’s contract, period.

Many have relied on the definition of a “stranger to a contract” being one that doesn’t have a “social or economic interest in the contractual relationship.” However, according to a recent California Court of Appeals case, a party (such as a property owner), can be held liable for interfering with a contract (such as a subcontract), regardless of their interest in the contract.

Court: Interest in a subcontract is not a defense against tortious interference

The case in question is Caliber Paving Co. Inc. v. Rexford Industrial Realty & Management, Inc.

Project Snapshot:

  • Owner: Rexford Industrial Realty & Management, Inc. (Rexford)
  • General contractor: Steve Fodor Construction, Inc. (SFC)
  • Subcontractor: Caliber Paving Co. (Caliber)

Rexford, the owner of various industrial properties, had hired SFC to make improvements to one such property. The work included the repaving of a parking lot, which SFC subcontracted out to Caliber.

The parking lot was split into four quadrants, with a separate cost for the completion of each. After Caliber had completed work on the first section, they agreed with SFC to begin work on the second quadrant would start on September 11. The day came, and as Caliber pulled up to the job site, there were vehicles parked on the lot, so they left.

Shortly thereafter, Caliber sent an email to SFC requesting an additional $7,500 as a “move on” charge. A few hours later, they increased it to $15K. SFC thought these charges were unjustified and refused to pay.

Diverging reasons for subcontractor’s termination

Caliber was subsequently terminated from the project. However, how we got there gets a little convoluted.

SFC claimed they began discussions with Caliber to resolve the matter. But Caliber refused to return to the site until the move-on charges were paid. Since they were unable to come to an agreement, SFC fired Caliber and hired a replacement paving sub to finish the job

According to Caliber, it was imperative to finish on schedule to start work on the 11th. The move on charge was justified under the contract. When explained to SFC, they agreed to reschedule the work a few days later.

The day before recommencement of work was schedule to begin, SFC cancelled the work. Caliber testified that SFC had told them that Rexford had directed them to “kick [Caliber] off the job, and hire someone else.”

Owner claims immunity due to economic interest in subcontract

Caliber then filed suit, with one claim for breach of contract against SFC, and one claim against Rexford for intentional interference with the contract. In response, Rexford filed a motion for summary judgment, substantially based on the fact that Rexford wasn’t a “stranger” to the contract, and therefore couldn’t be liable for interference with said contract. (The other basis for summary judgment was inadmissible evidence as hearsay, which was denied.)

The trial court granted the motion for summary judgment citing a CA Supreme Court case which declared, “non-contracting parties, i.e. strangers to the contract, could not be held liable for intentionally interfering with contract.”

However, the case referred to non-contracting parties as “outsiders” who have “no legitimate social or economic interest in the contractual relationship.” Since, according to the trial court, Rexford did  have an economic interest in the contract, they could not be liable for interference. Caliber appealed.

Appeals court declares owners can be liable for interfering with a subcontract

Rexford’s argument relied heavily on the definition of “outsiders” to a contract from the Supreme Court case which is those “who have no legitimate social or economic interest in the contractual relationship.” And there’s no more clear economic interest than an owner’s interest in a subcontractor completing their work.

However, that case dealt with whether a party can be found liable for conspiracy to interfere with their own contract. It did not deal with the issue of a non-contracting party claiming to have an economic interest. The Appeals Court reasoned that the Supreme Court case in question “did not intent to restrict tort liability for interfering with contractual relations to a non-contracting parties with no social or economic interest.”

The entire basis for the tort of intentional interference was to provide a remedy against a third party who disrupts an existing contractual relationship. The court declared that:

“A contractual relationship is no less disrupted, and the contracting party’s interest in reviving performance of the contract is no less impaired, when the non contracting stranger claims a social or economic interest in the contractual relationship.”

To declare otherwise would go completely against the remedy of intentional interference. Who, besides those who have an economic interest, would “have the greatest incentive to interfere with it”? Accordingly, the appeals court declared that “a defendant who is not a party to the contract or an agent to a party to the contract is not immune from liability for intentional interference with contract by virtue of having an economic or social interest in the contract.”

The judgment granting the motion summary was reversed, and the case was remanded back to trial.

Owners need to stay out of subcontractor issues

At first glance, this seems like a fair outcome for the subcontractor. But, this decision is tough pill to swallow for California property owners, and puts general contractors in a particularly unique situation. At the end of the day, it needs to be up to the GC to decide how to deal with a “problem” subcontractor.

If Rexford merely directed SFC to fix the problem, and get the lot paved, the burden would (and should) be on SFC to come to an agreement with Caliber. If SFC had decided to terminate and replace Caliber, then Caliber would have sued for breach of contract and wrongful termination. And if successful, SFC would have likely looked to Rexford for reimbursement.

If this case highlights anything, it’s that owners need to let their GC handle their subcontractors as they see fit. The owner needs to stay out of it. They can’t direct a GC to terminate or remove a sub, or they risk exposing themselves to liability under tortious interference with a contract. California property owners and developers can no longer rely on protection due to “social or economic interest” in the contract.