Generally, when a competitor sees your sign in a customer’s front yard, he respects that relationship and looks elsewhere for prospective business. It seems in this economy that more of our clients are finding that this time-honored tradition is being ignored. Instead, their sign is a magnet that attracts competitors intent on stealing customers. If you are the victim of these poor business practices, you don’t have to sit by and let it happen. It is a violation of the law to interfere with the relationship between a contractor and his customer.
Tortious Interference with Contractual Relations is called a tort. Simply speaking, a tort is an act that injures a person in some way, and for which the injured person may sue the wrongdoer to recover his damages. A tortious interference claim arises when a second contractor convinces a customer who already signed a contract to work with the first contractor, to cancel the first contract and sign a new one with the second contractor. In this situation, the first contractor may have a claim against the second contractor. So what do you need to prove in order to win? More importantly, what do you stand to gain if you win and how much will it cost?
To win a Tortious Interference with Contractual Relations claim, the injured party must prove 5 elements:
- The injured party had a valid contract with the customer;
- The wrongdoing party had knowledge of the contract;
- The wrongdoing party intentionally induced the customer to breach the first contract;
- There was not a justifiable reason for inducing the customer to breach; and
- The injured party actually incurred damages as a result.
- We’ll look at each element a little more closely.
This element only requires that you have a written and signed contract showing the terms of the agreement and the scope of the work. The ordinary “price agreeable” contract is sufficient.
This may require the customer to testify on your behalf which could be a difficult hurdle to overcome. However, courts will often find knowledge if the wrongdoer had facts which, with a reasonable amount of investigation, would have disclosed that a contract existed. For example, it would be reasonable to ask the homeowner if they have a contract with the company whose sign is in their yard. Ignoring the obvious does not let the wrongdoer off the hook.
The wrongdoer must do something to encourage the homeowner to cancel your contract. If the wrongdoer offered the same deal or the homeowner cancelled because he didn’t feel comfortable with you, the courts won’t find inducement. The wrongdoer must offer some additional consideration that induced the breach. Consideration usually refers to money, but it can be anything of value. For example, offering to waive a deductible the original contractor required the homeowner to pay is sufficient consideration.
The courts look at the wrongdoer’s motivation for interfering with your contract to determine if the act rises to unlawful conduct. This is the most difficult element for the injured party to prove. It’s okay for a wrongdoer to interfere with a contract if doing so gets him something he is legal entitled to or preserves a legal right. However, gaining a new or an added benefit at the expense of another person is not justified. The court will look at the:
- nature of the wrongdoer’s conduct;
- motivation for the wrongdoer’s conduct;
- interests of the first party;
- interest that the wrongdoer wanted to advance for himself;
- public policy interests of protecting everyone’s right to enter into a contract;
- relevance of actions taken by the wrongdoer to the customer’s decision to cancel the contract; and
- relationships between all of the parties.
The injured party must establish, first, that he was damaged and, second, that it was the actions of the wrongdoer that caused those damages. If the damages would have happened anyway, then the wrongdoer won’t be held responsible. For example, if the customer was pressured into signing the contract and would have cancelled anyway, then the actions of the wrongdoer may not have been the cause of the damage.
When you prove that the conduct of the wrongdoer was the cause, damages will be awarded. The most common damage is lost profits. The contractor can recover for past, present, and future damages and recover attorney’s fees and expenses.
Everyone knows of a situation where they’ve lost a contract to a competitor. So it would seem that everyone has a claim against a competitor for tortious interference. That may or may not be true. What’s more important is understanding that most cases result in a settlement; the wrongdoer agrees not to interfere any more and the injured party agrees to drop the case.
This can be a hollow victory because attorney’s fees and costs can run to $40,000 or more if the case goes to trial. Just getting to a settlement can cost $10,000. Each party may be responsible for its own legal expenses.
Tortious interference with contractual relations is a real claim that one party has against a wrongdoer when a customer is induced to cancel a contract. It‘s a difficult lawsuit to win because courts generally favor a right to freely enter into a contract. But when a customer is induced to cancel its contract with you by a wrongdoer, you may have a viable claim.
Tortious interference claims are expensive and there are no guarantees. But when a wrongdoer seems to do the same thing over and over again, it may be worth spending the money to get an injunction that stops the wrongdoer and protects your future profits.
Every situation is different. Consult with your legal advisor if you think you’ve been the victim of tortious interference. Your advisor will tell you if you have a good claim and the costs involved in pursuing it.