Business torts.

Robert had a unique business propositions presented to him. He was the head of the automotive division for his employer, a company we shall call CTC.

CTC had many franchised retail stores throughout Canada and sales of automobile seat covers at CTC stores represented 60 percent of the Canadian seat cover market.

For about 30 years CTC had used a company called Dynamics to supply seat covers to it. CTC was Dynamics largest customer. Dynamics' sales to CTC represented more than 50 percent of Dynamics' total sales.

A competitor of Dynamics approached Robert and offered to pay him a two percent commission for all sales made by the competitor to CTC. This would involve taking business away from Dynamics.

Robert has asked his lawyer what he should do. His lawyer has advised him that, first, the agreement to the business proposition or acceptance of the commission would be a breach of his duty as an employee of CTC and cause of his immediate dismissal. Second, such conduct may also be a criminal offence, commonly referred to as the acceptance of a bribe. Finally, it would also expose him and Dynamics' competitor to civil liability to Dynamics for unlawful interference with economic relations.

In this article, we will discuss various economic torts such as the unlawful interference with economic relations.

A "tort" is described in Black's Law Dictionary as "a private or civil wrong or injury, other than breach of contract, for which the court will provide a remedy ..." The remedy is usually a sum of money in compensation for the injury or loss caused by the wrongdoing. The most common tort is negligence, for example, a claim arising from a motor vehicle accident.

The common law derived from the decisions of the courts has traditionally recognized a number of economic torts. Three of these are

* intimidation;

* interference with contractual relations; and

* unlawful conspiracy.

Intimidation

The elements of this tort require that the plaintiff, or victim, must prove

* that the defendant, or alleged wrongdoer, threatened to commit an unlawful act;

* that the threat, if it had been carried out would have caused damage or a loss to the plaintiff;

* that the motive or effect of the threat was to harm the plaintiff financially;

* that the threat was made to the plaintiff or others; and

* that in response to the threat, the plaintiff or others reasonably altered their financial affairs or dealings with the plaintiff, causing a loss or damages to the plaintiff.

It is to be noted that the threat may be such that if it were carried out, it would cause damage either directly to the plaintiff or indirectly through the conduct of others in their dealings with the plaintiff.

The tort of intimidation is complete when the intentionally damaging threat is made. If the threat is carried out, other torts, as discussed below, will have been committed.

Interference with Contractual Relations

This tort is sometimes referred to as inducing a breach of contract. The elements of this tort require that the plaintiff must prove

* that a contract existed;

* that the defendant was aware of the contract;

* that the defendant wrongfully interfered with the contract or induced the breach of the contract; and

* that the plaintiff suffered damages as a result of the interference or induced breach of the contract.

The cases suggest that a defendant may not be reckless or willfully blind to the existence of the contract.

An example of the tort of inducing a breach of contract is an Alberta case where an individual provided financing to a group of employees that enabled the employees to leave their employment on short notice. The individual also provided business advice to set the employees up in competition with the employer. The employer was successful in suing the individual for the damages suffered as a result of the sudden departure of its employees.

In a Manitoba case, the father of a businessman who had agreed to purchase a business was held personally liable to the vendor of the business for encouraging his son not to complete the transaction. He had discovered that the business was being placed into receivership and the father believed that his son could negotiate a better purchase price once this occurred.

Civil Conspiracy

This obscure tort requires that two or more persons act in combination to either

* injure a third person by unlawful means; or

* act with primary intent to injure the plaintiff if the means used are lawful.

Justice Mesbur of the Ontario Court of Justice has described this tort as follows:

"The tort requires an agreement between two or more people. They must agree to act lawfully, but with the main goal of harming the plaintiff: the `injurious purpose' test. Alternatively, they must commonly intend to act unlawfully, where they know the plaintiff is likely to be harmed by their unlawful action: the `unlawful means' test. There must be an overt act, and the plaintiff must have suffered actual damages as a result."

Duca Community Credit Union Ltd. v. Giovannoli, 2000.

The difficulty in establishing that this tort has been committed is proving the purpose of the means used. For example, if the predominant motive is to advance the self-interests of the defendants rather than to cause injury to the plaintiff, and no unlawful means are employed, then the conspiracy is lawful. Therefore, to prove that this tort has been committed, it may be necessary to convince the court that the purpose was destructive by the prevailing standards of the community.

However, if the means used to further the conspiracy are unlawful, there is no need to prove an intention to harm the plaintiff.

In the example discussed at the beginning of this article, Robert and Dynamic's competitor would likely be found liable to Dynamic under a civil conspiracy, if the secret commission was paid and Robert caused CTC to move its business from Dynamic to that of the competitor.

Unlawful Interference with Economic Relations

Because of the overlap of these three economic torts, Canadian courts have derived the tort of unlawful interference with economic relations.

The elements of this tort are

* "the existence of a valid business relationship or business expectancy between the plaintiff and another party;

* knowledge by the defendant of that business relationship or expectancy;

* intentional interference which induces or causes a termination of the business relationship or expectancy;

* the interference is by way of unlawful means;

* the interference by the defendant must be the proximate cause of the termination of the business relationship or expectancy; and

* there is a resultant loss to the plaintiff" (671122 Ontario Ltd. v. Sagaz Industries Inc., 1999).

The cases discussed above all represent the tort of unlawful interference with economic relations.

Another example of such a tort was a case in which an accounting firm was found liable for luring a partner from a competing accounting firm with the knowledge that this was in breach of the notice requirements in the competitor's partnership agreement. The defendant accounting firm was liable for the damages suffered, as it was aware of the notice requirement, of the existence of a non-competition agreement and of other litigation regarding a similar agreement but decided to take the risk of hiring the accountant.

Deceit 

Another economic tort, deceit, is also sometimes referred to as fraud or a fraudulent misrepresentation and is closely tied to contract cases.

The elements of this tort are the following:

* there must be a representation of fact;

* the representation must be made with knowledge that it is false;

* the representation must be made with the intent that it would be acted upon by the plaintiff, or a group of persons including the plaintiff. Some authorities suggest that the representation must be material or the determining factor for the transaction;

* the plaintiff must have acted upon the false statements, i.e., the representation must have induced the plaintiff to act;

* the plaintiff must have suffered a loss or damage.

The representation must be made by word or conduct. Mere silence or a failure to disclose will not be sufficient unless a separate duty to disclose exists.

The representation must be of facts. A misrepresentation as to the law is not grounds for relief. It must be intentionally false or at least made in the absence of a genuine belief that it is true. The court usually must be shown an element of dishonesty in the representation, in that it was made knowingly as being false, or without belief in its truth or recklessly or carelessly as to whether it was true or false.

Employment Law

Another method by which the law recognizes economic interests is in employment law.

Under Canadian common law, the courts have determined that all employees owe a duty to keep confidential the proprietary information of the employer. This means that trade secrets must remain secret.

However, this does not prevent an employee, even one in top management, from leaving their employment and creating a business, which is in direct competition with their former employer, but the right to compete is qualified. The employee cannot use customer lists, price lists, or other confidential information of the former employer to actively solicit the business of specific customers of the former employer.

For directors, officers, and key managers, the courts often describe these individuals as having a fiduciary position that would prevent them, even after their resignation, from approaching a customer with a view of enticing the customer to cease doing business with the former employer. This situation will continue for a reasonable period of time after the termination of the employment and will depend on the nature of the position and duties of the former employee. That person is entitled to accept business from the former customer, but direct soliciting of that business is not permissible.

As was stated by the Alberta Court of Appeal, "... An employee will not be permitted, following termination of his employment, to use for his own benefit confidential information acquired in the course of his employment or information which is `special or peculiar to his ex-employer'. On the other hand, it is equally clear that following termination of the relationship an employee is free to use for his own benefit or for the benefit of third parties any skill and general knowledge which he acquires during the course of his employment" (Monarch Messenger Services Ltd. v. Houlding, 1984). Therefore, the courts have also made it clear that these restrictions do not prevent a former employee from using for his or her own benefit or for the benefit of a new employer any skills and general knowledge which the individual acquires during the course of his or her employment.

If an employer wishes to restrict the ability of an employee competing in its industry, the employer should, at the time of hiring, negotiate a specific Non-Competition Agreement with the employee.

Generally speaking, such Non-Competition Agreements must be reasonable in terms of both the geographic area in which the competition is restricted (for example, a city or province) and duration (for example, one year). Each case will depend on the circumstances pertaining to that particular employee, employer, and industry.

For example, a Non-Competition Agreement that purported to restrict an individual who worked as a plumber for a company that only had business in that town (and was the only plumbing company in town) from working as a plumber elsewhere in the province for five years would likely be unenforceable. However, if the Non-Competition Agreement prevented competition only in that town for six months, then this is more likely to be an enforceable agreement.

Conclusion

Most of us are aware of the potential consequences arising from a failure to meet our legal obligations, such as failing to stop our vehicles for a red light or failing to make our mortgage payment.

But the law also recognizes economic interests and the protection of these interests from unlawful interference.