Inducing a subsidiary’s breach of contract: Parental Misguidance
12 February 2021
Is a parent company liable if it restructures its operations and a now disused subsidiary is prevented from meeting its own contractual obligations? In Kawasaki v Kemball, the Court of Appeal held that the parent neither induced nor intended its subsidiary’s breach and reaffirmed this economic tort’s restricted scope.
Kawasaki formed a joint venture and ceased supplying its subsidiary K-Euro (it had no obligation to supply). Consequently, K-Euro breached its service agreement with Kemball. Kemball claimed that Kawasaki induced K-Euro’s breach.
The Court listed the ingredients of this tort (focusing on (2) and (4)):
- B breaches its contract.
- A induced B’s breach.
- A knew of the contract and that its conduct would have that effect.
- A intended to procure the breach.
- A lacked a lawful justification.
Inducement: A’s conduct must (i) constitute persuasion, encouragement or assistance (not mere prevention); and (ii) have sufficient causal connection with B’s breach to attract accessory liability.
Kawasaki’s lawful formation of the joint venture was mere prevention. Even if Kawasaki had encouraged K-Euro to breach, there was no causal connection because the breach was caused by the formation of the joint venture and not by any encouragement. Kemball’s alternative argument that the inducement consisted of Kawasaki’s inconsistent dealings by withdrawing supply also failed. The withdrawal was mere prevention. Furthermore, failing to act where there is no legal obligation to do so cannot constitute “dealings”.
Intention: A must intend B’s breach as an end or as a means to an end.
The breach was merely a foreseeable consequence. It was not an end: Kawasaki’s goal was to achieve the economic benefits of a restructuring. Nor was it a means because the establishment of the joint venture was not targeted at the service agreement.