Inducing a subsidiary’s breach of contract: a look at the merits (Kawasaki v Kemball)

The fact that a breach of contract is the inevitable consequence of a parent company’s actions does not of itself give rise to the tort of inducing a breach of contract. In Kawasaki Kisen Kaisha Ltd v James Kemball Limited [2021] EWCA 33, the Court of Appeal examined the test for inducing breach of contract in the context of a group restructuring. The court concluded that the claim against the parent company for its subsidiary’s breach had no real prospect of success. The case provides a useful summary of the law on economic torts and also serves as a timely reminder of the merits hurdle that a party must overcome when applying for permission to serve proceedings out of the jurisdiction.

Background

Kawasaki Kisen Kaisha Ltd (“Kawasaki”), the second Defendant, is a Japanese transportation company. In 2018, its container line business was restructured as part of a joint venture under the name Ocean Network Express (“ONE”).

James Kemball Limited (“JKL”), the Claimant, was adversely affected by the restructuring. JKL had a service agreement with K-Euro, an indirect English subsidiary of Kawasaki. Following the merger K-Euro was unable to comply with its obligation to offer a minimum number of haulage jobs to JKL, putting it in breach of the service agreement.

JKL sued K-Euro for breach of contract and Kawasaki in the tort of inducing breach of contract. The case against Kawasaki was that it had procured K-Euro to breach its contractual obligations to JKL in order to enable ONE to take over the haulage operations that would have otherwise been performed by JKL. JKL was required to obtain, and did obtain, permission to serve the claim on Kawasaki out of the jurisdiction. Kawasaki applied to set aside the order granting permission and Teare J dismissed the application. Kawasaki appealed. In support of its application for permission to appeal, Kawasaki made a number of criticisms of the way in which JKL had framed the inducement claim. In light of these criticisms, JKL sought permission to amend its Particulars of Claim.

Requirements for the tort of inducing breach

In order for JKL to succeed in its claim against Kawasaki, it needed to show that:

(1)      K-Euro had breached its contractual obligations to JKL;

(2)        Kawasaki had induced K-Euro to breach its contract with JKL by persuading, encouraging or assisting K-Euro to do so;

(3)        Kawasaki had known of the contract between JKL and K-Euro and had known that its conduct would have the effect of putting K-Euro in breach of that contract; and

(4)        Kawasaki had intended to procure the breach of contract either as an end in itself or as the means by which it achieved some further end.

The dispute focussed on the second and fourth of these ingredients, namely inducement and intention.

Inducement

Popplewell LJ, who delivered the judgment, held that conduct cannot qualify as inducement if it constitutes no more than preventing a party from performing its contractual obligations as one of its consequences. There needs to be some conduct that amounts to “persuasion, encouragement or assistance” towards the contract-breaker. In the words of Toulson LJ in the case of Meretz Investments NV v ACP Ltd [2008] Ch 244, “inducement requires the defendant’s conduct to have operated on the will of the contracting party”. The Defendant’s conduct must be capable of influencing a decision by the contract-breaker whether or not to breach the contract.

On JKL’s case as originally pleaded, the only relevant fact relied on as constituting inducement was that the establishment of the joint venture had the consequence that K-Euro breached its contract with JKL. Popplewell LJ held that this did not constitute inducement for the purposes of the tort; Kawasaki’s conduct was not unlawful in itself and it was not made unlawful merely because the inevitable result of its conduct was that K-Euro would breach its contract with JKL.

On JKL’s proposed amended case, it contended that Kawasaki had “encouraged or persuaded” K-Euro to breach the service agreement, but provided no evidential basis for this averment. JKL argued that it was likely that K-Euro would have been reluctant to breach its contract with JKL and that Kawasaki would have offered K-Euro some form of financial comfort, such as an indemnity against the consequences. Any such financial comfort, argued JKL, would constitute inducement. Popplewell LJ did not agree; K-Euro would have been in the same position whether any financial comfort was provided or not. The consequence of the joint venture was that K-Euro had no choice but to breach its contract with JKL; nothing that Kawasaki had said or done was capable of operating on the mind or will of K-Euro. It was not, therefore, reasonable to infer that K-Euro would have been reluctant to breach the service agreement without a financial inducement; it simply would not have been able to perform the agreement, whether or not it was willing to do so.

In the alternative, JKL argued that Kawasaki had been engaged in dealings with K-Euro which it knew to be inconsistent with the service agreement, and that these inconsistent dealings were sufficient to constitute inducement. The conduct relied on was Kawasaki’s withdrawal of supply of container haulage business to K-Euro. This argument failed for much the same reasons; the conduct in question was not capable of operating on the mind or will of K-Euro. Kawasaki was under no obligation to provide any haulage business to K-Euro and a failure to act, where there was no obligation to do so, could not constitute an inconsistent dealing for these purposes.

Intention

JKL needed to show that Kawasaki had procured the breach either as an end in itself or as the means by which it achieved some other end. Popplewell LJ held that JKL could show neither. It was plain that the breach of the service agreement between JKL and K-Euro was not the end that Kawasaki was pursuing, which was a restructuring of part of its business. Neither was the breach of the service agreement the means by which Kawasaki achieved that end; it was merely one (admittedly inevitable) consequence of the joint venture.

JKL argued that it was Kawasaki’s intention to acquire the economic benefit of the service agreement by taking over responsibility for the haulage operations itself. However, there was no evidence to support this assertion. Kawasaki’s evidence was that it and its subsidiaries had many similar contracts relating to the container business all over the world and that the individual contracts were not specifically considered as part of the merger discussions. Popplewell LJ considered that there was no reason to doubt this and concluded that the service agreement with JKL was “simply not part of the picture”.

The merits test and the Court’s decision

In an application for permission to serve a claim out of the jurisdiction, a claimant needs to establish that there is a serious issue to be tried. This means that the case has a real, as opposed to fanciful, prospect of success. It is the same test that applies when the court is considering an application to amend a statement of case. It is also what a party is required to show in order to defeat a summary judgment application made against it.

It is not enough that the claim is merely arguable; it must carry some degree of conviction. Further, the pleading must be coherent and properly particularised and must be supported by evidence which establishes a factual basis which meets the merits test; it is not sufficient to plead allegations which, if true, would establish a claim if there is no evidential material to support those allegations.

In light of the issues identified above, Popplewell LJ held that JKL had not met the required standard (both on the claim as originally pleaded and on the draft amended claim). Kawasaki’s appeal was therefore allowed and the order granting permission to serve Kawasaki out of the jurisdiction was set aside.

Practical implications

Following the UK’s departure from the EU, there is likely to be an increase in the instances in which a Claimant will be required to seek permission to serve out of the jurisdiction (at least in relation to non-contractual claims)¹. This case serves as a timely reminder of the merits hurdle that a claimant must meet when applying for permission to serve out. As the case makes clear, the hurdle is not an insignificant one, and claimants must ensure not only that their claim is carefully pleaded, but also that they have an evidential basis for each of the elements that they are required to prove.

The case also clarifies what a claimant must show in order to make out the ‘inducement’ and ‘intention’ elements of the tort of inducing breach of contract. While a parent company may often be a more attractive target for litigation than its subsidiary, the mere fact that its actions would inevitably lead to the breaking of a subsidiary’s contract is insufficient for the purposes of the tort. The parent (or other defendant) must have both influenced the decision of the subsidiary (or other contract-breaker) to commit the breach and procured that breach either as an end in itself or as the means by which it achieved some other end.