A Project Owner May Be Liable for Interfering with A Contract Between a Subcontractor and The General Contractor
California’s Fourth District Court of Appeal’s recent decision in Caliber Paving Co., Inc. v. Rexford Industrial Realty & Management, Inc. holds that an owner on a construction project may be liable for intentional interference with a contract between the project’s general contractor and its subcontractor.
Rexford Industrial Realty & Management, Inc. (Rexford) hired Steve Fodor Construction (SFC) as its general contractor to make improvements to a Rexford property. The scope of work included repaving the parking lots on the property. SFC hired Caliber Paving Company, Inc. (Caliber) as its subcontractor to perform the parking lot repaving work.
Caliber showed up to the jobsite on September 11, 2017, and then left because trucks and trailers were parked in the area where the paving work was to be performed. Caliber demanded that SFC pay a $15,000 “move on” charge provided under the subcontract and refused to return to the project unless SFC agreed to pay. SFC refused and then terminated Caliber from the project and hired another subcontractor to complete the repaving work.
Caliber sued SFC for breach of the subcontract, and it sued Rexford for intentional interference with the subcontract. Caliber claimed that SFC terminated Caliber from the project because Rexford personnel told SFC to “kick [Caliber] off the job or hire somebody else.”
California law recognizes a tort cause of action against a noncontracting party who intentionally interferes with the performance of a contract, as in Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (Applied Equipment). Intentional interference with contract requires proof of: (1) a valid contract between the plaintiff and a third party; (2) defendant’s knowledge of the contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) breach or disruption of the contractual relationship; and (5) resulting damage. A contracting party cannot be held liable for conspiracy to interfere with its own contract.
Rexford filed a motion for summary judgment. The trial court granted Rexford’s motion, relying on the California Supreme Court’s decision in Applied Equipment: “The tort duty not to interfere with the contract falls only on strangers—interlopers who have no legitimate interest in the scope or course of the contract’s performance.” The trial court held that Rexford could not be held liable for intentionally interfering with the subcontract between Caliber and RFC because, as owner of the project, Rexford had a legitimate economic interest in the subcontract.
The Appellate Court reversed and remanded the matter to the trial court for further determination. The Court held that the Applied Equipment decision does not confer immunity for intentional interference for noncontracting parties having an economic interest in the contract. The Court held that it would make no sense to allow Rexford to escape the consequences of its allegedly intentional misconduct merely because it had an economic interest in the subcontract between RFC and Caliber.
“Conferring immunity from tort liability for interference with contract on a noncontracting party claiming to have a social or economic interest in the contractual relationship could have the anomalous result of leaving a plaintiff without a remedy for tortious conduct. … A party with an economic interest in a contractual relationship could interfere without risk of facing either tort or contract liability.”
“Contract law exists to enforce legally binding agreements between parties; tort law is designed to vindicate social policy. (Citation).” The law places greater moral blame on one who intentionally interferes with another’s contractual relationship, as opposed to a contracting party who fails to fulfill a contractual commitment.
This differing moral blame is reflected in the assessment of damages an injured party may be entitled to recover for breach of contract, as opposed to tortious misconduct. Breach of contract damages provide the injured party the amount they would have received if the contract had been fully performed. The purpose of breach of contract damages is to put the injured party in as good a position as they would have been if the contract had been fully performed. Consequential damages beyond the parties’ expectations when they entered the contract are not recoverable.
Tort damages, on the other hand, are awarded for “the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.” In addition, punitive damages may be awarded against a defendant who acts with “oppression, fraud or malice” in committing a tort. Punitive damages, even for a willful or malicious breach of contract, are not available in the absence of other tortious misconduct. A plaintiff may be awarded a significantly greater recovery for economic losses caused by a defendant’s tortious misconduct, as opposed to breach of a contract.
Caliber may be entitled to recover the profits it would have realized from the project if it can prove that RFC breached the subcontract by terminating Caliber prior to completion. Caliber may be entitled to recover lost profits against RFC and Rexford jointly, and it may be entitled to other consequential and punitive damages against Rexford if it can prove that Rexford intentionally and improperly caused RFC to breach the subcontract. Rexford will likely argue that it was justified in demanding that RFC terminate Caliber from the project due to Caliber’s refusal to complete the project because of a $15,000 payment dispute. An “actor having financial interest in third person’s business does not improperly interfere if he did not employ wrongful means and acted to protect his own interest from being prejudiced.”
The final outcome of the dispute between Caliber, SFC and Rexford remains to be determined, but the Caliber Paving Co. decision provides useful guidance and clarification of the law concerning tortious interference with contract by related third parties, particularly in the construction project setting.
Decided September 1, 2020.
Applied Equipment Corp. v. Litton Saudi Arabia Ltd., (1994) 7 Cal.4th 503, 513-514.
Pacific Gas & Electric Co. v. Bear Stearns & Co., (1990) 50 Cal.3d 1118, 1126.
Asahi Kasei Pharma Corp. v. Actelion Ltd., (2013) 222 Cal.App.4th 945, 961.
Applied Equipment, 7 Cal.4th at p. 514.
Applied Equipment, 7 Cal.4th at p. 515.
Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist., (2004) 34 Cal.4th 960, 968; Civ. Code § 3330.
Civ. Code § 3333.
Civ. Code § 3294.
Woods v. Fox Broadcasting Sub., Inc., (2005) 129 Cal.App.4th 344.