California Court Holds Owner Liable to Subcontractor for Tortious Interference with Subcontract

The California Court of Appeals, Third District, in a recent opinion, found that the owner of a construction project and its general manager can be sufficiently removed enough from a construction subcontract to be found liable for tortious interference with the subcontract. In Torres v. Seaberg Const., Inc., 2011 WL 4844690 (Cal. Ct. App. Oct. 12, 2011), a general contractor had retained a completion subcontractor to finish installation of water, sewer and fire suppression lines. The general contractor and completion subcontractor were both under time and materials contract, whereby the general contractor reviewed and approved the subcontractor’s monthly invoices and forwarded them to the owner for payment. After initially paying the subcontractor’s monthly invoices, the owner started criticizing the subcontractor’s time records and equipment charges, and refused to make payments on these invoices to the general contractor.  As a consequence of nonpayment the subcontractor went out of business.

The trial court found in favor of the subcontractor on its breach of contract claim against the general contractor, and also awarded the subcontractor special damages against the owner for tortious interference with the subcontract. On appeal, the Third District considered whether an owner of a construction project could be liable to the subcontractor for “tortious interference with contract.” This tort permits a party to recover tort damages if a non-contracting party or “stranger to the contract” intentionally interferes with the performance of their contract or prospective contract. Intentional interference with contract requires an interference that is both intentional and improper.

The appellate court concluded that the owner’s behavior in disapproving time and expense reports from the subcontractor was an improper and intentional interference with the subcontract.  The parties’ contract in this case had no provision permitting the owner to question, review, or deny invoices approved by the general contractor and had no provision permitting refusal of payment based on the subcontractor’s unsatisfactory completion of the work.  Based on this, the court held that the owner was not contractually authorized to “insert” itself between the general contractor and subcontractor by refusing payment.

Furthermore, the court defined “stranger to the contract” as one who is neither a party to the contract nor an “agent” of any party to the contract. The court held that the owner was not an agent of the general contractor and the owner was also not a party to the subcontract.  Therefore, the court found that the owner was a stranger to the agreement between the subcontractor and the general contractor and could be liable for tortious interference with contract performance. However, the dissenting judge disagreed with the majority’s definition, finding that a stranger to the contract is an “outsider” who has “no legitimate social or economic interest in the contractual relationship.”  The dissenting judge found that the owner had a clear economic interest in the subcontract and therefore could not possibly qualify as a stranger.

The subcontractor in this case found a way around a common dilemma of lack of privity with the owner by pursing the owner under tort theory and recovering double its contractual damages. However, most courts would likely agree with the dissenting judge. The Torres decision focused on the fact that the contractual arrangements in this case were time and material, rather than fixed price.  Had both the prime contract and subcontract been fixed-price agreements, the owner would likely have escaped liability for the tort of intentional interference with contract.

Categories: Legal Updates