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Samuel F. Ernst

Abstract

Contract rules can be justified by utilitarian theories (such as efficiency theory), which are concerned with promoting rules that enhance societal wealth and utility. Contract rules can also be justified by rights-based theories (such as promissory and reliance theories), which are concerned with protecting the contractual freedom and interests ofthe individual parties to the contract. Or, contract rules can be analyzed through the lenses of a host of other theories, including critical legal theory, bargain theory, and so on. Because no single, unitary theory can ever explain the complex body of laws and societal conventions surrounding contracts, the best rule to govern any particular situation is the one that can be justified by multiple normative theories. Such an approach would stand the best chance of achieving consensus, and would acknowledge the insight of pluralism theorists—that no single unified theory can explain the civil law. This Article applies a concordant approach to selecting contract rules to address the question of whether a parent company should be held liable in tort for directing the termination of a contract entered into by its subsidiary.

Under ordinary circumstances, a simple breach of contract does not give rise to tort liability and punitive damages; one cannot tortiously interfere with one’s own contract. But the courts around the country are deeply divided on the question of whether parent companies are immune from tort liability for inducing a subsidiary to breach a contract. Some courts hold that because the parent and subsidiary share common interests, the parent is completely immune from tort liability, just as though it were a party to the contract (Category 1). Some courts take the similarly formalistic approach that because the parent and subsidiary are technically separate entities, the parent enjoys no immunity from tort liability (Category 2). Some courts impose tort liability only if the parent acted against the business interests of the parent and subsidiary or committed an independent tort (Category 3). Some courts impose tort liability even if the breach of contract was in the business interest of the parent and subsidiary if the parent company’s actions were “wrongful,” which can be something less than tortious behavior (Category 4).

This Article presents an exhaustive survey and categorization of these conflicting rules and then applies normative contract theory to determine which is the best approach. In particular, the two most dominant contract law theories of our time are applied to the issue: efficiency theory and rights-based theory.

Applying efficiency theory to the problem at hand, this Article begins with the proposition that, in order to facilitate efficient breaches of contract, no tort liability should be imposed. However, once one takes into account the underlying false assumption of efficiency theory that commercial actors always act rationally, allowing for tort liability to be imposed in those situations where the parent does not act out of business judgment makes sense.

When rights-based theory is applied to this issue, it raises questions as to whether breach should be penalized to honor the promise made to the nonbreaching party and to protect the non-breaching party’s reliance on that promise. However, rights-based theory would also argue for protecting the parent company’s autonomy by allowing it to reject a promise it never accepted and to decline to honor reliance it never induced—but only if the parent is acting out of rational business interest. Accordingly, the parent company should be afforded autonomy in choosing to terminate a contract it did not bargain for (so long as it pays compensatory damages). If the parent company’s actions are not taken for rational business reasons, but rather for reasons of spite, malice, or oppression, then the law should punish and deter such behavior.

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