Third-party complicity in breach of contract

Introduction

As an entrepreneur, you may encounter situations in which a third party knowingly cooperates in the non-performance of contractual obligations by your contract partner. This phenomenon is known in Belgian law as "third party complicity in breach of contract" and is an important part of the doctrine unfair competition. This is a complex legal figure that can have significant implications for your business, either as a victim or as a potential "accomplice."

Below we discuss the legal aspects of this phenomenon, including the historical development in case law, the conditions to be met, and the remedies available.

What is third-party complicity in breach of contract?

Conceptual framing

Third-party complicity in breach of contract occurs when a third party actively or passively knowingly participates in or benefits from the breach of contractual obligations by a contracting party. This legal concept represents an important exception to the principle of contract relativity, which provides that contracts in principle only affect the contracting parties.

Practical examples

Some classic examples to illustrate:

1. Breaking exclusive distribution systems: A pub owner buys beer from brewery A while being bound to brewery B through an exclusivity contract.
2. Infringement of selective distribution: An unauthorized distributor sells luxury products that he was able to obtain because an authorized distributor did not keep his agreements with the manufacturer.

It is remarkable that in many cases the victim of breach of contract does not (only) turn to his contract partner, but (also) takes action against the third party accomplice. This can have several reasons: sometimes the victim does not know which contract partner exactly committed the breach of contract, in other cases the action against the third party is strategically more interesting or procedurally more advantageous.

Legal framework and legal basis

Tort and unfair market practices

Third-party complicity in breach of contract is legally qualified on two levels:

1. In tort: Article 6.5 Civil Code provides that each person is liable for the damage he causes to another by his fault. The deliberate cooperation in another's breach of contract is considered a fault by case law.
2. As an unfair trade practice: Article VI.104 Code of Economic Law (CEL) provides a specific basis for cases between companies: "Any act contrary to fair market practices by which a company harms or may harm the professional interests of one or more other companies is prohibited."

Relativity of agreements

The legal starting point for the analysis is Article 5.103 of the Civil Code, which states that agreements only have effects between contracting parties and in principle do not bind third parties. However, case law has recognized that this principle does not mean that third parties are completely free to knowingly participate in breach of contract.

Historical evolution in jurisprudence

The evolution in case law surrounding third-party complicity in breach of contract shows an interesting shift in legal thinking over more than 90 years:

1. The 1932 ruling: limited liability

In a judgment of principle dated November 24, 1932, the Supreme Court held that a third party (a brewery) did not act unlawfully by merely profiting from contractual breach by a pub owner. According to this ruling, active participation in the breach of contract was required for tort.

2. The 1961 ruling: knowledge alone is insufficient

In a November 3, 1961 judgment, the Court refined this reasoning by ruling that a trader did not violate fair trade practices merely because he sold products in violation of an exclusive dealing agreement of which he knew the existence. This ruling created legal uncertainty about the precise conditions for third-party complicity.

3. The 1983 watershed judgment: knowledge and participation suffice

In an important turning point judgment of April 22, 1983, the Supreme Court fundamentally revised its earlier case law: a third party acts unlawfully when he was aware of the existing contractual situation and nevertheless participated in the breach of contract. This represented a significant relaxation of the conditions for third-party complicity.

4. Recent confirmation: judgments of 2020

In a judgment of May 28, 2020, the Supreme Court explicitly confirmed this doctrine by stating that the cooperation by a third company in a breach of contract, notwithstanding that it had or should have had knowledge of it, constitutes an extra-contractual misconduct and constitutes an act contrary to fair market practices within the meaning of Article VI.104 WER, the cessation of which can be ordered.

In a June 4, 2020 ruling, the Court further clarified that it is not necessary for the third party to have contracted directly with the contractual debtor, but that it is sufficient that he knowingly participated in the non-performance of the obligations.

Conditions for third-party complicity in breach of contract

For third-party complicity in breach of contract to exist, four cumulative conditions must be met:

1. Existence of a valid contractual obligation

A legally valid agreement must exist between two parties. If the agreement would be null and void (e.g., because of antitrust violation), then there cannot be third-party complicity in its violation.

This means that the third party can defend itself by invoking the nullity of the underlying agreement. For example: a distributor claiming that a selective distribution system violates competition law and is therefore void.

2. Breach of contractual obligation by the contracting party

The party to the contract who is debtor to the obligation must have actually breached it. This may involve active breach of contract (acting in violation of the contract) or passive breach of contract (failing to do what is contractually required).

What is important here is that the strike judge may find the existence of a breach of contract even if it is essentially a contractual dispute. This was confirmed by the Supreme Court in its ruling of May 28, 2020.

3. Knowledge by the third party of the contractual obligation

The third party must have known or reasonably should have known of the existence of the contractual obligation. This is an objectified knowledge standard: what would an ordinarily careful person have known or should have known in the same circumstances?

Concrete indications of such knowledge may include:

• Explicit statement on products that they may only be sold through authorized distributors
• Previous correspondence with the contracting party indicating exclusivity
• General industry awareness of certain distribution systems
• Prior contacts in which the contractual situation was discussed

4. Participation in breach of contract despite this knowledge

The third party, despite his knowledge of the contractual situation, must still have participated in the breach of contract. This requirement means that he knew or should have known that his act contributed to the breach of contract.

Case law shows that this participation can take different forms:

• Actively participate in the violation (encourage, facilitate)
• Knowingly taking advantage of breach of contract (knowing that products were obtained through "gray channels")
• Encourage breach of contract (such as in hiring tied by non-competition clauses)

The problem of proof

One of the biggest challenges in claims based on third-party complicity in breach of contract is proving the four conditions, particularly the third and fourth conditions.

The burden of proof is on the plaintiff (actori incumbit probatio). This means that the plaintiff will have to show that all the conditions for third-party complicity are met, which is often complex in practice.

Evidence difficulties in distribution systems.

Especially in claims surrounding the breach of selective or exclusive distribution systems, problems of proof often arise. The fact that a third party knows that a manufacturer operates a selective distribution system is in itself insufficient. The manufacturer accusing an unauthorized distributor of third-party complicity in breach of contract must prove that the third party procured from a tied dealer, which is often difficult to prove in practice.

Practical evidence strategies

Manufacturers resort to various tools to ease the burden of proof, such as endorsements on products that they may only be sold by authorized distributors. However, case law is divided on the effectiveness of such measures.

In an Oct. 17, 1997, ruling, the Supreme Court held that the finding that the seller did not himself affix the marking to the products he purchased on a foreign parallel market, and thus did not commit an affirmative act, did not preclude him from committing an act contrary to fair trade practices.

Available remedies

When third-party complicity in breach of contract is established, the victim has several legal remedies available:

1. Claim for cessation

Based on Article XVII.1/4 WER combined with Article VI.104 WER, the aggrieved party can file a cessation claim against the third-party contributor. This procedure has several advantages:

• Speed: The strike judge handles the case "as in summary proceedings"
• Preventive nature: The claim can be brought as soon as there is a risk of harm, without the need to prove effective harm
• Broad authority: The strike judge may determine the existence of breach of contract, even if it is essentially a contractual dispute

The strike judge may order various measures:

• Prohibition of further sale of the products in question
• Prohibition of further hiring
• Prohibition on use of confidential information
• Publication of the decision
• Non-compliance penalty

2. Claim for damages

In addition to or instead of a strike claim, the victim may bring a claim for compensation based on tort (Art. 6.5 BW). This must be demonstrated:

• The existence of fault (the third-party complicity)
• Damage
• Causal relationship between fault and damage

Compensation may include several elements:

• Profit foregone
• Market share loss
• Price erosion
• Image damage
• Distribution system repair costs

Practical advice for businesses

As a potential victim of third-party complicity

1. Preventive measures:
   • Have clear contractual clauses in your distribution, labor and other agreements
   • Implement traceability systems for your products
   • Provide clear labeling on products and packaging
   • Proactively inform potential "outsiders" about your distribution system
2. Monitoring:
   • Conduct regular market research
   • Use mystery shopping techniques
   • Install a breach hotline
3. Upon determination of violations:
   • Collect as much evidence as possible
   • Consider a formal notice before taking legal action
   • Make a strategic choice between different remedies
   • Assess the competition law aspects of your case

As a potential "accomplice"

1. Due diligence in contracting:
   • Ask questions about the origin of products
   • Solicit guarantees from suppliers about their right to sell
   • Observe warnings on products or in communications
2. When recruiting personnel:
   • Check for competition clauses
   • Prohibit use of confidential information from previous employers
   • Include contractual safeguards against misuse of information
3. When defending against claims:
   • Examine the validity of the underlying agreement
   • Challenge your knowledge of the breach of contract if possible
   • Evaluate competition law defenses

Conclusion

Third-party complicity in breach of contract remains a complex but essential doctrine in Belgian corporate law. With the evolution of case law, it is now clear that a third party who knowingly contributes to a breach of contract, knowing that he thereby contributes to a breach of contract, is acting unlawfully and can be held liable for it.

It is crucial for companies to adopt both a preventive and reactive strategy regarding this phenomenon, either to protect their own contractual relationships from third-party interference or to minimize the risk of liability as a potential "accomplice."

Our assistance

Our law firm has extensive expertise in this area and assists companies in all aspects of third-party complicity in breach of contract:

• Preventive advice in drafting contracts and distribution systems
• Strategic advice in identifying potential breaches
• Assistance with negotiations and amicable settlements
• Representation in strike proceedings and liability claims
• Defense against claims of third-party complicity

Each situation requires a thorough legal analysis and a customized strategy. Our team of experienced lawyers is ready to guide you through this and defend your best interests.