Memorial Gardens, Inc. v. Olympian Sales & Management Consultants, Inc.
1984 Colo. LEXIS 639, 690 P.2d 207 (1984)
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Rule of Law:
A contract containing a liquidated damages clause for cancellation is not terminable at will, and therefore, a competitor is not privileged to induce a breach of such a contract under the guise of business competition.
Facts:
- Memorial Gardens, Inc. sold preneed funeral plans to customers.
- Olympian Sales & Management Consultants, Inc., a competitor, was formed by a former executive of Memorial Gardens' parent company.
- Olympian engaged in a campaign of contacting Memorial Gardens' customers through random telephone calls.
- Olympian informed these customers of their right to terminate their contracts with Memorial Gardens and provided them with printed cancellation forms.
- The preneed funeral contracts with Memorial Gardens contained a clause allowing the purchaser to terminate the agreement but required them to forfeit 15% of the total contract price as liquidated damages.
- Olympian induced at least five customers to cancel their contracts with Memorial Gardens and purchase new, similar plans from Olympian.
- When selling to these customers, Olympian discounted its price by the amount the customer had forfeited to Memorial Gardens as liquidated damages.
Procedural Posture:
- Memorial Gardens, Inc. sued Olympian Sales & Management Consultants, Inc. in El Paso County district court (trial court) for tortious inducement of breach of contract.
- The trial court, deciding the case on stipulated facts, entered judgment for Olympian, finding the contracts were terminable at will and Olympian's actions were justified business competition.
- The trial court awarded attorney fees and costs to Olympian.
- Memorial Gardens, as appellant, appealed the judgment to the Colorado Court of Appeals (intermediate appellate court).
- The Court of Appeals affirmed the trial court's judgment in favor of Olympian (appellee).
- The Supreme Court of Colorado granted certiorari to review the decision of the Court of Appeals.
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Issue:
Is a contract that includes a liquidated damages clause for cancellation considered 'terminable at will,' thereby justifying a competitor's intentional inducement of its breach as privileged business competition?
Opinions:
Majority - Dubofsky, Justice
No. A contract is not terminable at will if its cancellation results in a legal consequence, such as the payment of liquidated damages. The court adopted the principles of the Restatement (Second) of Torts § 768, which distinguishes between interference with contracts that are terminable at will and those that are not. The privilege of business competition allows a competitor to induce the termination of a contract that is terminable at will, as this primarily interferes with a future expectancy rather than a vested legal right. However, a contract is only terminable at will if it can be ended without legal consequence or breach. The presence of a liquidated damages clause, which imposes a penalty for cancellation, is fundamentally inconsistent with the concept of a contract being terminable at will. Therefore, the Memorial Gardens contracts were not terminable at will, and Olympian’s actions constituted an improper and tortious interference for which the business competition defense is unavailable.
Analysis:
This decision clarifies the scope of the business competition privilege in tortious interference claims by narrowly defining what constitutes a 'terminable at will' contract. It establishes the precedent that the inclusion of a penalty or liquidated damages clause for termination removes a contract from the 'at will' category. This holding strengthens the legal protection of existing contractual relationships against poaching by competitors, forcing them to compete on merits for prospective customers rather than by inducing breaches of existing, albeit terminable, agreements that carry financial consequences for cancellation. The case serves as a key distinction for businesses, indicating that contracts with built-in cancellation penalties are afforded greater protection from third-party interference than those without such provisions.
