In general terms, in order to establish a breach of contract claim under New York law, a plaintiff must prove the following 4 things: (1) the existence of an (enforceable) agreement; (2) that the plaintiff performed his end of the agreement; (3) that the defendant breached the agreement; and, (4) that the plaintiff sustained damages as a direct result of the defendant’s breach.

A plaintiff’s failure to prove any one of these elements should prove fatal to a breach of contract claim. Leaving aside, for the moment, the issue of enforceability (some types of agreements must be reduced to writing, as required by New York’s Statute of Frauds, and other agreements, such as illegal contracts, are unenforceable on public policy grounds), the prong that most often dooms breach of contract cases is the first: proving the existence of an agreement.  Here, the plaintiff is obligated to set forth the essential and specific terms of the agreement that the claim is based upon.

As a corollary to this rule, the following must be borne in mind: generalized breach of contract claims that are cast against a battery of defendants will fail unless the plaintiff can show a specific agreement with each defendant. In legalese, this is called “privity.” In other words, if I enter into an agreement with A Corp. to buy some widgets, and A. Corp. breaches the agreement, I have no inherent right to sue A. Corp.’s 5 other affiliates that weren’t parties to the original contract, and did not tortiously interfere with or otherwise induce the breach of contract. See, e.g., Chen v. Street Beat Sportswear, Inc., 364 F. Supp. 2d 269, 294-95 (E.D.N.Y. 2005).

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

The facts of this case were – and are – rather fascinating.

In this case, the plaintiff, a Hong Kong garment manufacturer, sold the defendant several large containers of clothing.  But here’s the interesting part:  instead of standard invoicing for the shipments, both parties to the deal used a “double invoicing” method in order to avoid United States customs duties. The first invoice, which understated the amount and value of the clothing, was presented to customs officials for purposes of calculating the amount of customs duties that were owed;  a second invoice which set forth the actual value of the goods seeking payment was then sent by plaintiff to the defendants.

When the defendants failed to pay on these invoices, leaving an outstanding balance totaling nearly $2 million, this lawsuit seeking recovery in breach of contract, business fraud, unjust enrichment, tortious interference and conversion followed.

The defendants in this case definitely merit the “chutzpah” award: they sought to dismiss the claim – and thereby avoid having to pay for the goods that they ordered, received, and presumably profited from – on the grounds that the contract between the parties was illegal, and therefore, unenforceable.

The Court articulated the general rule as follows:

“In New York ‘[i]llegal contracts are, as a general rule, unenforceable.’ Lloyd Capital Corp. v. Henchar, Inc., 80 N.Y.2d 124, 127 (1992) … An agreement which is lawful on its face and which does not contemplate or necessarily entail unlawful conduct in its performance is enforceable by the promisee even though he engages in unlawful activity in the agreement’s performance.”

Applying these rules to reject the defendants’ argument, the Court stated as follows:

“It appears that the double invoicing was only indirectly related to the contract, rather than being “central to or a dominant part of the plaintiff’s whole course of conduct in performance of the contract … Defendants’ invocation of the illegality doctrine is unpersuasive in that they seek to use the doctrine “as a sword for personal gain rather than a shield for the public good.”

I have no doubt that justice was achieved by this decision.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

In Cantu v. Flanigan, the plaintiff was a Mexican businessman who, over several decades in the oil and other industries, had built a worldwide reputation for integrity. The defendant, frustrated over his inability to collect nearly $800 million he claimed he was owed by a Mexican union, chose to exert pressure to exact “his money” by blackmailing the plaintiff. How did he do this? By publishing fabricated claims (in legal terms, “defamation“) that the plaintiff had made his fortune through illicit means, including money laundering and “rigging bid contracts” in an effort to compel him to either force the union to pay, or for him to pay the money out of his own pocket in exchange for a retraction. In fact, when confronted about these allegations by plaintiff, the defendant responded that he “did not care whether the statements were true or not, and that he just wanted his money.”

The defendant’s fabricated claims were picked up by a Mexican reporter, who then published an article that disseminated the story worldwide. As a result, both the U.S. and Mexican governments investigated the plaintiff; and while both investigations found the allegations against the plaintiff completely unfounded, the cloud of the investigations led several companies to back out of multi-million dollar deals that had been negotiated with the plaintiff (i.e., tortious interference with contract, and tortious interference with prospective advantage).

So why do I think the plaintiff will have trouble collecting on this judgment? Simple: (1) there are very few people who can afford to pay a judgment of this magnitude; and, (2) I noticed that the defendant represented himself at the trial of this case, and, quite frankly, I cannot imagine anyone of significant means wanting to represent themselves, i.e., without an attorney, when the ramifications of a multi-million dollar judgment are looming.

This leaves me with another nagging question: why didn’t the plaintiff sue the magazine that published the story – and did so without verifying any of the facts ? Presumably, they would have some means to satisfy a judgment, and he would therefore be able to recoup some of his losses.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Raedle v. Credit Agricole Indosuez, a decision out of the Federal Court for the Southern District of New York that was rendered on April 14, is no different.

In this case, the Court felt obliged to dismiss the jury’s award of punitive damages that arose out of the defendants’ tortious interference with the plaintiff’s prospective employment with another company. In so doing, the Court articulated the basis for its decision dismissing the punitive damages aspect of the case as follows:

“The purpose of punitive damages is, as the word indicates, to punish. The purpose of punitive damages is to punish a defendant for shocking conduct and to set an example in order to deter him and others from committing similar acts in the future. In order to award punitive damages, you must find circumstances of aggravation or outrage, such as spite or malice or other evil motive on the part of the defendant, and a conscious and deliberate disregard of the plaintiff’s interests so that the conduct could be called willful or wanton. These are strong words, but that’s what is necessary to be shown in order to obtain an award of punitive damages.”

Two instances where New York’s courts have allowed punitive damages are in the tort (i.e., personal injury) context, and the tortious interference context. But, as the Court made clear, the standard for a punitive damages award differs greatly from that required to prove the underlying tort or tortious interference claim: unlike the tortious interference claim, which is proved by evidence that but for the defendant’s intentional and wrongful interference, the plaintiff would likely have entered into a contract with a third party, a punitive damages claim must also be supported by proof that the defendants’ actions have “the character of outrage frequently associated with crime.” Prozeralik v. Capital Cities Comm’ns, Inc., 82 N.Y.2d 466, 479 (1993).

In addition, and importantly, where the punitive damages are sought against a company based upon the actions of that company’s officer, the plaintiff must prove that a “’superior officer’ … employed in a managerial capacity participated in, authorized, consented to, or ratified the misconduct.  …  such that “his participation in the wrongdoing renders the employer blameworthy, and arouses the institutional conscience for corrective action.”

In other words, the employee’s wrongful actions have to carry the implicit blessing of the employer. That is certainly not an easy standard to meet.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

As a threshold matter, it is important to distinguish between two related, but distinct, causes of action – interference with prospective advantage, and interference with contract.

Interference With Contract – in order to succeed on this claim, the plaintiff must prove that the defendant, with knowledge of the existence of a contract between plaintiff and a third party (i.e., someone else), intentionally and without justification induces one of the contracting parties to breach the contract.

Interference With Prospective Advantage – as its title suggests, this claim does not involve an actual contract, but only a prospective contract. Consequently, the plaintiff’s burden of proof on this claim is higher: here, the plaintiff must prove that the defendant “intentionally, knowingly, and by wrongful means” prevented another (person, entity) from entering into a contract that would have been entered into if not for the defendant’s interference.  is responsible to the other party to the contract for any damage caused by (his, her, its) conduct. Lest you think this is easy, New York’s Pattern Jury Instructions defines “wrongful means” as follows:

“[W]hen physical violence, fraud, misrepresentation or undue economic pressure is used or when civil actions or criminal prosecutions are improperly brought.”

A heavy burden of proof indeed.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

The significance of this decision should be apparent: although New York’s courts generally look to invalidate non-compete agreements, in this case the Court went out of its way to hold that the plaintiffs’ claims should survive dismissal (at least at this introductory stage of the commercial litigation) because the non-solicitation agreement that the defendants-employees signed was not overly broad, and was legitimately tailored to protect the plaintiff-employer’s proprietary interests. (The defendants were barred from forming a competing business while still employed by plaintiff, or from soliciting the plaintiff’s customer base or employees in New York City, Nassau and Suffolk Counties for a 2 year period following termination.)

There is also an important lesson to be learned from this case: the plaintiff acted wisely in having a competent attorney draft their non-compete agreements. That modest investment a few years back may save them untold sums of money now.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.