How to Prove the Two Types of Tortious Interference Claims Under New York Law April 14, 2010
In the last few years, I’ve been asked this question quite a bit; unfortunately, at least in my experience, there seems to be a great deal of misunderstanding about what is – and what isn’t – tortious interference. So, I figured, why not publish a brief article that clarifies the parameters of this legal doctrine under New York law.
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.
Jonathan Cooper is a New York Business Litigation and New York Commercial Litigation Lawyer with a focus on New York breach of contract and New York business fraud claims before the Nassau, Queens, Brooklyn, Bronx, Westchester and Suffolk County courts of New York State. For more information, feel free to contact his Long Island office at 516-791-5700.
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Posted Under: breach of contract new york, business litigation new york, commercial litigation, tortious interference Tags: breach of contract new york, business litigation ny, commercial litigation, jonathan cooper, new york, tortious interference
Reader Comments
Is it still tortious interference of a contract if the defendant induces a
breach of their own franchise agreement with the plaintiff? In other
words there is only two parties to the action not three. Here’s an
example: a major franchisor sends fraudulent letters to a franchisee
inducing the franchisee to breach his franchise agreement. Is the
above circumstance an example of tortious interference with a contract?
That’s a very good question, Louis.
As a general rule, though, tortious interference with contract has to do with inducing the breach of an agreement with a third party.
Your fact scenario more closely resembles an anticipatory breach of contract, which is discussed here: http://nysmallbusinessattorney.com/what-to-do-when-it-becomes-clear-that-your-small-business-partner-is-going-to-breach-your-contract-under-new-york-law/.
Let me be more specific: a franchisor informs a franchisee that he has
breached a contract between the two parties that calls for his immediate termination. This contract was said to be a seperate agreement that was added on to the standard franchise agreement that had a clause allowing the franchisee to remedy in a timely manner
any violations of company rules. The franchisee believes that he signed this add on agreement and decides to abandon his efforts to
remedy any company violations in a timely manner since he believes
he has been terminated effective immediately and sees no hope in trying to remedy a no-win situation. Surprise; it turns out that he
never signed this automatic termination agreement but unfortunately
for him he has abandoned his franchise business and moved his
equipment at great expense to a new location where he had to hire
contractors to remodel and had to sign a new lease. Not surprisingly
the new business fails and the former franchisee reasons that he was
duped into defaulting on the franchise agreement he did affirm and has
suffered insurmountable losses due to the franchisor’s negligence and
trickery. Is this not a case of tortious interference with a contract? Doesn’t the franchisor have an obligation to be truthful to it’s franchisee
and inform him of their errored communications? The developement
agent who was supposed to have had the franchisee sign the additional contract received a carbon copy of the phony termination
letter but never informed the franchisor he worked for or the franchisee
that this letter of automatic termination was fraudulent. If this is not a
case of tortious interference or inducing the franchisee to break his
existing contract then what is it?
received
The Subway Case alluded to in the previous example could also be
handled in court as a case of fraudulent inducement which of course is
an independent tort requiring proof of a false statement. Recently in a
lawsuit against AIG a district court ruled that a fraudulent inducement
claim was not subject to the arbitration clause of the contract. If you would like to see the story I will gladly email it to you. There is more
than one way to get justice from the unjust who hide behind franchise
agreements heavilly weighted in their favor.
Fraudulent Inducement Claim Not Subject To Arbitration Clause and $34 Million Verdict Upheld Against AIG
Article By:
Michael J. McGaughey
Howrey LLP
posted on: Tuesday, May 25, 2010
Criminal Law / Business Crimes / Dispute Resolution / Insurance Reinsurance & Surety / Litigation / Trial Practice
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A district court recently reaffirmed a $34 million jury verdict against three subsidiaries of American International Group Inc. ( “AIG”), finding that a claim for fraudulent inducement brought by AXA Versicherung AG (“AXA”), as successor in interest to Albingia Versicherungs AG (“Albingia”), was not subject to the arbitration clauses found in the two reinsurance contracts at issue. This decision is further confirmation that policyholders may be entitled to litigate extra-contractual claims in court despite the presence of an arbitration provision in the insurance policy at issue.
Here, AXA brought suit against AIG alleging that AIG fraudulently induced Albingia, through both affirmative misrepresentations and material nondisclosures, to enter into two reinsurance agreements. The suit proceeded to trial and a jury rendered a verdict in AXA’s favor for $34, 373, 170, including $5,750,000 in punitive damages. AIG appealed the verdict to the U.S. Court of Appeals for the Second Circuit, arguing that the allegations of misrepresentation and nondisclosure sounded in contract and, therefore, should have been arbitrated pursuant to the arbitration clauses contained in the reinsurance contracts, which required that “[a]ll disputes or differences arising out of the interpretation of this Agreement shall be submitted to the decision of two arbitrators . . . .”
The Second Circuit remanded for further proceedings regarding whether the fraudulent inducement claim should have been sent to arbitration pursuant to the contractual arbitration clauses and, if so, whether AIG waived its right to arbitration. Upon remand, the U.S. District Court for the Southern District of New York held that the claims for fraudulent inducement were not arbitrable. First, the Court held that AXA’s fraudulent inducement claim sounded in fraud, rending it outside the scope of the agreements’ arbitration clauses. Second, the Court independently determined that even if the fraudulent inducement claim could be viewed as sounding in contract, it still would fall outside of the scope of the arbitration clauses because “it does not ‘arise[e] out of the interpretation’ of the contracts.” Finally, the Court determined that, even if the claim had been arbitrable, AIG waived its right to arbitration by sitting on its arbitral rights in a “strategic gambit” meant to provide it a second bite at the apple in the event that it lost in court.
In the end, the Court confirmed that extra-contractual claims, such as a claim for fraudulent inducement, may fall outside the scope of the arbitration clauses often found in contracts of insurance. Moreover, as set forth by the U.S. Supreme Court in the recent Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Inc. decision, the Court affirmed that “parties may agree to limit the issues they choose to arbitrate” and a party may not be compelled to arbitrate that to which it has not agreed to arbitrate. Stolt-Nielsen, 559 U.S. __ (2010), slip op. at 17-23. Therefore, if a policyholder desires to litigate an extra-contractual claim against its insurer in court, be it a claim for fraudulent inducement or one for bad faith, careful attention should be paid to the actual language of the policy’s arbitration clause and the nature of the extra-contractual allegations levied against the insurer.
Reposted from Howrey LLP’s Insurance Coverage Monitor blog which features discussion and analysis from leading policyholder insurance attorneys on news and developments relating to insurance recovery law.