If You Falsely Claim Power to Bind Someone to a NY Contract, You May Be Held Personally Liable March 21, 2010

In DePetris & Bachrach, LLP v. Srour, et al., a decision in a business litigation and breach of contract case that was just handed down from New York’s Appellate Division, First Department (which covers both New York and Bronx Counties), the Court had occasion to set forth the law with respect to two related doctrines: (1) implied warranty of authority; and, (2) tortious misrepresentation.

In that case, the plaintiff law firm sued to recover unpaid legal fees it was owed, and which had been supposedly guaranteed by two of the individual defendants. The New York County trial court granted the defendants’ motion to dismiss, apparently finding that the plaintiff’s claims were largely barred by New York’s  Statute of Frauds, and the fact that the defendant law firm lacked the authority to bind the individual defendants to the supposed fee agreement with the plaintiff. In reversing the trial court’s ruling, the Appellate court articulated the standards for these doctrines as follows:

“Under the doctrine of implied warranty of authority, a person who purports to make a contract, representation, or conveyance to or with a third party on behalf of another person, lacking power to bind that person, gives an implied warranty of authority to the third party and is subject to liability to the third party for damages for loss caused by breach of that warranty, including loss of the benefit expected from performance by the principal (see Restatement (Third) of Agency § 6.10 [2006]).

“Under the doctrine of tortious misrepresentation and assurances of payment, if the person who falsely claims to have power to bind another knows that the claim is untrue, the person has made a fraudulent misrepresentation and is subject to liability to those who, justifiably relying on the representation, suffer a loss as a consequence (see Restatement (Third) of Agency § 7.01 [2006]).”

Applying those doctrines to this case, the appellate court held that since “the complaint alleges that defendants-respondents represented to plaintiff law firm that they had authority from the [individual defendants] to promise payment of $75,000 of the legal fees incurred by plaintiff’s client when, in fact, they lacked the authority to bind the[m],”  the complaint alleges a viable claim for breach of the implied warranty of authority.”

In addition, the Court held that since “the complaint also alleges that defendants-respondents falsely represented to plaintiff law firm that they specifically discussed the subject matter of their authority and representations with the [individual defendants], the complaint also alleged a viable clam for tortious misrepresentation of authority and assurances of payment.”

Although this ruling only applies to the initial stages of the case (the issue was whether the complaint as to these defendants should be dismissed at the outset, i.e., whether they even make out a claim that has a valid legal basis), it is highly significant, and serves a clear warning:  if you falsely represent that you have authority to bind someone to an agreement, and that third party later does not honor the agreement, you may be held on the hook – personally.

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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