When it comes to corporations, it is important to distinguish two kinds of agreements that may be entered into. On the one hand, there is an agreement between the prospect shareholders who will form the corporation, this is usually called the “Incorporation Agreement”. On the other hand, there the agreements entered into by the corporation with third-parties. The latter agreements are entered into by the corporation as an independent entity separated from its shareholders.
If a corporation breaches a contract with a third-party that party may sue the entity, but not the independent shareholders in their individual capacity. The corporation is created to establish a different legal person and to limit the liability of shareholders. However, If the shareholders accept personal responsibility for a specific contract or if they occupy a director or officer position, third-parties may sue them in their personal capacity. Additionally, between them, shareholders or heir representatives may use each other for breach of their obligations under the incorporation agreement.
Now, the day-to-day operations of a corporation are usually conducted by individuals different than the shareholders. In this context, if the shareholders of the corporation interfere with those operations or in some way induce the corporation's breach of contract, they may be liable for tortious interference with contract.
Under New York law, a tort action for interference with a contract must be based upon five basic elements:
· The existence of a valid contract between the plaintiff and a third party,
· Defendant's knowledge of that contract
· Defendant's intentional procurement of the third-party's breach of the contract without justification
· Actual breach of the contract
· Damages resulting therefrom
In a recent case decided by the Supreme Court of New York, New York County, the court explained that only a stranger to a contract may be liable for tortious interference with a contract. Therefore, it is not possible to sustain an action where the defendant played a role in the negotiation of the contract or executed the contract at issue.
In Shyer v Shyer, 2020 N.Y. Misc. LEXIS 2259, the Plaintiff was representing her husband's estate against the Zyloware corporation. According to the Plaintiff's allegations, prior to her husband's death, the corporation failed to honor its share-repurchase obligations under a Shareholders and Employment Agreement. The Plaintiff sued Christopher Shyer and James Shyer who acted as co-CEOs of the corporation before her husband died.
In this case, the court dismissed the action because the individual defendants were not strangers to the agreements at issue. The Plaintiff argues that “although the Individual Defendants were parties to some of the provisions of the Agreements, they were not parties to the ones covered by alleged tortious interference”.
In this case, there was a reference to what is called “multilateral agreements” where more than two parties are involved with correlated obligations. The plaintiff stated that “in multilateral agreements like these, a contracting party can still be a stranger in relation to specific obligations running between co-parties to the contract.”
Regardless of the Plaintiff's arguments, the court explained that even though some courts have held that a party to a multilateral agreement can be found liable for tortious interference with a contract, it is has been accepted where the defendant has rights and duties that are separable from those of the breaching party.
The court noted that the Plaintiff has failed to explain how, in light of the defendants' roles, they had rights and duties separate from those of the corporation. Therefore, to the extent multilateral agreements represent an exception to the standard rule precluding claims of tortious interference against contracting parties, the Estate has not shown that this case fits within that exception.”
In conclusion, you may sue the executives of a corporation under the theory of tortious interference with a contract if they interfered with a contract separate and different from those that involve them as representatives of the legal entity.
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