Thoughts on Third-Party Liability – Tortious Interference vs. Aiding and Abetting the Breach of a Fiduciary Duty
A recent Delaware Court of Chancery ruling provides useful clarity on the differences between two commonly asserted claims of third-party liability: tortious interference and aiding and abetting the breach of a fiduciary duty. In Atlantic NWI, LLC v. The Carlyle Group Inc., et al., https://courts.delaware.gov/Opinions/Download.aspx?id=339620, Vice Chancellor Glasscock discussed how and why these claims differ.
The case arose out of a claim for breach of a joint venture agreement. Plaintiff Atlantic NWI (“Atlantic”) entered into a joint venture limited liability company with REDCO Fund I Manager (“REDCO”). REDCO agreed to find real estate investment opportunities to present exclusively to Atlantic, subject to non-competition and fiduciary obligations. However, REDCO was alleged to have presented competing opportunities to Defendant The Carlyle Group (“Carlyle”). Atlantic settled its claims against REDCO; Atlantic then brought suit against Carlyle for tortious interference and for aiding and abetting the breach of a fiduciary duty.
Atlantic claimed Carlyle interfered with the joint venture agreement by contracting with and providing material consideration to REDCO to receive real estate opportunities, causing REDCO to breach. The Vice Chancellor permitted this claim to go forward. Tortious interference with a contractual relationship requires a showing of five elements: (a) the existence of a contract, (b) that the defendant knew about, (c) an intentional act by defendant that is significant in causing its breach, (d) without justification, and (e) which causes injury. Atlantic needed only to “aver[ ] generally” that Carlyle acted with knowledge in the pleading stage under this “liberal knowledge standard,” and the complaint alleged facts from which the Vice Chancellor could infer that Carlyle knew REDCO would breach its contract by working with Carlyle.
Aiding and Abetting the Breach of a Fiduciary Duty
Through the same actions, Atlantic claimed Carlyle aided and abetted REDCO’s breach of its duty of loyalty to the joint venture. Aiding and abetting the breach of a fiduciary duty requires that (a) a fiduciary relationship existed, (b) the fiduciary breached its duty, (c) the non-fiduciary knowingly participated in that breach, and (d) damages to the plaintiff resulted from the concerted actions of the defendant and the fiduciary. The knowledge standard is a “stringent” one, requiring the plaintiff to allege specifics facts demonstrating the defendant had actual or constructive knowledge of the specific fiduciary duties, and the Vice Chancellor found it had not been adequately alleged here.
As the Vice Chancellor explained, although both claims allow a plaintiff to obtain relief from a third party who contributed to another’s breach, the differences in knowledge standards are “not random.” Rather, they help hold responsible the party who is most easily able to prevent their own breach. For tortious interference, once the defendant knows of the contract, it is then in their control whether they continue forward with any act that would interfere with the contract. As for a fiduciary claim, the person best situated to uphold their fiduciary duties is the fiduciary themselves. Unless a party intentionally participated in this breach, they should not be held jointly and severally liable with the fiduciary, and the heightened knowledge requirement helps ensure this is the case. Additionally, holding third parties liable for the breaches of others could chill the desire to compete in the marketplace. These knowledge standards help strike the balance between allowing parties to compete in the marketplace and protecting bargained-for contractual and fiduciary obligations.
This case brings clarity on the knowledge requirements for these torts. Tortious interference is an easier hurdle to overcome, requiring only a general assertion of defendants’ knowledge. Aiding and abetting the breach of a fiduciary duty is a much higher hurdle to overcome, requiring specific facts demonstrating the defendant knew of the duties and wrongfully participated in the breach. This hurdle is especially high where limited liability companies are involved due to the ability to modify fiduciary duties. As the Vice Chancellor puts it, this case is a “neat illustration” of the differences between these torts, and practitioners would do well to keep it in mind when assessing possible claims against a third party.