December 12, 2022

Liability of Third Parties: Tortious Interference v. Aiding & Abetting

Several recent Delaware decisions have addressed the potential liability of third parties for aiding & abetting breaches of fiduciary duties, but in Atlantic NWI v. The Carlyle Group, (Del. Ch.; 10/22), the Chancery Court addressed the distinction between the elements of an aiding & abetting claim and the elements of another claim sometimes asserted against third parties in M&A transactions – tortious interference with a contract.

The case arose out of an alleged breach of a joint venture agreement entered into by the plaintiff with an entity called REDCO Fund 1 Manager.  Under the terms of the JV, which took the form of a jointly owned LLC, REDCO agreed to seek out exclusive real estate investment opportunities for the plaintiff, but the plaintiff alleged that REDCO was presenting competing opportunities to Carlyle. As a result, the plaintiff (which settled its claims against REDCO), sued Carlyle for tortious interference and for aiding and abetting REDCO’s purported breach of fiduciary duty under the LLC agreement.

Vice Chancellor Glasscock dismissed the aiding & abetting claim, but allowed the tortious interference claim to move forward.  This excerpt from Sidley’s recent blog on the decision explains the Vice Chancellor’s reasoning:

Tortious InterferenceAtlantic 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.

The Vice Chancellor explained that the differing knowledge standards applicable to the claims arise out of policy considerations relating to which party was in the best position to prevent their own breach.  When it comes tortious interference, once the third party knows about the contract, it can decide on its own whether to take actions that interfere with it. In contrast, the person in the best position to know what fiduciary duties require is the person subject to those duties.

This case gives me flashbacks to all that “cheapest cost avoider” stuff that we all heard about ad nauseam in law school. I’m sure all the law & economics profs can’t wait to dig into this one!

John Jenkins