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Piercing the Corporate Veil in Breach of Contract Actions

Piercing the Corporate Veil in Breach of Contract Actions

Cross-border transactions involving exports and imports should be carefully conducted - any mistake could cost your business enormous amounts of money. As in most industries reputation is the key to choosing certain companies over others, but more importantly, most companies seek quality, good prices, and predictability.

In a recent Court decision within the Supreme Court of Suffolk County on motions for summary judgments against each other, Padma Paper Mills, Ltd, a Bangladeshi corporation alleged breach of contract and fraud claims against a US-based company known as J & A International, Inc. and Universal Exports, Inc., to supply it Hard White Envelope Cuttings in order to convert it into ordinary white paper.

What seems to be a pretty high and dry lawsuit was made very interesting when the principal owner of J & A and Universal who happens to be a named defendant, Avis Afshar, utilized fake named individuals to induce this Bangladeshi company to work with it. The names it chose were John McDonald and Bill Travis - both non-existent within the company, but allegedly utilized to induce the client.

The essential elements of a cause of action for fraud are:

  1. Representation of a material fact;
  2. Falsity;
  3. Scienter;
  4. Deception; and
  5. Injury.

New York Univ v. Continental Ins Co, 87 NY 2d 308, 639 NYS 2d 283 (1995).

A misrepresentation of a material fact, which is collateral to the contract and serves as an inducement for the contract is sufficient to state a cause of action for fraud in the inducement. WIT Holding Corp v. Klein, 282 AD 2d 527, 724 NYS 2d 66 ( 2d Dep't 2001).

The Supreme Court in its application of the UCC allowed the Plaintiff, Padma, to pierce the corporate veil for the fraud which the defendants seemingly admitted through depositions in an effort to collect its damages.

Piercing the corporate veil requires a showing that the individual defendant 1) exercised complete dominion and control over the corporation and used such control to commit a fraud or wrong against Plaintiff. See, Matter of Morris v. New York State Dep't of Taxation and Finance, 82 NY 2d 135, 603 NYS 2d 807 (1993).

Under the UCC:

"Where a purchaser of goods effectively revokes acceptance, he may cancel the contract and recover the purchase price, the difference in cost of replacement goods, and incidental and consequential damages. UCC §§2-711, 2-712, Toto We're Home LLC v. Beaverhome.Com, Inc, 301 AD 2d 643, 754 NYS 2d 334 (2d Dep't 2003).
Even where revocation of acceptance is not available, the purchaser is not precluded from other remedies for nonconformity (UCC §2-607(2), as long as the buyer notifies the seller within a reasonable period of time after it discovers the breach. Flick Lumber Inc v. Breton Industries, Inc, 223 Ad 2d 779, 636 NYS 2d 1269 (3d Dep't 1996). In such instances, the buyer is entitled to the difference between the value of the goods as warranted and their value as accepted. UCC §2-607(3)(a)."

When dealing with cross-border and international transactions, it is important to have a business law attorney on your side to review all contracts and more importantly conduct due diligence on companies so that such business litigation can be prevented

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