Business Torts

Besides a claim for breach of contract, the law recognizes a category of causes of action called business torts. A contract is enforceable because the parties agreed to be bound by it. But there are situations where the parties don't have contracts, but are nonetheless subject to liability because society imposes on every person a certain set of obligations. Where those obligations are breached, the wrongdoer is said to have committed a tort.

Consider, for example, an automobile accident. The parties to the accident don't have a contract, so how is it that the victim may recover from the careless driver? That's because the law imposes on every person a duty of care. So notwithstanding the absence of a contract, the careless driver is liable to his victims under a body of law called negligence.

Negligence applies to commercial relationships as well. For example a depositary bank owes a duty of care to its corporate account holder. Thus, if the account holder has a employee embezzling money from its account, and the evidence of embezzlement is glaring, the depositary bank has a care to report the evidence of embezzlement to its depositor. Failure to do so beaches the bank's duty of care to the depositor, and the depositor's may sue for negligence.

Similarly, society imposes on everyone a duty to be honest. So that if one person cheats another, he's liable notwithstanding the absence of a contract. In particular, he's liable under a body of law called fraud. The common law, consisting of the body of decisions, permits an action for so-called common law fraud. But in addition, statutes provide their own causes of action, such as a claim for securities fraud under the Securities and Exchange Act of 1934.

In addition, relationships are so close and trusting that the law imposes on the parties a heightened obligation to be honest, and loyal and to act in the best interests of the other person. These relationships are said to give rise to fiduciary duties. The most commonly known of such relationships are between a lawyer and his client, a doctor and his patient, partners, an agent and his principal, a corporate officer or director and a shareholder, and a majority shareholder with a minority shareholder. Where the duty is breached, the cause of action is called a breach of fiduciary duty.

But even some ordinary business relationships may give rise to fiduciary duties. Typically, those are relationships where one side relies on the other, and the other has de facto control and dominance, such as dominance resulting from better access to non-public information. Thus, in one case, one bank involved in collecting funds owed by reason of the use of credit cards was held to owe a fiduciary duty to another bank involved the collection process.

One of the most popular business torts to sue on is the cause of action afforded by the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"). The statute was initially directed at organized crime, but was written in such a way as to be applicable to business dealings. One reason for its popularity is that RICO permits the recovery of treble damages as well as attorneys fees. But the cause of action is one of the most complex and conceptually slippery claims in the law, and shouldn't be resorted to except by someone with a sound grasp of the subject matter.

The business torts are attractive to plaintiffs' lawyers for a number of reasons. For one they, unlike a claim for breach of contract, a tort claim permits the recovery of punitive as well as compensatory damages. That is, a tort claim permits the recovery of a penalty in addition to recovering an amount to compensate the victim for his loss. And the penalty need not bear a close relationship to the claim for compensatory damages; the Supreme Court has upheld an award of punitive damages some forty-times the recovery for compensatory damages. Thus, RICO has become popular amongst plaintiffs' lawyers.

Similarly, some tort claims permit the recovery for pain and mental suffering, which a breach of contract claim does not. And given the difficulty of quantifying the damage for pain and mental suffering, such a claim permits the plaintiff's lawyer to seek a very high recovery.

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