Court decisions are a critical source of information about the proper interpretation of the laws and rules that govern so many of our actions. Our goal with comments on case law is to provide you with an accurate summary of the main issues in the case, and to comment on the case's possible relevance. Keep in mind, however, that every case has unique facts and circumstances. Court decisions cannot be relied upon as legal advice because no two situations are exactly the same. Nonetheless, cases can provide valuable insights and taken together, they can offer guidelines for our conduct.
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Why This Case May Interest You
Many non-profit organizations are incorporated, but not all are. Individuals who are involved with or who contract with unincorporated groups need to know that there is a legal difference between incorporated and unincorporated organizations, should confirm the legal status of the organization with which they are dealing, and should be aware of personal liability issues.
Summary of Facts
Huang entered into a business relationship with Szecket to market technology owned by Szecket in Taiwan. In July 1998, a letter of understanding was signed and the parties began to negotiate a formal license agreement. During the course of these negotiations Huang and his associates rejected a draft of the license agreement in which they would be required to provide personal guarantees. Ultimately, Huang signed an agreement "acting on behalf of a company to be formed". This company was never formed. When the signed agreement went into default, Szecket sued Huang personally for breach of the contract. A trial judge awarded damages to Szecket and Huang appealed that decision.
Can there be personal liability when an individual signs a contract on behalf of a corporation that is not yet formed?
Szecket relied on a provision of the Ontario Business Corporations Act to the effect that a person who enters into a contract "on behalf of a corporation" before it comes into existence is personally bound by the contract. Huang claimed that he had expressed the clear intention not to be personally bound by the contract as was required by section 21(4) of the Act. The Ontario Court of Appeal upheld the trial court's decision and found Huang personally liable for damages.
Section 21(4) requires that an express term be included in the pre-incorporation contract to limit the personal liability of a person signing the contract on behalf of a corporation to be formed. Here there was no such express term in the signed agreement. Any indication that Huang did not wish to incur personal liability, which arose by inference only in the negotiation stage, was not sufficient to avoid liability for the contract he eventually signed. Because no company was ever formed to adopt the contract that was signed, Huang was personally liable for the damages arising from its breach.
Far from an obscure commercial transaction gone bad, this case has significant implications and lessons for all contracting parties. First, in Ontario, if signing any contract or agreement on behalf of a company to be formed in the future (which is quite a common occurrence) ensure that there is an express term in the contract stating that personal liability is excluded. When the corporation is eventually formed, do not forget to have the company take the required steps to formally assume the contractual liability.
Second, this case reminds us to be careful to ensure that the actual contracting parties are accurately set out in the agreement. Business can legally be conducted in many forms - by individuals, sole proprietors, partnerships and various forms of corporations. While a sport or recreation organization may in fact be incorporated, this might not be obvious to a third party discussing commercial matters with the executive director.
It is common for individuals associated with these organizations, perhaps a director or the executive director, to make personal contact with a sponsor or a supplier. They negotiate, draft and eventually sign various agreements. These individuals are the "public face" of the organization and the existence of such a personal relationship is often a major reason the deal gets done and a contract is signed. Is it crystal clear that the director is contracting "on behalf of the corporation"? Could it be interpreted, especially if only a personal name is included on the execution page or the parties simply shook hands to close the deal, that the director is entering the contract in her personal capacity? Has authority actually been delegated by the company to this individual to sign contracts that bind the corporation? If not, it will be easier to argue that since the individual had no authority to sign the contract that individual must have entered into the contract in her personal capacity.
Negotiation of the deal is only half the battle - make sure that you are not surprised with whom you have contracted!