- posted: Jun. 24, 2016
A shareholder or an officer of a corporation who signs a contract on behalf of the corporation generally is not personally liable under the agreement. That’s why corporations were created in the first place. After all, a corporation can function only through its officers and agents acting in a representative capacity. Of course, an officer or shareholder may personally guarantee a contract or undertaking of the corporation, but that personal obligation must typically be set forth in a separate agreement. These black letter principles have been relied on by business executives for as long as corporations have been around. We regularly see these principles expressed in the description below the signature line on a contract, for example “Acme Corporation, by its duly authorized officer, J. P. Smith, Secretary.”
But are the winds changing?
In a recent decision, the Kentucky Court of Appeals held that an executive was personally liable on an agreement which he signed on behalf of the corporation “as a duly authorized officer.” The name of the corporation was listed. There was no signature line for the officer in his individual capacity. Nevertheless, the Court of Appeals held the officer personally liable as a guarantor of the contract. To reach that conclusion, the Court of Appeals seized upon a sentence in an editorial comment in a treatise on agency law: “An executive’s agreement to become a party to a contract made on behalf of the organization may be shown by language in the agreement itself that names the officer individually as a party.” While no Ohio court has yet relied on that treatise commentary, a recent case decided by a Court of Appeals in Florida illustrated the ease with which courts can determine that the words accompanying the signature block are merely descriptive.
Whether the law is changing is open to debate. The key point for your business to remember is to ensure the body of the document cannot be construed to impose personal liability—if that is in fact the parties’ intent. Relying solely on the frame of the signature block is inadequate insurance against an erroneous construction later when witnesses have disappeared and memories have faded. Ensure that the entire contract reflects the extent to which any of the parties intends to be personally bound to any of the agreement’s terms.
Many of us were taught to draft concise agreements. Adherents to this school of thought advise you to state the terms on which the parties agree and leave out the surplusage. This is good advice to the extent saying things once with precision avoids ambiguity. The introduction of language about what is not part of the agreement may seem counter-intuitive but it need not be. One can draft language that excludes undesired interpretations without repetition of agreed terms. In many situations, you may find yourself trying to prove a negative, inserting unnecessary contractual terms solely to avoid a misconstruction later. For example, the following words do not add to the agreement but merely state what is not agreed: “J. P. Smith is duly authorized to sign this agreement by Acme Corporation. By signing this agreement, J. P. Smith undertakes no personal obligations, as guarantor or otherwise, to Zenith Corporation.” Better to include too much seemingly unnecessary language to express what is not part of the agreement than to be held to an obligation that you never thought you assumed by signing a company document.
If you would like more information about these issues, please contact Scott Thomas. He welcomes the opportunity to help you navigate these waters. Scott’s direct line is 859.578.3862. You can email him at [email protected]. If there is a particular topic you would like to see addressed in a blog, please send Scott an email with your ideas.