Who is a Party to a Contract? Sometimes the Participants are Surprised!

Posted on November 5, 2009 by Gavin Craig

How often does an officer of a corporation sign a contract, listing the business as the contracting party, but neglect to indicate that the business is a corporation or an LLC?  Then sign the contract? 

Marc Ward in his Blog discusses a case of, who are the parties to the contract?

Marc writes:

In Builders Kitchen and Supply Co. v. Moyer, N0. 0-655/09-0194 (September 2, 2009) is a deceptively simple case.  On the one hand it represents the folly of not having even run of the mill contracts reviewed by lawyers before they are signed.  And on the other hand, it is a warning to lawyers that things aren't as simple as they appear.

Frank Moyer signed a contract with Builders Kitchen for the purchase and installation of some kitchen cabinets and countertops.  The contract was just two pages long.  On the first page there was a place for the name of the business and a little later a space to indicate the type of entity.  Moyer filled in the name of his business, Crystal Creek Development, but neglected to indicate that it was a corporation.  He signed the contract as "Frank Moyer, Pres." The second signature line, presumably for the guarantor, was left blank.

The question for the court was, is Frank Moyer a party to the contract?  As a simply matter of agency law, the answer has to be “Yes.”  The officer of the corporation is an agent, and the agent has the duty to disclose the existence and name of the principal.  For a lawyer these are fun cases, but I have had numerous attorneys argue with me that filing articles of incorporation are all the notice that the agent (officer) needs to give.  That position, by the way, is not the law. 

In Minnesota there is a famous case where the same thing happened.  Except that in the Minnesota case the defendants were lucky.  They had paid for the goods with checks that clearly showed that the seller was selling to a corporation, and the court found that the checks were sufficient  notice.    See Paynesville v. Ever Ready Oil, 379 NW2d 186 (Minn. App. 1985)

Earlier in my career I had an opposing counsel argue that a person listed as a contracting party and who signed the contract was really not intended to be a party. 

Most people, including especially small business owners, are very informal when signing contracts, and create real problems for the principal of any company.  The lesson is clear.  Have an attorney review the contracts.  Marc is right:  Pay me Now or Pay me Later. 

 

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He Can do That! No He Can't! The Wonderful World of Agency!

Posted on September 12, 2008 by Gavin Craig

I am one of those strange attorneys that thinks cases involving agency are interesting. An agent is a person (including a company) that acts for another. Simple, right! An officer is usually - not always - an agent for the company. What does it mean to be an agent? I am glad you asked.

                                                                   What is an Agent?

The agency is created by contract - written or verbal. The contract determines the scope of the agency. If an agent has the power to bind the principal to a specific contract to purchase, the agency could be limited to that one agreement. Or the agency could be open ended. The officer of an LLC at least has the appearance of having the authority to enter into any contract as agent for the LLC. Agency is one of the simplest legal principles; the principle is based on contract law, and yet there are numerous disputes every year.

                         But He Didn't Have the Authority! He was No Longer the Agent!

The Delaware Business Litigation Report blog discusses a recent case that has many of the issues relating to Agency. In this case, the Plaintiff contracted with a Virginia LLC to provide certain services. Burden was the general manager of the LLC. Two days before the LLC signed the contract (by Burton) with the Plaintiff, the LLC amended its Operating Agreement to remove Burton as the general manager. The reason for the change was not related to the contract with the Plaintiff. When the Plaintiff was not paid, it sued. The LLC's defense was that Burton did not have the authority to bind the LLC. In other words, the Burton was no long an agent for the LLC when he signed the contract!

                                                      Defense Problems!

The defense has a several serious problems with this defense. First, since Burton was dealing with the Plaintiff as the general manager, how would the Plaintiff know that Burton no longer had the authority to bind the LLC? Burton apparently never mentioned it. Moreover, Burton continued to act as though he were still the general manager.

An agent can act for a principal when the agent has express authority (Contract,) Implied authority (as an officer of the corporation or LLC, a partner, or by the actions of the principal,) or apparent authority (when the agent holds himself out as having the authority and the principal allows the representation.) I am summarizing and these points are a little more complicated that I have outlined.

In this case, Burton had the authority before the contract was signed, and Burton continued to hold himself out as having the authority, with the knowledge of the principal, even after the authority was removed. So Burton appeared to have the authority to bind the LLC to contracts as an agent with either express or apparent authority.

                                              What about the Ex-Agent?

One funny thing that the case does not mention is that the LLC, owned in part by Burton, is effectively arguing a position that Burton is personally liable as a principal to the contract. The case does not appear to address this point.

I discussed a similar legal point in an earlier post where I urged owners of corporations to disclose that the contracting entity is a corporation. Failure to disclose that you are an agent for a principal (the LLC or the Corporation,) or the failure to disclose that a prior agent can not longer bind the company can lead to unfortunate results.

                                            Verbal Contracts and Agency!

This leads me to my final point. Verbal contracts are perfectly valid, and enforceable so long as they do not violate the Statute of Frauds. A verbal contract with an agent would not violate the Statute of Frauds. However, the always interesting Rush Nigut's Blog has an interesting post on the verbal agreements - with the simple but good advise: Don't do it!

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