Corporations July 2005 Flashcards
(3 cards)
Summary
Peg, as a promoter, is personally liable on the contract unless the parties did not intend for her to be personally liable. This is a question of fact, which an applicant could argue either way. Acme, Inc., is liable on the contract with Chem Corp. if it adopted the contract. Although Acme did not expressly adopt the contract, by accepting delivery of and paying for the chromite, it impliedly adopted the contract with Chem Corp.
Under the contract, Peg, as a promoter, is personally liable unless the parties, as evidenced by their words and actions, did not intend for Peg to be liable.
Peg is a “promoter.” A promoter is someone who “forms a corporation and procures for it the rights, instrumentalities and capital to enable it to conduct its business.” Stap v. Chicago Aces Tennis Team, Inc., 379 N.E.2d 1298 (Ill. App. 1 Dist. 1978). See 1A William Meade Fletcher et al., Fletcher Cyclopedia of The Law Of Private Corp. § 189 (perm. ed., rev. vol. 2002).
Generally, a promoter who signs a contract in the name of a proposed corporation is personally liable on that contract unless the parties agree otherwise. See Revised Model Bus. Corp. Act § 2.04 (2003); Spence v. Huffman, 486 P.2d 211 (Ariz. App. 1971); Restatement (Second) of Agency § 326, cmt. b (1958). This is true even if the contract does not mention the promoter’s liability. Subsequent adoption by the corporation does not relieve the promoter of liability unless the third party and the corporation expressly or impliedly enter into a novation, by which they agree to relieve the promoter from personal liability on the contract. See Malisewski v. Singer, 598 P.2d 1014 (Ariz. App. 1979). Therefore, absent a novation, Peg ordinarily would be personally liable to Chem Corp. for the liquidated damages.
However, if a party who contracts with a promoter knows that the corporation has not yet been formed and agrees to look only to the corporation for performance, the promoter is not liable. The facts clearly state that Chem Corp. knew that Acme, Inc. had not yet been formed. The facts, however, do not indicate that Chem Corp. agreed to look only to the future corporation or that the contract expressly relieved Peg of liability. Peg signed the contract “as agent for Acme, Inc., a corporation to be formed.” However, Peg cannot act on behalf of a nonexistent principal. See Restatement (Second) of Agency §326 (one who acts for a nonexistent principal is himself liable on the contract). Therefore, Peg would be personally liable for the liquidated damages unless she can show that Chem Corp. did not intend to hold Peg liable. This is a fact-based analysis, which an applicant could argue either way.
Chem Corp.’s statement, “No problem. We know with whom we are dealing and what the chromite’s for. Do not waste our time. If you are serious, lock in the deal, “could be interpreted to support either argument. It could be interpreted as an indication that Chem Corp. planned only to look to the corporation for payment, in which case Peg bears no personal liability for the contract. See Quaker Hill, Inc. v. Parr, 364 P.2d 1056 (Colo. 1961). Alternatively, the statement “if you are serious “could be interpreted to mean “if you, Peg, are willing to be personally liable.”
The fact that Peg signed the contract as an agent for the corporation to be formed is ineffective to eliminate personal liability, as a matter of agency law. However, it does evidence her belief that she was not signing in her personal capacity and that Chem Corp. would look to the corporation, not to her, for performance on the contract.
The facts do not suggest an express novation of the contract. However, some jurisdictions imply novation upon formation and adoption by the corporation. In such a jurisdiction, Peg might argue that she is not liable because Acme adopted the contract (see Point Two below).
Acme, Inc., is liable under the contract if it expressly or impliedly adopted it. While there was no express adoption, by receiving and paying for chromite for three months, Acme, Inc., implicitly adopted the contract.
A contract with a promoter is not a contract with the subsequently formed corporation. The newly formed corporation is not automatically bound by thecontracts executedby its promoter prior to formation. The newly formed corporation is only liable on such a contract if: (1) a statute mandates liability, (2) charter documents mandate liability, or (3) the contract is adopted or ratified by the corporation. See Bishop v. Parker, 134 P.2d 180 (Utah 1943); 1A Fletcher et al., supra §207.
[NOTE: Although there are technical differences between the terms “adoption” and “ratification,” many courts use them interchangeably.]
Adoption of a contract can be either express or implied. Express adoption requires the unequivocal action by someone, with knowledge of all material facts, who would have had the authority to bind the corporation to this type of contract. The fact that “[n]either the board of directors nor the officers of Acme, Inc., formally reviewed or approved the contract with Chem Corp.” indicates that Acme never expressly adopted the contract.
A corporation can impliedly adopt a contract so long as it is done with knowledge of all material facts by someone who would have had the authority to bind the corporation to this type of contract. Implied adoption requires that the corporation receive some benefit or accept some service. See Stolmeier v. Beck, 441 N.W.2d 888 (Neb. 1989); Fortune Furniture Mfg. Co., v. Mid-South Plastic Fabric Co., 310 So.2d 725 (Miss. 1975). This test is clearly satisfied. Acme received three shipments of chromite at the contract price and paid each invoice promptly. Because Vic acted pursuant to the direction of Acme’s board of directors, he had the authority to bind the corporation to this type of contract (raw materials needed for production). Vic approved the invoice after checking that the invoice price agreed with the contract price. Because Acme received a benefit after Vic checked the material facts, Acme, Inc., adopted the contract and is liable to pay the liquidated damages.
