Common Contracting Pitfalls Part One
Business men and women are constantly reviewing and signing contracts. They can be for the most mundane purchase like garbage pickup or a bet-the-company piece of new business. Instinctively, larger contracts get more scrutiny, including attorney review. But what may seem like routine contracts may contain significant pitfalls. This is the first in a series of articles designed to identify things for you to keep in mind when reviewing agreements.
Let’s start by considering the consequences of not identifying the contracting parties properly. As a matter of law, a corporation, LLC, or similar organization only has one correct name. They are not like humans who can be both William andBill. It is the name, in the style, shown on the records of the Secretary of State’s office in the state in which it is organized. For example, are there periods after the “L”, the “L”, and the “C”? Is it “corp” or “corporation”? While these differences may seem trivial, sometimes getting these items wrong is the difference between binding the correct party or a different company altogether. Frequently, companies do business in a tradename that is not their true corporate name. However, establishing which corporation holds that tradename is not always easy, especially when that business did not properly register the assumed business name. For example, “John’s Deli” may actually be “231 Second Street, LLC”. If John’s Deli is a popular national franchise, how would you be able to prove which franchisee is liable if the contract only says “John’s Deli’s”? Getting the name of the contracting party correct is obviously going to be important to make the contract enforceable against the people you thought you were dealing with.
Proper identification of the parties also comes in to play at the signature line of the contract. Sloppy work here can inadvertently bind individuals to contracts that they intended to sign only in a representative capacity. I have seen examples of signature lines that do not identify the party by its correct corporate name. I have also seen signature lines that do not call for the individual to sign in a representative capacity. There is case law that states that if a person signs in his individual rather than representative name, he may be individually liable on the contract, not the corporation. This can have consequences for both parties to the agreement. But, it is going to be an especially nasty surprise for the individual employee who signed the contract not understanding that they were going to be liable for the contract.
Regardless of how busy someone might be, the law implies the obligation to correctly identify the parties and to take care in the execution of the agreements to show representative capacity. Sometimes this takes a little extra digging. But, the failure to take the time can lead to big problems down the road.