Most businesspeople are aware that incorporation shields a company’s directors, officers and shareholders from personal liability. However, the circumstances in which directors and officers may lose this protection are less commonly known. This article explains what directors and officers who execute contracts for a corporation should do to avoid personal liability for their corporation’s contractual obligations.
In law, a corporation’s identity is separate from the people controlling the business. As a result of this distinction, using a corporation to carry on a business affords the people who direct the company recognized protections, the most important of which is immunity from personal liability for the acts of the corporation. This characteristic is often referred to as a corporation’s “limited liability status” and has led many directors and officers to assume that they can never be found personally liable for the conduct of a corporation they control. In reality, directors and officers may not always be shielded from personal liability.
In a 2013 British Columbia Court of Appeal case, Pageant Media Ltd. v. Piche, the president and chairman of a corporation was found personally liable for the corporation’s breach of a contract that he executed on its behalf. The Court concluded that the president could not rely on the limited liability status of the corporation because he did not clearly identify that he was acting as an agent for the company. The contract and all correspondence, invoices and business cards did not refer to the legal name of the corporation and its limited corporation designation was not displayed. Further, the president signed order forms in his own name, without stating his relationship to the corporation, and paid invoices with his personal credit card.
The Court found that, when someone signs a contract on a corporation’s behalf, that person has a duty to give clear notice to the other contracting party that he or she is acting solely as an agent for the corporation and is not entering into the contract personally.
Generally, this obligation to give clear notice is met if the contract has been executed “per” an authorized signatory of a corporation. Notice can also be inferred from the circumstances where, for instance, invoices show the corporation’s legal name with its limited corporation designation of “Ltd.” or “Inc.”, or where payments are made by cheques drawn on a corporation’s account.
However, if it has not been made clear that a corporation is the contracting party, the person who signs the contract on its behalf runs the risk of being held personally liable for any breach or default of the contract by the corporation.
In addition to the duty to give clear notice discussed in the Pageant Media decision, there are statutory requirements that must be satisfied if the people controlling a corporation wish to rely on its limited liability status. Section 27 of B.C.’s Business Corporations Act (Act) requires a company to conspicuously display its name at its place of business, on documents like contracts, business letters and invoices, and on monetary instruments such as promissory notes and cheques.
If a company fails to meet these requirements, Section 158 of the Act provides that any directors or officers who knowingly permit the contravention may be personally liable to those people who suffer loss or damage as a result of being misled. Directors and officers may also be personally liable for the amount of any cheque that is issued by a company—but not paid—if the company’s name is not displayed on the cheque.
The limited liability status of a corporation is one of its most important advantages, especially when the corporation becomes party to a contract. When a corporation enters into a contract, its directors and officers will not generally be held personally liable for any breach or default of the contract—assuming they have not engaged in fraud, illegality, or other improper conduct. According to Pageant Media, however, they could find themselves personally liable even absent such conduct.
Consequently, any time you execute a contract as agent of a corporation, it is critical that you clearly indicate that the corporation is the contracting party. If you fail to take sufficient steps to communicate to the other contracting party that you are signing a contract in your capacity as an authorized signatory of a corporation, you may be held personally liable for the corporation’s obligations under the contract, including any loss or damage that results from a breach or default by the corporation.