What’s In A Name?Added by Steve M. Frinsko in Articles & Blogs, Business Law on October 5, 2015
“What’s in a name? That which we call a rose
By any other name would smell as sweet”
William Shakespeare, Romeo and Juliet,
Act 2, Scene 2
For Romeo and Juliet, names (and long-running family feuds) weren’t important. All that mattered for them was how they felt about each other. In the world of contracts, however, names matter just as much as (and maybe more than) how the parties feel about each other. Especially if they want an enforceable contract.
So, what is in a name? Is it good enough to sign a contract as “Sam’s Widgets, by Sam Smith”? That’s almost the same as “Sam’s Widgets, Inc., by Sam Smith, President” isn’t it?
In short, no. Names and titles matter in contracts. Thus, it’s very important that the contracting parties are correctly named. This includes the obvious issues like whether you’re buying from Company A or Company B. It also includes the more subtle issues like whether the counterparty is an Idaho or Delaware corporation and whether its correct legal name is “Company A, Inc.” or “Company A, Ltd.”
For one thing, using the correct name ensures that the contract will be enforceable against the intended party. That is, a contract with Sam’s Widgets, Inc., an Idaho corporation should be enforceable against Sam’s Widgets. But, what if Sam’s Widgets, Inc., an Idaho corporation doesn’t exist? There’s a Delaware corporation called Sam’s Widgets, Inc.—is that the company you contracted with? And, even if it is, can you enforce the contract against the Delaware company? Well, maybe. But it will be more difficult to enforce because you will probably have to prove by outside evidence—beyond just producing the signed contract—that both parties intended to be bound by that contract.
Another common contracting situation is one in which a seller of goods wants to get a security interest from the buyer to secure payment for the goods. To perfect that security interest, the seller usually must file paperwork in the buyer’s state of formation. And, while it’s not impossible to perfect a security interest if the state of formation isn’t shown on the contract, it’s more time-consuming. Further, there is a risk that the grant of security interest will be invalid if the buyer isn’t properly named because using that incorrect name may cause the seller to file the security interest against the wrong company.
Similarly, a seller might want to check the buyer’s credit and needs to know where to look to find that information. Because there are often several companies with similar names, having the right name helps ensure that the seller gets the right credit information.
For employees signing contracts on their employers’ behalf names can really matter when things go wrong and the parties end up in court. In those cases, it’s critical that the person who signs the contract does so in a way that shows he or she is acting in his or her capacity as an agent (employee) of the company (employer). Getting these things wrong—or even almost right—can have serious consequences.
Idaho courts have consistently held that, unlike horseshoes and hand grenades, almost isn’t good enough. That is, “almost” signing for the entity can lead to personal liability for the person signing. And, that can be a very expensive “oops” as Mr. Johnson learned in 2014.
Johnson’s case involved contracts for the sale of wheat. Johnson managed a grain elevator as an employee of a company called Johnson Grain Inc. However, even though he and the company shared a name, Johnson had never been an owner of Johnson Grain Inc. Johnson, purportedly on behalf of Johnson Grain Inc., signed two wheat supply contracts with Agrisource. In the seller’s name field in the contract form, Johnson wrote “Johnson Grain” and then signed his name below. He didn’t include a title.
The wheat was never delivered and as a result Agrisource incurred about $50,000 in damages. When Agrisource sued for breach of contract, it sued Johnson personally alleging that it had contracted with Johnson the individual doing business as Johnson Grain. Johnson argued that he was not personally liable because Agrisource should have known that it was contracting with Johnson Grain Inc. He also argued that using “Johnson Grain” was good enough to disclose that he was acting on behalf of Johnson Grain Inc.
The Idaho Supreme Court disagreed. Instead, it held that to avoid personal liability Johnson should have disclosed to Agrisource (1) that he was acting as an agent (a representative) for a principal (i.e., Johnson Grain Inc.), and (2) the principal’s identity.
Johnson’s true relationship with Johnson Grain Inc. was a classic principal and agent relationship of employer and employee. But, because Johnson simply signed his name without any indication that he was acting in some representative capacity (that is, by adding a title such as “Sales Manager” or “Vice President” after his signature), there was nothing on the face of the contracts to indicate that he was acting in his capacity as an agent of (employee of) Johnson Grain Inc. (his employer).
Likewise, the Court held that Johnson did not properly identify his principal. In the Court’s view, the only thing that writing “Johnson Grain” in the seller name field accomplished was to inform Agrisource that it was contracting with Johnson Grain. But, there was nothing to show Agrisource that it was contracting with a corporation. Generally speaking, corporations are required to include some indication of their status in their corporate name, such as “Inc.,” “Incorporated,” “Company,” or “Co.” Because none of those indicators was included, the court held that Johnson did not inform Agrisource that it was contracting with a corporation and did not disclose corporation’s identity.
In fact, the court specifically noted that it would have been reasonable, because Johnson’s name was also included in the purported seller’s name, for Agrisource to believe that it was really contracting with “Johnson the individual, doing business as Johnson Grain.” In Idaho, as in most other states, a “doing business as” designation does not create an entity separate from the individual using that designation. As such, the individual is personally liable for whatever obligations he/she undertakes using the “doing business as” designation. Moreover, on these facts Agrisource had no duty to investigate further and was entitled to rely on the party name used in the contract.
Therefore, because he failed to disclose any details of his principal-agent relationship with Johnson Grain Inc., the court held that Johnson was personally liable to Agrisource for the $50,000 in damages.
Granted, the Idaho Supreme Court might have reached a different result if, instead of Johnson Grain Inc., the seller had been a larger, more well-known corporation or was called something other than Johnson Grain Inc. Even so, Johnson’s case reinforces the fact that names matter in contracts. It also demonstrates that employees can inadvertently make themselves liable for the company’s debts.
Similarly, Mr. Bryant was held personally liable for a contract made by one of his salespeople on behalf of his company. In that case, the principal-agent relationship was disclosed and prevented the salesperson from being liable. However, neither the salesperson nor Mr. Bryant properly disclosed the company name, or that it was in fact a corporation. Instead, the facts of the case were such that the court concluded that the identified principal in the contract was Mr. Bryant doing business as Bryant and Associates. As a result, Mr. Bryant was held personally liable for the corporation’s debt.
Here again, both the party found responsible and the entity had similar names, which may have factored in the court’s decision. Nevertheless, these cases should serve as a cautionary tale for business owners to ensure that their business’s contracts properly name the entity they so carefully created to shield them from personal liability for business debts. This is especially true in those cases where the entity’s name is some variant of the owner’s name.
Making sure the counterparty is properly named helps ensure that the contract is enforceable against the right party. Likewise, making sure his/her company is properly named and including his/her title are the little things that the person signing for a company should do to ensure the company, not the employee or owner, is the responsible party. Otherwise, that person might end up like Mssrs. Johnson and Bryant—personally liable for business debts.
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