Don’t get Roles mixed up when signing for a Business Entity (plus case in point)
When signing for a business entity, such as a corporation or limited liability company, an officer’s signing capacities can get confusing. Is she signing on behalf of the entity only, or in her personal capacity and on behalf of the entity?
Check the following points:
1. When only the business entity is supposed to have obligations under the agreement, the signature block should look like this:
Name: Jane Smith
2. When both the entity and the officer are supposed to have obligations under the agreement, insist on two signature blocks and put all provisions that establish the officer’s personal obligations before the signature blocks. Example:
Name: Jane Smith
3. If you are the officer signing for the entity, carefully read every agreement you sign, despite the fact that you are only signing on behalf of the entity. Even if there is only one signature block for the entity, you may end up having to defend yourself against personal liability, because there were personal obligations hidden somewhere in the agreement.
With respect to No. 3 above, it so happened to a CEO of a New York limited liability company (See Integrated Marketing and Promotional Solutions Inc. v. JEC Nutrition LLC, decided December 12, 2006; via the New York Law Journal, subscription required).
The CEO signed a seven page agreement on behalf of the LLC. The first three pages of the agreement contained the main obligations between the LLC and the other party to the agreement. The fourth page contained the parties’ signatures. The CEO signed on behalf of the LLC only, i.e. only one signature block. Three unsigned pages followed the signature page. Page six of the agreement (unsigned) contained the following language:
The undersigned (that is the CEO) for the client (that is the LLC) personally guarantees the payment of client’s debts. In the event that agency is unable to secure payment from the client, the undersigned personally guarantees all liabilities, including interest, collection costs and attorney’s fees.
The LLC didn’t pay, so the LLC and the CEO got sued. Should the CEO be personally liable under the guarantee provision above, despite only one signature, which was clearly on behalf of the entity?
The court wasn’t in a position to decide this issue yet, but it stated the rules:
In order to determine whether the CEO’s signature on the agreement was intended by the CEO to bind the LLC and herself personally, the court must look at five factors: 1. the length of the contract, 2. the location of the provisions that made the CEO personally liable in relation to the signature line, 3. the presence of the CEO’s name in the agreement itself, 4. the nature of the negotiations leading to the contract, and 5. the CEO’s role in the corporation. In addition, the court stated that although two signatures are not required in order to impose personal liability on the CEO, the existence of only one signature weighs against imposition of personal liability.
The court applied the factors and found that factor 1, factor 3 and factor 5 weighed against the CEO. The contract was only 7 pages long, the CEO’s name was mentioned in the agreement, and the CEO had a position of "prominence and control" in the LLC. Factor 2 weighed in favor of the CEO; the provision that established liability against the CEO was located after the signature block.
Still, it will take further court proceedings and additional convincing evidence to show that the CEO did not intend to be bound by the agreement.
Related Post: How to execute a Contract – Good Practice Checklist