Does the Law Treat a Person Like a Sole-Proprietor For Failure to Identify a Corporation While Negotiating a Contract?

The Existence of a Corporation Must Be Without Surprise If Corporate Veil Protection Is To Exist. If a Deal Was Struck Without Identifying a Corporation During the Dealings, Law Will Treat the Failing Party As If Unincorporated.

Understanding That Personal Liability May Arise By Failure to Identify Corporate Details During Business Dealings

Man in business suit presenting blank business card When a business is incorporated, the reasons of the business owner for doing so may include, among other things, tax benefits and protection from personal liability.  The protection from personal liability arises from the creation of what is called a corporate veil which creates legal separation of the business owner from the business.  In other words, from a legal standpoint, a person can be viewed either as being the business (a sole-proprietorship) or as owning a business (a corporation).

Legally, as a sole-proprietor a business owner is personally liable for the debts and wrongs arising from the contracts and operations of the business.  As a sole-proprietor, this personal liability occurs regardless of whether the business owner was involved with any wrongdoing by the business, such as an accident caused by an employee; however, when the business is incorporated, and the business owner merely owns the business rather than is the business, the business owner is protected from wrongdoing by employees, among others, with some exceptions, via what is called a corporate veil.  The corporate veil exists whereas by incorporating the business as a separate legal entity, the business owner distances the potential liabilities of the business from the business owner (unless the business owner was hands-on with, or improperly permitted or enabled, the wrongdoing).  With all this said, and whereas there are personal liability protection benefits by incorporating, many business owners subsequently fail to amend business materials to reflect the change from sole-proprietorship to incorporation.  Neglected business materials may include such things as websites, business cards, brochures, contract, invoices, and other forms.

The Law

When a business converts from sole-proprietorship to incorporation, if the change is omitted from the business materials, it is plain and obvious that people entering into dealings with the business will be unaware that the business is a corporation, separate from the business owner, than a sole-proprietorship where the business and the business owner are one-and-same.  When this occurs, in the manner described here or in some other way where there is a failure to identify the business as a corporation rather than sole-proprietorship, the person who fails to provide the proper corporate details remains at risk of personal liability without the corporate veil protection that would be available if the corporation was properly identified.  This legal principle was explained within the case of Kobes Nurseries Inc. v. Darren Convery and 1553022 Ontario Limited, 2010 ONSC 6499 and subsequently confirmed by the Court of Appeal in the case of Kobes Nurseries Inc. v. Convery, 2011 ONCA 662 wherein it was stated:

[15]  The plaintiff relies on section 10 of the Business Corporations Act, RSO 1990 c.B. 16 which provides:

10(1)  The word “Limited”, “Ltee”, “Incorporated”, “Incorporee”, or “Corporation” or the corresponding abbreviations “Lltd.”, “Lltee”, “Inc.” or “Corp.” shall be part, in addition to any use and figurative or descriptive sense of the name of every corporation, but a corporation may be legally designated by either the full or the abbreviated form.

(5)  Despite sub (4), a corporation shall set out its name in legible characters in all contracts, invoices, negotiable instruments and orders for goods or services issued or made by or on behalf of the corporation and all documents sent to the Director under this Act.

[16]  The plaintiff also relies on the Business Names Act, RSO 1990 c.B. 17 as amended.  Section 2(6) provides:

A corporation and such other persons as are prescribed carrying on business under a registered name or, in the case of a corporation, identifying itself to the public under a registered name, shall set out both the registered name and the person’s name in all contracts, invoices, negotiable instruments and order involving goods or services issued or made by the person.

[17]  Mr. Sapone argues that the burden is on the defendant to show that the plaintiff must be imputed with the knowledge of the existence of the numbered company.  He relies on Bridge City Electric (1981) Ltd. v. Robertson, 1986 CanLII 3201 (SK QB), [1986] S.J. No. 396 (Sask. Q.B.) per Kindred J.:

There is ample authority in law to support the principle that the onus is on the individual who contracts with the plaintiff to make it known to the plaintiff that he is acting for a corporate principal. In Corkum v. Lohnes, (1981) 43 N.S.R. (2d) and 1981 CanLII 2694 (NS CA), 81 A.P.R. 477, Cooper J.A., in delivering the judgment of the Appeal Division of the Nova Scotia Supreme Court, stated at p. 486:

If a person incorporates his business, as was done by the appellant in 1977 he must make it clear to those with whom he is negotiating contracts that he is doing so on behalf of his company and not in his personal capacity. If he fails not only to do so but also enters into a contract, as here, signing only in his personal capacity he should not thereafter when sued be allowed to hide behind the corporate veil so called. We should not countenance such an effort.

[18]  Mr. Sapone also relies on the decision in Nord Ovest Spa v. Gruppo Giorgio Ltd., [1994] O.J. No. 1657 where Stayshyn J. said at para. 19, 24 and 25:

19  In my view it was simply not enough for George Elian to contract using the name "Boutique Cerutti 1881" and have all of the documents use the name "Boutique Cerutti 1881". It was his duty to make it clear to Hitman and Nord Ovest that he was acting as agent for his company 762993 Ontario Inc., and he did not discharge his duty. There was no evidence to suggest that George Elian made it known that the contracts were with 762993 Ontario Inc. Further, it was the evidence of Patrizia Beneventi that when she met with George Elian in 1990 at the store, she, and therefore Hitman was led to believe that Elian was the owner of the store.

24  Neither George Elian nor 762993 Ontario Limited did this. As I see it this should be one factor considered by a Court in deciding the issue of the personal liability of George Elian. It would appear that the purpose of this legislation is to protect the public, and as a consequence if someone expects to take advantage of the limited liability available to him by the process of incorporation, he should make the public aware of such corporation. I am aware that in Short's Backhoe & Trucking Ltd. v. Noseworthy (1992) 101 Nfld. & P.E.I.R. p. 277 Newf. PCJ. this was one factor taken into consideration by the Court in imposing personal liability on the defendant.

25     I note that it was indicated in Excelco Foods Inc. v. Snider (1991) 1991 CanLII 7569 (SK QB), 95 Sask R. p. 314 Sask. Q.B. at p. 316, that if an individual defendant wishes to escape personal liability on a contract that such a person has a duty to make it clear to the person with whom he is contracting that he is negotiating on behalf of his corporation and not in his personal capacity.

The decision was overturned on appeal at [1997] O.J. No. 4030, but on another basis.

[19]  In Victor Canada Ltd. v. Farbetter Addressing and Mailing Ltd., [1978] O.J. No. 2687, Morand J. noted that the defendant used a style “Farbetter Business Product” which it knew to be operated by “one James Sinclair”.  Morin J. held, even where a single cheque included the corporate name:

20  I am satisfied in this case that it would be unreasonable to expect that the plaintiff should have known that they were dealing with a limited company. Indeed, the evidence before me, with the exception of several inconsequential matters, indicates that the plaintiff would fully expect that they were dealing with an organization known as Farbetter Business Products, of which Mr. James Sinclair was the operator and owner.

[1]  The appellant Darren Convery appeals from the judgment of Lauwers J. dated 24 November 2010 finding Mr. Convery personally liable to pay the invoices of the respondent Kobes Nurseries Inc. totalling $78,798.25.

[2]  The appellant submits that the trial judge made a palpable and overriding error in finding that, as of 21 July 2008, the respondent’s contractual relationship was with Mr. Convery personally and not with the defendant numbered company.

[3]  We do not accept this submission.  The trial judge’s review of the conversations over the years between Mr. Convery and Mr. Kobes and of the relevant documentation passing between the parties, including fax transmissions, invoices and cheques, strongly support his conclusion that “Mr. Convery did not bring home to the plaintiff the fact that the status under which he was carrying on business had changed from that of sole proprietorship to a corporation ...[T]he plaintiff has proven on the balance of probabilities that its contractual relationship was with Darren Convery personally and not with the numbered company.”

This personal liability against the person who held out without expressly identifying the involvement of a corporate entity may apply even in circumstances where the Plaintiff is aware of a corporate entity; however, the person who held out during contractual negotiations failed to clearly demonstrate that a contractual agreement will be with the corporate entity rather than with the person who is negotiating. The same occurs in circumstances where a corporate entity is subsequently added during the course of business dealings unless there is an express removal of the persons and substitute by the entity.  This view was stated by the Court of Appeal in the case of Truster v. Tri-Lux Fine Homes Ltd., 1998 CanLII 3497 where it was said:

[23]  The record and the trial judge’s finding shows that the Trusters knew by closing they were dealing with a corporation but there is no evidence of an intention on the part of the Trusters to relieve Kaufman or Matta of their personal liability. The Trusters testified that the fact that Tri-Lux Fine Homes was not a corporation was important to them. As Mr. Truster’s testimony reveals, he knew the respondent did not need to go through with the closing but was fearful of litigation if she declined to do so. The Trusters consciously agreed to complete the transaction and accept the undertaking from the corporation, Tri-Lux Fine Homes Limited. But none of this testimony indicates more than that Mr. Truster was accepting that Tri-Lux Ltd. was now liable for the obligations under the Undertaking.

[24]  An agent who contracts in his or her own name does not cease to be contractually bound merely because it is proved the other party knew when the contract was made that he or she was acting as agent: Basma v. Weekes, [1950] A.C. 441 (P.C.). The agent remains personally liable (though the principal may also be found liable) unless there is sufficient evidence to establish that the intention of the parties was that the contract would only be with the principal, or in other words that there has been an unequivocal election to contract only with the principal: Dramburg v. Pollitzer (1873), 28 L.T. 470; Lawson v. Kenny (1957), 1957 CanLII 407 (ON SC), 9 D.L.R. (2d) 714 at 717-718 (Ont. H.C.J.); Vic Priestly Landscaping Contracting Ltd. v. Elder (1978), 1978 CanLII 1272 (ON SC), 19 O.R. (2d) 591 at 598-599 (Co. Ct.). The agent held personally liable may have resort to their principal for indemnification: Vic Priestly Landscaping Contracting Ltd., supra.

[25]  The documents and the testimony reveal that there was an intention of the parties that the obligation to build the house to specification continue after the conveyance, but there is no evidence that this obligation was to be held only by the corporation and not Kaufman and Matta. The terms of the contract did not change upon closing, but the  appellants Kaufman and Matta, perhaps inadvertently, added a party to the contract. The Undertaking clearly sets out the obligations of the corporation to the Trusters up to, and past, the closing. However, there is no mention of Kaufman or Matta being relieved of their personal capacity in that document. On the whole, the corporation undertook to convey the land and build the house within a time-limited period in compliance with the specifications in the Agreement and the Amendment. The Trusters accepted the undertaking, but did nothing to indicate that they did not also consider Kaufman and Matta personally bound under the contract.

Additionally, a business that fails to properly identify itself may be subject to liabilities or fines arising from Provincial Offences prosecution via various acts such as the Consumer Protection Act, 2002, S.O. 2002, Chapter 30, the Business Corporations Act, R.S.O. 1990, c. B.16, or the Business Names Act, R.S.O. 1990, c. B.17, among others.  The failure to properly identify a corporation and confirmation that such conduct violates the Business Corporations Act, was confirmed in the case of MA Fire & Safety Protection v. Satsang, 2018 ONSC 1916 wherein it was stated:

[30] The findings of fact showed that the Defendant did not know it was dealing with a corporation.  None of the business documents of MA Fire set out the registered business name or the corporation name and this was in violation of the Business Corporations Act, R.S.O.  1990 B.16

Summary Comment

Typically when a person is acting on behalf of a corporation during business dealings such as contract negotiations, the person will be protected from personal liability for the contractual obligations established between the corporation and the other party to the contract negotiations.  However, where the deal is conduct without explicit identification of the corporation, or where a business is improperly identified, the deal will likely be treated as entered into with the person rather than entered into with the unidentified corporation.  This rule of law abides by the common sense that a party to a contract should know who the contract is with; and accordingly, the law says that if a party was unable to appreciate that discussions were being conducted on behalf of a corporation, then the resulting deal will be treated as if entered into personally without corporate law protections.

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