Canada: A John Hancock And Lifting The Corp Veil

Last Updated: April 15 2015
Article by Jonathan Speigel

One would think that a signatory to a contract is bound upon signing. Unfortunately, it is not always that simple.

Did the person sign above or below the signature line? Did the person sign as a representative of a corporation? If there are two places to sign, once in a representative capacity and once in an individual capacity and the person signed only once, for whom did the person sign? Two recent cases shed some light on the issue: Proulx v. Canadian Cove Inc. 2014 ONSC 3493 (Ont SCJ) and H.S.C. Aggregates Ltd v. McCallum, 2014 ONSC 6214 (Ont SCJ).

Proulx

A dealer and a boat owner (the "buyer") entered into a contract whereby the buyer would purchase a very fancy boat from the dealer for cash and his existing boat. Before completion, the dealer decided that there was no binding contract and then re-sold the fancy boat for a higher price than the contract price.

The judge held that there was a contract and that the dealer breached it. She awarded damages of $213,000 pursuant to the Sale of Goods Act, based on the fair market value of the two boats as at the contemplated date of closing compared to the prices set out in the contract. Since this fancy boat was hard to come by, the owner was unable to purchase another one at an amount anywhere near the original transaction price. Accordingly, the judge held that the owner properly attempted to mitigate his damages.

The judge was thoroughly unimpressed with the dealer, particularly because the dealer re-sold the fancy boat before even informing the buyer that the dealer would not be completing the transaction. The judge awarded $25,000 in punitive damages.

Dealer

We keep referring to the "dealer," but who was the dealer? The dealer's standard contract referred to an owner (i.e., the person we call the dealer) and the buyer. Unfortunately, the standard contract never set out names, just dealer and buyer. The dealer contended that the contract was between the buyer and Jim Earle Marine Group (whatever that is). The buyer contended that the contract was between him and Jim Earle, with whom he had all his dealings.

So who signed the contract? The dealer, whoever it was, signed the contract by writing the initials "JE." There was no indication of the dealer's full name or whether the initials were inserted in a representative capacity. The buyer argued that neither the dealer, nor the contract, stated that the registered owner of the fancy boat was Jim Earle Marine Group – at least not until after the contract had been formed. He argued, in the alternative, that if a corporation were the contracting party, then Jim Earle should be personally liable because the corporate structure was a sham.

The judge held that, if the corporation were the contracting party, then she would not lift the corporate veil to make Jim Earle personally liable. She felt that there was no evidence that the corporation was incorporated for an "illegal, fraudulent, or improper purpose" or that Jim Earle expressly directed that a wrongful act be done. Nothing drove her to conclude that the corporate structure "was a sham from the outset or an afterthought to a deal which had gone sour."

However, that did not much help Mr. Earle. The judge held that "Mr. Earle made himself personally liable, in signing all documentation using his own initials 'J.E.', without indicating that he ... was signing on behalf of Jim Earle Marine Group."

Corporation

The decision makes good sense. How can a dealer not indicate on a contract for a fancy boat worth hundreds of thousands of dollars, exactly who owns the fancy boat? How can a dealer jot down initials without even indicating his full name?

What disturbs us is that the judge referred to Jim Earle Marine Group as if its name implied a corporation. That name is not a proper corporate name. There is no indication of Incorporated, Ltd., Corp. etc. at the end of the name. As far as we are concerned, since Jim Earle Marine Group is not a proper corporate name and there was no indication of an actual corporation, then the person with whom the buyer dealt, (i.e. Jim Earle) would, of necessity, be the person with whom the buyer contracted.

Aggregates

An employer and a newly acquired employee entered into an employment agreement and a side loan agreement by which the employer loaned $50,000 to the employee to assist the employee to purchase a house in the employer's locale. Unfortunately, these agreements were complicated because, for tax purposes, the employee wanted his corporation to provide his services to the employer.

The employment agreement referred to the employee personally throughout. However, looking vertically at the signing page, there was a line for signature, immediately below which was the employee's name, and below the employee's name, for the first time, was the name of the employee's corporation. The employee signed above the line.

The loan agreement referenced an employment agreement as being between the employer and the employee's corporation. It noted that there would be a gift to the employee's corporation if the employee remained with the employer for the full term of his five-year contract but, if not, the advance would have to be repaid. The signing portion of the loan agreement was set up in the same fashion as the signing portion of the employment agreement.

Of course, the employee did not remain for the full term, the employer demanded the return of the advance, and the employee claimed that only his corporation was liable to repay it.

Ambiguous

The judge extensively canvassed the jurisprudence (140 paragraphs with 79 footnotes) and concluded:

where a person's signature appears immediately above or below the name of his corporation, without another signature on the document, and without a clear indication that the person was signing in a representative capacity only, the instrument will be deemed to be ambiguous and the court will look to other evidence, both from the nature and content of the document and the circumstances in which it was signed, to determine whether the parties intended the signer to have personal liability for the obligations it entailed. The single signature will generally not attract personal liability, in the absence of other evidence that demonstrate an intention of the parties that the signature was to have this effect.

The judge noted that the loan agreement stated "If Calvin McCallum (Construct Michigan Corporation) terminates the contract prior to the five year term, he will be liable to repay $50,000.00 within 2 years of the contract termination." The judge held that, when the employee signed the loan agreement above his name and his corporation's name, the parties intended him to be personally liable for the loan agreement obligations.

More Reasons

The judge gave two more reasons for finding the employee personally liable. First, the employee assumed personal liability by authorising his corporation, as his agent, to enter into the loan agreement on his behalf. The employee had agreed that the only reason he had involved his corporation was to preserve his tax status as an independent contractor. The judge held that the employee represented that his corporation had authority to enter into the loan agreement on his behalf and that the employer was induced to advance the funds because of that representation

Second, by way of promissory estoppel the employee was precluded from denying his personal liability under the loan agreement. He made a promise, both orally and in the loan agreement, that he would be personally responsible for repaying the funds. The employer relied on this promise and altered its position to its detriment and to the employee's benefit.

Drafting

The contracts in both these cases were sloppy. Sloppy contracts keep litigation lawyers employed. Few drafting skills are required to demonstrate exactly who is contracting with whom.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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