Legal Blog

No principal

A purchaser entered into an agreement in his own name in trust. The purchaser intended to assign the agreement to his corporation (“Holdco”) and the vendor knew this. The purchaser also knew that, although Holdco had existed as an Alberta corporation, it had been dissolved. The agreement did not close, because the purchaser could not come up with the purchase price. After tender, the purchaser incorporated Holdco in Ontario. Was the purchaser personally liable? These are the basic facts in 1080409 Ontario Ltd. v. Hunter (2000), 50 O.R. (3d) 145 (S.C.J.).

Background

We are not talking about some semi; the property was a 78-acre parcel of raw land to be used as a “weekend retreat.” The vendor had spent $100,000 in obtaining architectural plans from Arthur Erickson to build his dream residence. Unfortunately, for reasons that will be apparent later, he needed some ready cash. The sale price was $565,000.

Liability

Section 21 of the Business Corporations Act seems to govern. Section 21 (1) states that a person who enters into a contract on behalf of a corporation before it exists is personally bound to the contract unless the contract states otherwise. Section 21(2) allows a corporation to adopt the pre-incorporation contract, in which case the person who executed the contract is no longer subject to the rights and obligations under it. Holdco never adopted the agreement and section 21(2) was, therefore, inapplicable.

In a prior decision, in which both contracting parties believed the corporation to exist, the Divisional Court held that the contract was a nullity. In another prior decision, in which both of the parties knew that the corporation was not in existence, the Ontario Court of Appeal enforced a contract against the individual.

Since the facts of this case were slightly different from each of the prior decisions, the judge felt that neither of the decisions bound her. She held that the intent of the legislation was to make individuals liable for their actions and held the purchaser liable both in the interests of justice and commercial expediency.

The vendor?

Who was the vendor? Garth Drabinsky.