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Sloppy Builder

People who are shareholders in small corporations, simply do not learn. The word “Limited” means something; leave it out of a contract at your peril. Truster v. Tri-Lux Fine Homes Ltd. (1998), 39 C.L.R. (2d) 6 (Ont. C.A.) is a case in point.

Facts

Tri-Lux Fine Homes Ltd. (“Tri-Lux Ltd.”) was a custom house builder. It entered into an agreement of purchase and sale with the plaintiffs whereby the plaintiffs would purchase land, to be obtained by Tri-Lux Ltd. from a non-related third party, on which Tri-Lux Ltd. would build a custom home for the plaintiffs. The agreement was entered into in the name of “Tri-Lux Fine Homes” and was signed on behalf of the vendor by two individuals, the directors and officers of Tri-Lux Ltd. Just prior to closing, the vendor informed the plaintiffs that the proper name of the vendor was Tri-Lux Ltd. A warranty to complete the home was signed by Tri-Lux Ltd. and the parties completed the transaction.

Tri-Lux Ltd. breached its warranty to complete the home and the plaintiff commenced an action against it and the two individuals who executed the agreement of purchase and sale.

The Rule

Section 10(5) of the Business Corporations Act specifies that a corporation must use its correct legal name on all contracts. Failure to do so, however, does not result in an imposition of personal liability. What results in personal liability is the failure of a signatory to a contract to ensure that the other contracting party knows that the party is dealing with a corporation. It is an example of the old adage, first articulated in law school, that you can’t suck and blow simultaneously.

Trial Decision

The trial judge held that the individuals were personally liable. The judge found that the individuals did not ensure that the plaintiffs knew that they were dealing with a corporation. The individuals appealed.

Court of Appeal Decision

The court agreed with the trial judge. The individuals had not informed the plaintiffs that they were dealing with a corporation, and not with individuals, and, therefore, the individuals could be held personally liable. We say “could be” because the court still had to deal with the issue that the ultimate warranty was given in the name of the corporation, Tri-Lux Ltd.

The court held that “an agent who contracts in his or her name does not cease to be contractually bound merely because it is proved that the other party knew when the contract was made that he or she was acting as an agent”. The court further held that “the agent remains personally liable … unless there is sufficient evidence that the contract would be with the principal, or in other words that there has been an unequivocal election to contract only with the principal”.

Since the plaintiffs testified that they did not accept the new status but completed the transaction only because they were fearful of litigation, the court held that the individuals were personally liable. The plaintiffs had never elected to contract only with Tri-Lux Ltd. Using the corporate name for the warranty was too little, too late. The damage had been done when the individuals did not use the corporate name or disclose the corporate existence on the signing of the agreement of purchase and sale.