Legal Blog

What’s in a Name

With a few minor exceptions, the only entities who can sue or be sued are individuals or corporations. Partnerships are just a group of people or corporations carrying on business together resulting in personal liability for the partners. Business names, whether they are the names of people or corporations, are irrelevant. It is not the name that is important, for purposes of liability, but the corporation or individual behind the name.

What happens when an individual hides behind a business name of a corporation or a group of corporations make so many complicated transactions among themselves that no one really knows exactly what is happening?

Not Me, My Corporation

A renovation contract is entered into between Josh Developments and an owner. Josh Developments is the business name of a numbered corporation. Terry Kaufman signs for Josh Developments, but there is nothing in the contract to indicate that Josh Developments is only a business name. The owner is never told about the existence of the corporation. The contract goes sour and the corporation registers a claim for lien for $61,700. The affidavit of verification is sworn by Kaufman, in his personal capacity (i.e. Part A on the lien form) and not as agent for the numbered corporation (i.e. Part B on the lien form). The corporation commences an action against the owner to enforce its lien. The owner does not counterclaim against the corporation, presumably because the corporation has no assets. Instead, the owner commences an action for deficiencies against Kaufman personally. These are the facts in 573521 Ontario Inc v. Waldman, a decision of the Ontario Court (General Division).

Kaufman’s Liability

Section 10(5) of the Business Corporations Act requires a corporation to set out its name on all contracts. It does not automatically impose personal liability on a signing officer for failing to do so. However, as the trial judge stated, “there is an onus on a participant to a contract who seeks to avoid personal liability and to shelter under the limited liability of a corporation, to establish that the other participant to the contract was aware at the time of contracting that it was dealing with a limited company“. The trial judge held that Kaufman had not established this fact and held that the contract was made between Kaufman, personally, and the owner.

Results 

The case of the numbered corporation was dismissed. After all, if it was not the contracting party, what right did it have to sue?

The lien registered by the numbered corporation was discharged. The lien could have been valid as against holdback, if the affidavit of verification had been completed properly – but it was not. The improper affidavit was fatal to the lien.

The owner’s action for deficiencies as against Kaufman was to continue to trial. The owner still had to prove that there were deficiencies. We assume that Kaufman could amend his statement of defence to add a counterclaim for unpaid contract monies.

In Trust?

People think that if they use the words “in trust”, somehow, magically, all their liabilities will disappear. As has been said, “it ain’t necessarily so”.

The case of Markborough Properties Inc v. 841202 Ontario Inc. and Rathgeber et al, a 1996 decision of the Ontario Court (General Division), deals with a complex scheme of corporate financing and ownership.

Rathgeber needed a building for his real estate operation. He entered into two agreements with Markborough whereby they would sell the land to him and build a building on it. The agreements were in the name of Rathgeber in trust. Rathgeber incorporated a numbered company (“Corp #1”) and used it to purchase the land from Markborough. Rathgeber then incorporated Milltower Place Development Corporation (“Milltower”) and assigned the construction contract to it with the consent of Markborough. Finally, Rathgeber incorporated three more corporations to deal with the land as a limited partnership.

Markborough worked on the project for a period of time but, after not being paid, ultimately stopped work and liened the project.

Who’s the Owner? 

     “I have been referred to several cases where the facts are as contrived and convoluted as in the case at bar, dealing with the issues of whether the defendant requested that the improvement be made and whether the defendant who did request the improvement, has an interest in the lands.” With this opening the trial judge then proceeded to strip away the form to get at the substance and held that Rathgeber, Milltower and Corp #1 were all owners. Rathgeber was integrally involved with all of the corporations. There was never a designated beneficiary to the trust. There was never an assumption of Rathgeber’s obligations as purchaser by Corp #1. There was never a release from Markborough.

Rathgeber’s Liability 

Of course, the main fight was whether Rathgeber should be personally liable for the monies claimed by Markborough pursuant to the construction contract. The trial judge referred to the contract; it had a clause stipulating that an assignment did not release the assignor from its obligations. The trial judge also noted that Milltower did not execute a corporate resolution that formally adopted the contract. As a result, Rathgeber was not able to rely on the provisions of the Business Corporations Act dealing with pre-incorporation contracts.

However, the kiss of death to Rathgeber’s position dealt with his claim that he executed the contract “in trust”. The court stated: The words ‘in trust’ are not magic words that change the liability of the purchaser unless in fact there is a beneficiary of the trust at that time or the contracting party is acting as an agent for some other person.

Moral 

Always find out the correct name of the person or corporation with whom you are dealing. If you do not know the corporation, you can conduct a cheap corporate search or you can ask for a copy of its articles of incorporation. If you think you are dealing with a corporation and, at the end of the name, you do not see words like “Limited, Ltd., Inc., or Incorporated” or you see the word “Company”, be on your guard because something is wrong.

If you are attempting to act as a trustee without personal liability, state this in the contract or ensure that there is an existing trust agreement with an existing beneficiary.