Manager Held Personally Liable for Company Contract Breach
In case your eyes are glazing over from all this legalese, let me translate for you:
the liability protection that Turnbow thought he was getting from his LLC was worthless due to poor contract drafting & signing practices.The trial court found for BSS and agreed that Turnbow had entered into the contract in his individual capacity. Accordingly, it rendered a judgment against both PMC (for quantum meruit) and Turnbow in his individual capacity (for breach of contract). The Court of Appeals for the Fifth District of Texas, after review, affirmed the finding of personal liability for Turnbow. If you are a manager, owner, or officer of a company, this should alarm you. If you don’t follow the correct procedures when signing contracts, you could be personally on the hook. One particularly illuminating segment from the trial court transcript (quoted by the appellate court) is as follows:
Q. And that contract would have been signed by you individually; is that correct? A. I was signing for my company. Q. . . . Where on this document does it say that you’re signing for your company? A. It doesn’t. . . . . Q. And is this document addressed to you and signed by you individually? Is that correct? A. Yes. Q. And nowhere on the document does it say that you’re signing on behalf of PMC Chase? A. No.You may be able to see where this is going. Ouch. PMC and Turnbow argued that Turnbow acted as only an agent of PMC, but the appellate court disagreed
“It is well-settled that the law does not presume agency. ….When an agent seeks to avoid personal liability on a contract he signs, it is his duty to disclose that he is acting in a representative capacity and the identity of his principal.”What’s more, parol evidence of an agency relationship rather than personal capacity was not sufficient to defeat the finding of personal liability. Again, I’ll translate: what the parties understood to be the case outside of the document was here found to be irrelevant, in light of the clear meaning of the actual document.
“[PMC and Turnbow] contend the trial court erred … “because both parties to the contract testified that they understood Turnbow to have signed the contract for PMC Chase.” The contract, which neither side contends is ambiguous, bears Mr. Turnbow’s signature and does not mention PMC Chase or indicate representative capacity in any way. Thus, on its face, the contract unambiguously shows it is the obligation of Mr. Turnbow personally.”Double ouch. Three takeaways here:
- Be careful with drafting and signing contracts. Seemingly small mistakes can have very big consequences.
- Don’t assume that once you’ve formed an entity, liability protection automatically attaches to everything you do permanently and forever. You can accidentally pierce your own corporate veil.
- Best practices are always relevant. The law does not presume agency.