Contracts - Traps For The Unwary

by Doug Whitlock

Businesses enter into contracts every day. Some are verbal. Some are written. Important contracts should be written. Businesses can reduce risks by adhering to some basic contract procedures regarding their written contracts. The purpose of this article is to provide an overview of a couple basic contract procedures.

The most common procedural problems we see with contracts that businesses ask us to review (too often after they are already signed) are: (i) the wrong business entity is used, and (ii) an officer or manager signs individually or without authority.  

Businesses should confirm that they are using an entity that is “active” and in “good standing.” They also should confirm that the company on the other side of the contract is too. A quick check of the secretary of state’s website where the companies are doing business will provide the answer.  If the name does not appear or the company has been “administratively dissolved,” then you have a problem. It may mean that you do not have the correct spelling, correct name, or that the so-called company is not a registered business entity in the applicable state.  

If the problem arises as to your own company, it may mean that the person signing your contract has individual liability. If the problem arises as to the party on the other side of the contract, it may mean that they also are individually liable or that the contract is unenforceable. From a practical standpoint, if a party has not kept up-to-date its corporate records, there is a good chance that there exist other problems with the company, its financial wherewithal, and its ability to perform. The bottom line is that you need to know who can and who is entering into the contract before you and the other party sign it.    

Even when there are two valid business entities, there often arise problems with the signature lines and the people signing. If a party to a contract is a separate business entity, such as an LLC or a corporation, then the person signing for them must sign in their official capacity on behalf of the company. This means that after the printed name under the signature, there should be a clear statement as to “President,” “Manager,” “Managing Member” or similar and also reference to “duly authorized.” If such a title does not appear, then the person signing potentially exposes herself or himself to personal liability for the company’s obligations, as many courts have concluded.  If the person signing is not authorized to sign on behalf of the company, then there becomes a question as to whether there is an enforceable contract against the company.  There are additional due diligence measures for confirming authorization, such as obtaining a resolution as to authority directly from the company.

This article discusses only two procedural issues out of the many possible procedural and substantive problems that may arise. Parties often forget key business terms, legal warranties and disclaimers, and make unreasonable representations, exposing themselves to unnecessary risks. 

Doug Whitlock can be reached directly at 314-446-4396 or dwhitlock@sandbergphoenix.com.  Doug is a shareholder with Sandberg Phoenix & von Gontard P.C. in the area of commercial contracts and transactional business law.