Parties That Signed Agreement on Behalf of Non-Existent Entities Personally Bound By Contract

On October 30, 2018, Justice Hudson of the Suffolk County Commercial Division issued a decision in Olympus Am. Inc. v. Greene House Surgicare, 2018 NY Slip Op. 32874(U), holding that parties who signed an agreement on behalf of non-existent entities were personally bound by the agreement, explaining:

Under well-established agency law, a contract between individuals purporting to act on behalf of a nonexistent principal enter into a contract with a third party, the contract does not for that reason alone become void or voidable. Liability is based on the rule that one who assumes to act as agent for a nonexistent principal is himself or herself liable on the contract in the absence of an agreement to the contrary and on the theory of a breach of an implied warranty of authority. Thus, courts have determined that the individual who signed the contract may be liable where there was no existing corporation under any name because, under those circumstances, the Plaintiff has no remedy except against the individuals who acted as agents of those purported corporations. Applying these principles, the Court finds that Plaintiff demonstrated, prima facie, its entitlement to judgment as a matter of law that the individual Defendants were liable under this theory. The Court further finds that since Green House Surgicare had neither de facto nor de jure existence at the time the contract was entered into, it cannot he bound the terms thereof unless the obligation is assumed in some manner by the corporation after it comes into existence by adopting, ratifying or accepting it. Having submitted no facts which demonstrate that Greene House Surgicare had de facto nor de jure existence. Defendants foiled to meet their burden of raising a triable issue of fact.

(Internal quotations and citations omitted).

Usually, the only parties who have rights or obligations under a contract are the parties to the contract. Here, individuals who signed a contract on behalf of a company that did not exist were found to be bound by that contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether you have rights or obligations under a contract.