Officer Liability for Failure to Disclose Agency
By Elliott M. Portman
Do you know who your customer is?
Are you sure?
Often a Seller of goods or services is unsure who to pursue legally if payment is not made on their bill. The situation is common, especially when there is no formal Credit Application taken prior to the unpaid transaction. Is the person you contracted with an “agent” and insulated from personal liability?
An “agent” is the party who entered into the contract for goods or services on behalf of a disclosed “principal” or “contracting party”. The “agent” is not responsible for the unpaid bill if the Seller knew who the agent was working for. The owner of a business might be considered an “agent” for the corporation she/he uses to organize her/his business. If a lawsuit was brought against the “agent”, she/he might argue that they are not the proper defendant and seek to have the lawsuit dismissed against them.
However, there are exceptions to the Rule. A Seller can argue that where an officer of a valid corporation enters into a contract with them and does not disclose its existence, the officer is personally liable on the contract. The law imposes a duty on the officer of the corporation to disclose who the Seller is doing business with at the time of the contract formation.
The fact that corporate checks are used to pay on accounts billed to the officer in her/his individual name does not change the nature of liability. There has been no court ruling imposing an affirmative duty on the Seller to investigate who is the responsible party, after the fact. The receiver of a check is not charged with actual knowledge of the existence of the corporation for liability purposes. In order to avoid liability as a principal, the agent must disclose the existence of the representative capacity at the time the contract is made.
Officers of a corporation who enter into a contract under a trade name, as opposed to their individual name, and deliberately conceal the fact that the business name is a valid corporation, with the furtive intent of escaping personal liability, are estopped from claiming that the debt was corporate and not individual. The protection of the corporate umbrella in New York is a narrow concept that applies only where an entity openly identifies itself as a corporation by the use of certain words, such as “corporation”, “incorporated”, or “limited”.
When an agent deals in his own name, and later the other party to the contract learns that the agent was really the agent for an undisclosed principal, the other party can elect to sue either the agent or the undisclosed principal for any default, because both the agent and the undisclosed principal were unconditionally obligated to perform the contract, that is, to pay the bill.
A dispute as to whether or not the principal-agency relationship existed is a matter of proof, but not an outside event or contingency which must occur in order to bring the principal’s obligation into existence. Based upon the foregoing, the sole issue remaining for determination by the court is whether there was some meaningful disclosure by the Buyer prior to the first shipment of goods by Seller. If the Judge finds that the agent did not properly disclose the person or entity that Seller was doing business with, the agent can be held liable for the price of the goods or services.
Elliott Portman, Counsel to Rosenthal & Goldhaber, P.C., is a creditor’s rights attorney with Portman Law Group, P.C. who regularly engages in creditor’s rights law matters. He was recently appointed for a fourth term as Chair of the Creditor’s Rights Law Committee of the Suffolk County Bar Association.