A Simple Contract Secret to Save Your Boss’s Shirt
Susan, the President of a limited liability company called Sunguard, buys all of the fabric Sunguard needs to make its products from Weaver Sisters. The two companies have done business together for years and enjoy a business relationship where they trust each other and do not observe the business formalities two less friendly companies would insist on. Weaver Sisters sent a contract to Sunguard where Weaver Sisters agreed to sell $100,000 of fabric to Sunguard. The contract was the two company’s usual straight-forward version, requiring payment of half of the contact price at the time the contact was signed and the remaining amount a month later.
A month after Susan signed the contract, Sunguard had not paid the final half of the amount due to Weaver Sisters. After numerous demands for payment and many unpleasant discussions, Weaver Sisters filed a lawsuit against Susan personally rather than Sunguard, seeking the final $50,000 contract payment. Susan went to court and argued that she couldn’t be sued personally because she had formed Sunguard as a limited liability company to protect her personal assets. The court ruled against her, finding that Susan herself was liable for the $50,000 payment, because of the way she signed the contract with Weaver Sisters. A very simple change in the way the signature section of the Weaver Sisters’ contract was written would have saved Susan from now having to pay $50,000 from her personal assets for a business debt.
To prevent this, first you should understand how important using the correct name of the two parties agreeing to the contract is. The parties’ names are the most basic part of a contract and they must be:
• included in the agreement;
• indicated as a party to the agreement;
• spelled correctly;
• legally correct.
What does this mean?
Sunguard and Weaver Sisters agreed that Weaver Sisters would sell $100,000 in fabric to Sunguard and that Sunguard would pay Weaver Sisters $100,000 in two installments. They smartly draft a written agreement to document this, rather than relying on a verbal agreement. Verbal agreements are difficult to enforce in court and they both knew that.
The written agreement goes as follows:
Weaver Sisters agrees to ship 200 yards of green fabric to Sunguard on June 1, 2011 in return for Sunguard paying Weaver Sisters $100,000. Half the amount due will be paid on the date this agreement is signed and the remaining half a month later.
Agreed this 10th day of April, 2011
Susan Jones Weaver Sisters
Go back to the list above. This agreement has all the parties included. It’s clear that each company named is a party to the agreement. It’s not necessary that you specifically state “The Parties to this agreement are ….” but the parties to the agreement should be obvious from the context. It seems like the names are spelled correctly. But are these the real names of these companies? Probably not.
Most companies have an official legal name stated on a “birth certificate.” Sole proprietorships will not have birth certificates; partnerships may or may not have them; but every other type of company will. A company’s birth certificate is the form filed with the state where the company was started that states the company’s name, the type of company it is and its ownership. These forms may be called “Articles of Incorporation,” “Articles of Organization,” “Certificate of Limited Partnership,” “Statement of Qualification” or other similar titles. The name stated on these forms, as filed with the state agency overseeing formations of companies (usually the Secretary of State or Corporation Commission) is the company’s real name. Whenever you use your company’s name or the name of a company you are contracting with it should be the exact name stated on the company’s birth certificate. For example let’s say Weaver Sisters was incorporated as “Weaver Sisters Inc. of Boston.” That would be its legal name.
It’s possible to have a legal name that differs from the name your company is conducting business under. For this to be legally effective a notice must be filed with the state, or county in some cases, where the company is doing business that indicates that the real name of the company is XXX but the company is doing business as YYY. These are usually called “DBA” filings, which is shorthand for “doing business as” filings. If your company is doing business under a name different than its legal name, contracts it enters into should state the legal name of your company followed by the dba such as Weaver Sisters Inc. of Boston dba Harry’s Fabric Shop.
Why is it important to state the legal name of the company? Because if you do not, it can be used as evidence that it was not the company that entered into the agreement but the individual who signed the contract. This is what happened to Susan. She signed the contract with Weaver Sisters as follows:
Agreed this 10th day of April, 2011
_______________________
Susan Jones
Instead of:
Agreed this 10th day of April, 2011
Sunguard, LLC
By:__________________________
Susan Jones, President
The two statements above are what are commonly referred to as “signature blocks.” The first signature block indicates that Susan Jones has agreed to the contract dated April 10, 2011. The second signature block indicates Susan Jones, as President of Sunguard, LLC agreed to the contract dated April 14, 2011. In the first case Susan is responsible for the contract, in the second Sunguard is.
Is it good enough for the agreement above to state “Weaver Sisters” if the legal name is Weaver Sisters, Inc. of Boston”? It’s always best to use the exact official legal name of the company as reflected on its birth certificate. Otherwise it creates the opportunity for disputes and the whole point of a contract is to avoid disputes and create rules for resolving controversies. Incorporated businesses must act as entities separate from the people that run them and evidence of that is consistent use of the actual legal name of the company. Make sure the signature block correctly reflects the legal name and that the person signing, signs on behalf of the company, not on behalf of themselves!
Checklist:
- Determine the legal name of your company as reflected in the official records filed with the state it was formed in
- Determine if the company operates under another name
- If so, make sure the correct “DBA” filings were completed
- Once completed, examine all contracts to be sure that the correct legal name of the company is stated in the signature block, as well as throughout the contract
- If there is a DBA, state the legal name of the company followed by “DBA” and then the name the company is doing business as.
- Make sure the names are spelled correctly
- Be sure the signature block indicates the person signing is doing so on behalf of the company, not themselves, by including the name of the company and the person’s title at the company.
