Corporate & Securities Law

When What?s In the Contract Is Inconsistent with the Signature Block

By Ken Adams

What happens if a contract says that someone is personally liable for an obligation, but that person signs the contract not in their individual capacity, but as an officer of a limited liability company?

In this newsletter article, Doug Batey of Stoel Rives considers a recent Washington Court of Appeals opinion that addressed exactly that issue. Here, from Doug’s article, are the facts (citations omitted):

William and Teresa Grover formed Grover International, LLC in 2005 and shortly thereafter acquired a business. In connection with the acquisition they received an assignment of the seller?s real estate lease. Their LLC signed the assignment using a conventional corporate style of signature, as ?Grover International, LLC by William Grover member.?

So far so good. But the lease assignment said that the lease was assigned to ?William and Teresa Grover as individuals, dba Grover International, LLC? (?dba? of course being the customary abbreviation for ?doing business as?). The lease assignment in fact referred five different times to the assignee as ?William and Teresa Grover as individuals, dba Grover International, LLC.?

In 2006 the Grovers sold their business, and the new buyer later defaulted on the lease. The owner of the real estate sued the Grovers, the LLC, their seller and their buyer. The trial court ruled on summary judgment that all defendants were liable jointly and severally, including William and Teresa Grover individually.

The Court of Appeals held that the language in the contract trumped the signature block, and that if the signatory in question ?did not want to be personally bound on the assignment, he should have insisted on the elimination of the language within the agreement that designated the assignee as ?William and Teresa Glover as individuals.??

Doug expresses surprise that the court didn’t treat the inconsistent language as an ambiguity capable of being resolved by means of extrinsic evidence. He also points out that the contract wasn’t entirely clear that personal liability was intended:

The contract language did not refer simply to the Grovers individually, but to the Grovers doing business as Grover International, LLC, which at the time was an existing LLC. The phrase ?doing business as? is usually used only for situations where a corporation or LLC does business under an alternate name. In Losh, however, the dba referred to an existing and separate entity, not just an alternate name for the Grovers.

But for drafters, the moral of the story is a simple one: Don’t introduce this sort of inconsistency into your contracts!

Full post as published by AdamsDrafting on July 03, 2010 (boomark / email).