It is common for individuals to carry on business using a corporation to shield themselves from personal liability. Even a company with a single shareholder is generally treated by the law as a legal entity separate and apart from the shareholder so that liability accrued by the company is not imposed on that shareholder. As the Ontario Court of Appeal has affirmed in Koubi v. Hascalovici:
“… in the absence of a personal guarantee given by a shareholder, a shareholder in his capacity as such is not liable for any act or liability of a corporation because the corporation is a separate legal entity”.
This creates a practical concern for individuals who carry on business using a company when they are the sole shareholder, principal employee, or representative of that company. Where does their personal liability end and the liability of the company begin? This issue was recently considered by the Superior Court of Justice in Drew v. Topple.
Home Builder Was the Sole Shareholder and Executive Officer of a Corporation
Drew v. Topple involved a lawsuit brought by the plaintiffs regarding a custom home they had contracted to have defendants build in Pickering. The plaintiffs sought damages in excess of $1 million, which they alleged they were owed because of improper construction.
The plaintiffs and the individual defendant signed a contract in 2017 with “Future Perfect Construction, ” which was also later amended. The individual defendant signed for Future Perfect Construction, which was not identified anywhere in the contract as a corporation. The plaintiffs testified that they believed this to be the individual defendant’s business name and that he carried on a sole proprietorship.
The individual defendant originally operated a sole proprietorship under the business name “Future Perfect Construction,” which he registered in 2014. He then incorporated Future Perfect Construction Inc. in 2017, not long before signing the contract with the plaintiffs.
Dispute Arose as to Whether Contract Signed With Sole Proprietor or Corporation
The plaintiffs alleged the individual defendant told them to make cheques payable to “Future Perfect Construction.” One of the plaintiffs testified that he thought he was dealing with a sole proprietorship when he signed the contract. However, the individual defendant argued that during their dealings, the plaintiffs had always been dealing with the corporation, Future Perfect Construction Inc. He also referenced emails between himself and the plaintiffs in 2017 (pre-dating the contract) that had referred to the individual defendant as “President” of “Future Perfect Construction Inc.”
The Court was tasked with determining whether the individual defendant should be held personally liable for the plaintiffs’ claims.
Statutory Requirements for Business Names
The Court referenced section 10 of the Business Corporations Act, which requires the use of the words “Limited,” “Limitée”, “Incorporated”, “Incorporée”, or “Corporation” (or their abbreviations) in the company’s name. These words are sometimes referred to as “status identifiers.”
Further, section 10(5) of the Business Corporations Act requires that a corporation’s name be set out “in all contracts, invoices, negotiable instruments and orders for goods or services issued or made by or on behalf of the corporation.” However, the statute does not stipulate that a failure to do so automatically creates personal liability. The Court of Justice (General Division) has previously held that a failure to comply with this section of the Business Corporations Act does not create such liability in and of itself. As the Court commented in Watfield International Enterprises Inc. v. 655293 Ontario Ltd., imposing such liability would require clear statutory language.
To Avoid Personal Liability, a Party Associated With a Company Must Identify the Name of that Company in a “Reasonable Manner”
So what is the test for determining when a person (as opposed to their company) may be held liable on a contract? The Court of Appeal has previously held (in Truster v. Tri-Lux Fine Homes Ltd.):
“… [P]ersons wishing to benefit from the protection of the corporate veil should not hold themselves out to the public without qualification. They should identify the name of the company with which they are associated in a reasonable manner or risk being found personally liable if the circumstances warrant it …”
In the Drew case, the Court noted the onus is on the defendant to prove the “plaintiff was aware at the time of contracting that the plaintiff was dealing with a limited company.”
In making this determination, a court will consider the express wording of the contract and may also consider the surrounding circumstances of its formation. From an evidentiary perspective, this means a court may consider “the background that was or reasonably ought to have been within the knowledge of both parties at or before the date the contract was entered into” (see Dhillon v. Stewart).
What Practical Steps Can a Business Owner Take to Identify Their Company to the Other Party?
A business owner who wishes to take reasonable steps to identify their company when contracting with other parties and thereby avoid personal liability may want to use business signage showing their company name, business letterheads and/or invoices showing that name, and advertisements showing the name (see Bercall Integrated Technologies Ltd. v. Chartrand). The use of corporate cheques containing the company’s name may be one factor to consider when determining if a contract was formed with a company as opposed to an individual, but such cheques alone have not generally been found to be sufficient notice.
In the Drew case, the Court found the plaintiffs had proven they believed they were contracting with the individual defendant in his personal capacity. It noted that the individual defendant had drawn up the contracts in question and did not identify Future Perfect Construction as a company. He had also asked the plaintiffs to make cheques payable to Future Perfect Construction rather than the company. The Court thus found the individual defendant personally liable for damages resulting from the breach of contract.
Contact the Mississauga Business Lawyers at Bader Law For Strategic Advice on Legally Protecting Your Business
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