Every businessperson knows that sometimes, swift action is required to ensure that their business doesn’t miss out on a golden opportunity.
Take the example of Mr. A, a real estate developer who has just discovered that the property he’s been coveting for a residential condo development has just been put on the market. When he visits the current owner of the property, Ms. B, she informs him that there are several interested parties, however, she’s willing to sell to Mr. A if he immediately signs a promise to purchase at a price above market value.
Mr. A is not new to the real estate game and knows that there are numerous legal and fiscal advantages to the property being owned by a corporation. He therefore indicates in the promise to purchase that he is signing for the benefit of a corporation to be created and that said corporation will ultimately sign the deed of sale and become the owner of the property.
Mr. A promptly incorporates NiceCondos Inc. A few days later, he starts having regrets about his decision to overpay for the property and decides not to go through with the sale, believing that since he signed on behalf of a corporation, NiceCondos Inc. would be responsible for any damages suffered by Ms. B due to the loss of the sale.
Imagine his surprise when he receives a claim for damages from Ms. B, and his lawyer tells him that he is personally responsible for her losses. Why is that the case? The answer lies in article 320 of the Civil of Québec, which states the following:
“A person who acts for a legal person before it is constituted is bound by the obligations so contracted, unless the contract stipulates otherwise and includes a statement to the effect that the legal person might not be constituted or might not assume the obligations subscribed in the contract.”
In other words, it’s not enough for someone to state that they are signing a contract on behalf or for the benefit of a corporation to be created, even if the other party is perfectly aware of this fact.
How could Mr. A have avoided this situation? It is important to note that corporations can now be created quite quickly (in some cases in less than 24 hours), so the first question anyone should ask is whether there is real urgency justifying the signature of a contract immediately. In almost all cases, no harm will come from delaying the signature of the contract by a few days.
If the contract must be signed without delay, it must explicitly state that the person signing for the corporation to be created shall under no circumstances be liable for the performance of the obligations set out in the contract, even if the corporation is never created or never agrees to respect the terms of the contract.
Of course, Mr. A could also have had his lawyer review the contract before signing!
Do you have questions about a contract that you’re being asked to sign? We’re here to help. Contact us to schedule a consultation with one of our lawyers.