Commercial Division Blog

Posted: March 3, 2021 / Categories Commercial, Contracts

Party That Contracted With Non-Existent Company Cannot Avoid Obligations Under the Contract to the Persons Who Signed it

On February 24, 2021, the Second Department issued a decision in Sutton v. Houllou, 2021 NY Slip Op. 08211, holding that a party that contracted with a non-existent company cannot avoid its obligations under the contract to the persons who signed it on behalf of the non-existent company, explaining:

As a general rule, a person entering into a contract on behalf of a nonexistent corporate entity may be held personally liable on the contract. Such liability is based on the rule that one who assumes to act as agent for a nonexistent principal is himself [or herself] liable on the contract in the absence of an agreement to the contrary and on the theory of a breach of an implied warranty of authority.

As a corollary, when individuals purporting to act on behalf of a nonexistent principal enter into a contract with a third party, the contract does not for that reason alone become void or voidable at the whim of the third party. Rather, under well-settled principles of agency law, the contract generally remains valid and enforceable as between the third party and the individuals who executed the contract on behalf of the nonexistent principal. Contrary to the defendants' contention, the plaintiffs have standing to enforce the agreement, in light of the fundamental contract principle of the mutuality of obligation.

(Internal quotations and citations omitted).

Part of the reason parties to commercial contracts choose to have those contracts governed by New York law is that New York courts typically enforce contracts as written. This decision might seem to violate that rule, but the logic is sound: if the court will hold the person who signed a contract on behalf of a non-existent company liable under that contract, the other party similarly should be liable to that individual under the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the interpretation of a contract under New York law.

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