During a particularly tough case involving a construction dispute, a sage old attorney told me the favorite saying of an even more sage like and older attorney was “read the contract, read the contract, READ THE CONTRACT.” While this particular phrase could likely be traced down the line of attorneys through rudimentary contracts drawn on a cave wall, it holds no less true today. The contract forms the basis for how business is done. While the law can impose certain behavior on people, it can’t and shouldn’t dictate everything that occurs between people or businesses. Contracts fill that void and lay out the expectations and duties for each party to the agreement. While usually beneficial to both parties, contracts can sometimes trap the unwary.
In a recent decision (Progressive Electrical Services, Inc. v. Task Force Construction, Inc., 327 Ga. App. 608), a Georgia court found the president of an electrical contracting company personally liable for the money his company owed to a supplier. The electrical contractor signed a contract containing a “Signature Provision” above where the president was to sign. This provision included language stating that the signor of the contract would bind himself, individually, as well as his company to the terms of the contract. The signature line itself simply had his name and his title within the company. There was no separate area in the contract where he signed indicating that he was accepting personal liability for the provisions of the contract.
Because otherwise there would be no need for this cautionary tale, things went sour on the project. The electrical contractor was not able to pay its supplier. The supplier sued to recover money owed to it, which the general contractor eventually paid. The general contractor then sued the electrical contractor and its president in an individual capacity to recover the money it paid to the supplier. The president argued that he signed the contract on behalf of the company and did not sign individually. The court disagreed. The court found the language in the paragraph above his signature enough to make the president individually liable for the debt if the company could not pay. By all appearances, the company could not afford to pay the balance owed leaving the president solely responsible.
As with most things, there are two sides to this outcome. First is that of the president of the electrical contracting company. Typically when an individual signs a contract as the agent of the company and do not take on personal responsibility. The reason for the business’s existence is to limit its investors and employees from the risk needed to operate: taking on debt, performing work, hiring employees, and generally interacting with the world. If a business fails, the investors would only lose their investment and not their home. With the signature on this contract, however, the president circumvented all of those protections and made himself personally liable.
The other side of this outcome concerns the general contractor and its good planning that the provision was included in this agreement. The foresight of its management and counsel increased the likelihood that they would recover against the electrical contractor for any breach of its contract.
This case illustrates two practice points. It re-enforces the need to actually read the contract you are signing. An educated review would have revealed the troubling language to the electrical contractor and could have likely been a negotiation point. The flip-side of that point is that a contract can be a great tool to protect your interests. By including a simple provision in a contract with a contractor who might be on an unsteady financial foundation, the general contractor minimized its liability.
If you have a question regarding any construction contract presented to you, or need one prepared, feel free to contact Will Tate, attorney with Thompson, Meier and King, P.C., at email@example.com or (770) 479-1844.