Frasier and Niles fulfill a lifelong dream by purchasing a treasured but faded restaurant through their company, Crane Brothers, LLC. They rechristen their restaurant as “Les Freres Heureux” and file an assumed name certificate registering that name. Frasier also signs multiple contracts to renovate the building and purchase food, beverages, and furniture in the following manner: “Les Freres Heureux by its president, Frasier Crane.” Unfortunately, opening night is a disaster, and the restaurant quickly closes its doors. Frasier and Niles put Crane Brothers, LLC into bankruptcy, so unpaid vendors begin suing Frasier, arguing that he is personally liable for the contracts he signed. Is Frasier in the soup?
In Texas, Frasier is likely a party to—and liable for—the contracts that he signed using a trade or “doing business as” (DBA) name. The rules governing an agent’s liability for contracts that he signs on a company’s behalf are relatively straightforward, turning on the level of disclosure:
- Fully Disclosed – The other party to the contract knows that the agent is acting on behalf of a company and the company’s identity. In these circumstances, the contract is the company’s. Unless the parties agree otherwise, the agent is neither a party to the contract nor liable for its breach.
- Partially Disclosed – The other party to the contract knows that the agent is acting on behalf of a company but does not know which company. This often occurs when the agent has either withheld the information or misidentified his company. In these circumstances, the agent is a party to the contract and liable for its breach.
- Undisclosed – The other party to the contract does not know that the agent is acting on behalf of a company. The agent is a party to the contract and liable for its breach.
Thus, if an agent wishes to avoid liability for his company’s contracts, he must fully and accurately disclose the company’s identity at the time the contract is signed. Because Texas law never presumes an agency relationship, the agent will bear the burden of proving that he did so. Signing using the company’s DBA does not suffice for two reasons.
- Courts have stated that a DBA is not itself an entity; it has no actual or legal existence. A DBA is nothing more than a name under which another person or company is doing business.
- Courts have repeatedly held that using a DBA does not adequately disclose either the fact of agency or the company’s true identity. Texas law requires any company that regularly conducts business using a trade name or DBA to file an assumed name certificate with the a Secretary of State. That certificate’s purpose is to allow the public to learn who is actually operating the business. But courts have pointed out that contracting parties have no duty to discover the principal’s true identity; rather, the agent must disclose both (1) the fact that he is acting in a representative capacity and (2) the true identity of the company he represents. The other party’s actual knowledge of the principal’s identity, not just its suspicion, is the test of disclosure.
Tilting the Scales in Your Favor
Referring to a company by its DBA or trade name in contracts puts its agents at risk. Anytime an agent signs a contract for a company, he should ensure that the contract identifies the company using the name exactly as it appears on its formation documents. Moreover, to clearly and fully disclose the agency relationship, the agent should sign all contracts as follows:
Correct Company Name, d/b/a Trade Name
This form unambiguously discloses the agent’s representative capacity and the principal’s identity, eliminating any risk of personal liability. For further advise on signing corporate contracts, check out our previous post.