This is the third and final installment in a three part series exploring liability concerns and challenges that we all risk facing by signing our name, clicking “I Agree,” or even simply browsing or accessing a particular website.
If you Co-sign a Contract, Are YOU on the Hook?
Often an individual signs a document – let’s use a car purchase agreement and associated lending agreement for example – that only includes the purchaser’s name. In that case, the individual’s responsibility for payments and adhering to the lending agreement are clear-cut.
Changing the scenario a bit, let’s say the purchaser has less than stellar credit, and the lender requires that someone cosign or guarantee the purchaser’s loan. Because you have a great credit score, the purchaser gives you a call and asks you to cosign the lending agreement; being the good friend that you are, and without hesitation, you head over to the dealership and sign on the “X”. Now, the lender can not only pursue the purchaser if he or she fails to make payments in accordance with the lending agreement, but the lender can also come directly after you – the good friend who cosigned the loan document! The moral of this story is really quite clear – always be sure you understand that, as a lender requires an additional signature as a means to ensure that it gets paid, you very well may be risking your personal assets and financial well-being whenever you cosign or guarantee any document!
You Signed a Contract for Your Business – Can the Other Side Come After YOU Personally?
Turning to agreements that work to benefit or serve a business, things can become a bit more tricky and unclear, particularly when individuals other than the business owner, officer, or principal sign documents or contracts.
In the first scenario, let’s assume that you are the owner of a small business (a corporation or limited liability company) working to obtain a contract for services for the business. You’ve done your research, found a solid services company to work with, negotiated the services and payment details, and are at the conference room table about to sign the contract. Two things could happen here – (1) concerned about the success rate of small businesses, and having been burned in the past, the services company requires that you, as owner of the business, sign a personal guaranty; or (2) the services company does not require any cosigner, guarantor, or personal guarantee.
As confident as you may feel about the success of your small business, it is actually common for owners of small corporations and/or LLCs to be required to sign personal guarantees when entering a contract for their business. In this scenario, similar to the one above where the good friend cosigned a lending agreement, you must understand that by guaranteeing or personally cosigning your business’ contract, you are signing away the limited liability rights and status that you may otherwise have had. And, in the worst case scenario where your small business defaults on the contract payment terms, the services company will be able to, within the terms of the guaranty, seek payment directly from you personally!
In the second scenario, where the services company does not require that anyone cosign or personally guaranty the services contract, it is imperative that you, the small business owner, take care in signing the document. While it may be second nature to just quickly and casually scribble your name on the signature line, failing to include your title and position in the business or, even better, words similar to “president, signing on behalf of small business” may be a fool’s move! Without ensuring that it is perfectly clear that you have signed solely on behalf of the business, you open yourself up to possibly being held personally liable for the contract terms and obligations! Even if you do sign the document as described above, you should also be sure that your signature isn’t doing “double duty.” Specifically, fine print, buried deep in the contract may state that the business signer is also personally liable, even if there is only one signature block! This is a very dubious, but increasingly common, provision; why take the tisk? As such, reviewing not only all of the terms and provisions, but also the signature block, of your small business contract, and then taking care in how you sign such contract, is crucial!
Now, what happens if you do not own the business, but rather are an employee who was tasked with obtaining a contract for the business as part of your job? In this scenario, it is unlikely that you would have signatory power for the company. In other words, you are not able to sign a contract with any meaningful business title using the words suggested in the above paragraph. As a result, you might be signing the contract personally, which, as above, opens you up to potential personal liability for all of the terms and conditions of the contract.
So, if you are this small business employee tasked with obtaining some sort of goods or services contract for your company, while you should feel comfortable researching providers of said goods and services, when it comes time to sign a contract, it is absolutely in your best interest to hand it over to the “boss!”
As the final installment in this series demonstrates, it is IMPORTANT not only to review all of the terms and conditions of a document, and pay attention to what you click on the internet, but also to take care in how you sign a document! If you haven’t read them yet, Part I of this series can be found here, and Part II can be found here.