Contracting under the name of a corporation will usually protect the principals behind that corporation from personal liability arising from a breach of contract. That is usually still the case where the corporation is not yet incorporated at the time the contract is entered, if the contract is adopted by the corporation following its incorporation. For Ontario corporations, statutory support for this principle is found in Section 21 of the Business Corporations Act.
This can create enforcement issues for persons who contract with newly formed corporations, since those corporations usually do not have any assets or track record, and the individuals behind the corporation have no remaining liability. A recent decision on a motion for summary judgment shows that the corporate veil will continue to protect individuals from personal liability, even where the corporation is incorporated after the date of the contract.
Facts
In Dawood v. Popes Property Holdings Inc., the plaintiff (seller) entered into an agreement of purchase and sale in March 2022 to sell a Kitchener property for $880,000. A few days later, the buyer assigned the agreement of purchase and sale to a nominee corporation that had not yet been incorporated. The deposit was delivered by the individual defendant, who was to become the director and officer of the corporation. The corporation was incorporated 12 days after the assignment. The corporate assignee subsequently failed to complete the transaction. The plaintiff re-listed the property for sale but suffered a loss when the property was successfully resold for a purchase price of $710,000. This summary judgment decision deals with a claim by the plaintiff not only against the corporate assignee but also against the sole director and officer of the corporation.
Court’s Analysis
Even though the parties did not appear to dispute that the assignment was to go to the corporate defendant upon its incorporation, the Court was asked to examine whether the corporate veil could be pierced to hold the individual defendant personally liable for the failed transaction.
The Court reiterated that piercing the corporate veil is an exceptional remedy, reserved for situations where the corporation is used as a vehicle for fraud or improper conduct. While the plaintiff asserted that the assignment agreement was signed by the individual defendant and that the individual defendant delivered the deposit on behalf of the corporate defendant, the Court did not find these actions to amount to the type of conduct that would justify piercing the corporate veil. Ultimately, the Court granted judgment against the corporate defendant but dismissed the action against the individual defendant.
Key Takeaways
The Court’s decision underscores several key considerations for parties involved in real estate transactions:
- Corporate Separateness: Courts continue to be reluctant to pierce the corporate veil and will only do so in exceptional circumstances, usually where there is evidence of fraud or improper conduct. Contracting with shell companies can complicate enforcement and recovery efforts.
- Due Diligence: Who you contract with is important. Parties should conduct thorough due diligence before entering into an agreement to ensure that the other party is able to fulfil their obligations.
- Clear Legal Drafting: If a newly formed corporation lacks assets or a track record, a seller can seek additional protections within the agreement. For example, a seller may wish to incorporate an assignment provision that does not release the assignor from liability until after the transaction is successfully completed with the assignee.
Contact Duncan, Linton LLP for Top-Tier Real Estate Law Services in Waterloo Region
The real estate lawyers at Duncan, Linton LLP are experienced in advising on contractual provisions in agreements of purchase and sale and on the challenges associated with assignments. Our firm is located in Waterloo and proudly serves clients throughout Kitchener, Waterloo, Cambridge, Guelph and the surrounding area of Southwestern Ontario. Contact us online or call us at (519) 886-3340 to discuss your residential or commercial real estate matter.