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The Mischief of the OBCA

December 17, 2021

Ontario

,

Canada

Issue

Is a borrower required to repay a loan if the loan documents have an incorrect borrower name?

Conclusion

A person who enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to the benefits thereof (s.21(1)). Except as provided in s.21(4), whether or not an oral or written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between the corporation and the person who purported to act in the name of or on behalf of the corporation, and, upon such application, the court may make any order it thinks fit (s.21(3)). (Business Corporations Act)

While the Ontario Business Corporations Act does not expressly deal with the situation of an incorrect name being inserted into a contract, section 21(1) is applicable by anaology. That section provides that a party who enters into a contract on behalf of a corporation before it comes into existence is personally bound by the agreement and entitled to benefits under it. The section does not appear to require that a corporation be eventually formed. The purpose of the section is, in large part, to ensure that parties do not escape their contractual obligations by contracting in the name of non-existent entities. (Pelliccione v. John F. Hughes Contracting and Development Company)

The reason for naming as a party the individual signing a contract on behalf of a non-existent company is to hold that person accountable for the obligations undertaken in the contract in circumstances where the corporation named in the contract does not exist and never comes into existence. Otherwise the other party to the contract is left with no recourse. That is the mischief that section 21(1) of the OBCA is designed to remedy. (Greyfield Construction Co. v. Dyck)

As noted by Master Haberman in Mexam Corp.v.Coffee,Tea or…Me Bakery & Café Inc., the purpose of section 21(1) of the OBCA is, in large part, to ensure that parties do not escape their contractual obligations by contracting in the name of non-existent corporate entities. In relying on this passage from the Mexam case, as affirmed on other issues by Justice A. Campbell, Justice Ferrier in the Pellicione case drew the parallel with the case before him where the principal of the defendant companies had a number of business style names and used multiple corporate names, but had only one company. Justice Ferrier relied on the following passage from the Mexam case:even where the court found that there was no intention to mislead, section 21 of the OBCA was applied to render the signatory to the contract personally responsible for the debt of the non-existent corporation. Whether or not there is an intention to mislead, s.21(1) nevertheless applies where an individual enters into a contract on behalf of a contract that does not exist at the time of the contract and that never subsequently comes into existence." (Greyfield Construction Co. v. Dyck)

The law is clear that parties to a contract cannot escape their contractual obligations by merely contracting in the name of a non-existent entity per s.21(1) of the OBCA. (Randall Wood and Laura Brown v Clark (Re))

Law

Section 21(1) of the Business Corporations Act, RSO 1990, c B.16 provides that a person who enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to the benefits thereof. Pursuant to s.21(3), except as provided in s.21(4), whether or not an oral or written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between the corporation and the person who purported to act in the name of or on behalf of the corporation, and, upon such application, the court may make any order it thinks fit:

Contract prior to corporate existence

21 (1) Except as provided in this section, a person who enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to the benefits thereof. R.S.O. 1990, c. B.16, s. 21 (1).

Adoption of contract by corporation

(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt an oral or written contract made before it came into existence in its name or on its behalf, and upon such adoption,

(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and

(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract. R.S.O. 1990, c. B.16, s. 21 (2).

Assignment, etc., of contract before adoption

(2.1) Until a corporation adopts an oral or written contract made before it came into existence, the person who entered into the contract in the name of or on behalf of the corporation may assign, amend or terminate the contract subject to the terms of the contract. 2011, c. 1, Sched. 2, s. 1 (5).

Non-adoption of contract

(3) Except as provided in subsection (4), whether or not an oral or written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between the corporation and the person who purported to act in the name of or on behalf of the corporation, and, upon such application, the court may make any order it thinks fit. R.S.O. 1990, c. B.16, s. 21 (3).

Exception to subs. (1)

(4) If expressly so provided in the oral or written contract referred to in subsection (1), a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof. R.S.O. 1990, c. B.16, s. 21 (4).

Greyfield Construction Co. v. Dyck, 2007 CanLII 79362 (ON SC) involved a claim against a corporation which used a number of variations of its name, none of which were registered. The plaintiff sought to amend the claim to include the proper name of the corporation, and also to include a claim against the corporate proprietor personally.

Master Albert outlined the operation of section 21 of the OBCA. Master Albert found that the reason for naming as a party the individual signing a contract on behalf of a non-existent company is to hold that person accountable for the obligations undertaken in the contract in circumstances where the corporation named in the contract does not exist and never comes into existence. Otherwise the other party to the contract is left with no recourse. That is the mischief that section 21(1) of the OBCA is designed to remedy. As noted by Master Haberman in Mexam Corp.v.Coffee,Tea or…Me Bakery & Café Inc., the purpose of section 21(1) of the OBCA is, in large part, to ensure that parties do not escape their contractual obligations by contracting in the name of non-existent corporate entities. In relying on this passage from the Mexam case, as affirmed on other issues by Justice A. Campbell, Justice Ferrier in the Pellicione case drew the parallel with the case before him where the principal of the defendant companies had a number of business style names and used multiple corporate names, but had only one company. Justice Ferrier relied on the following passage from the Mexam case:even where the court found that there was no intention to mislead, section 21 of the OBCA was applied to render the signatory to the contract personally responsible for the debt of the non-existent corporation. Whether or not there is an intention to mislead, s.21(1) nevertheless applies where an individual enters into a contract on behalf of a contract that does not exist at the time of the contract and that never subsequently comes into existence":

Does Section 21(1) of the OBCA apply?

[8] Greyfield relies on section 21(1) of the OBCA which provides that a party who enters into a contract on behalf of a corporation before it comes into existence is personally bound by the agreement and entitled to the benefits under it. The OBCA does not require that such a company ultimately be formed.

[9] The reason for naming as a party the individual signing a contract on behalf of a non-existent company is to hold that person accountable for the obligations undertaken in the contract in circumstances where the corporation named in the contract does not exist and never comes into existence. Otherwise the other party to the contract is left with no recourse. That is the mischief that section 21(1) of the OBCA is designed to remedy. It applies to the facts of the case before me.

[10] In opposing the motion Mr. Garforth relies on the decision of Justice Jenkins in La Fornareta v Diodati[3]. In that case, after obtaining judgment against the company and after discovering that the company was insolvent the plaintiff launched an action claiming that the principal was jointly and severally liable with the company. The claim against the individual was dismissed. I find that La Fornaretta is distinguishable for two reasons: (i) judgment against the company had been obtained and (ii) section 21(1) of the OBCA was not considered by the court.

[11] Mr. Garforth also relies on Watfield International v 655293 Ontario Limited[4] where the court considered section 10 of the OBCA and found the principals of the company not personally liable. Again, the court did not consider section 21(1) of the OBCA. The Watfield case is distinguishable from the case before me for that reason and also because in Watfield the plaintiff had not been given the new company name.

[12] Neither counsel provided any cases where the court refused to add the principal of a non-existent company as a party in circumstances where the corporate entity with which the plaintiff had contracted was non-existent and section 21(1) of the OBCA was considered by the court.

[13] In Pellicione v John F. Hughes Contracting and Development Co.[5] the homeowners sued the contractor in his personal capacity on the basis that they believed that the business named in the contract was not a corporate entity. Justice Ferrier found that the homeowners were entitled to recover from the contractor personally because the principal knew at the time of contracting that the company named in the contract did not exist and was merely an alter ego of the principal.

[14] As noted by Master Haberman in Mexam Corp.v.Coffee,Tea or…Me Bakery & Café Inc.[6], the purpose of section 21(1) of the OBCA is, in large part, to ensure that parties do not escape their contractual obligations by contracting in the name of non-existent corporate entities.

[15] In relying on this passage from the Mexam case, as affirmed on other issues by Justice A. Campbell[7], Justice Ferrier in the Pellicione case drew the parallel with the case before him where the principal of the defendant companies had a number of business style names and used multiple corporate names, but had only one company. Justice Ferrier relied on the following passage from the Mexam case:even where the court found that there was no intention to mislead, section 21 of the OBCA was applied to render the signatory to the contract personally responsible for the debt of the non-existent corporation.[8]

[16] One question is whether misnaming GarforthCo in the contract was an inadvertent error such that correcting the misnomer is sufficient, or whether section 21(1) of the OBCA applies. In the Pellicione case Justice Ferrier rejected the defendant’s argument of inadvertent error for the following reasons:

a) there was no “Group” even though the contracting party included “Group” in its name

b) there was no company with the name used in the contract

c) there were four dissimilarities in the name used and the correct corporate name, and

d) the use of the incorrect name was not confined to the one time use in the contract but was a frequently used version of the business name.

[17] On that basis Justice Ferrier concluded that misnaming the company in the contract was not an inadvertent error and section 21(1) of the OBCA applied.

[18] Plaintiff’s counsel distinguishes the cases relied on by Mr. Garforth on the basis that they did not consider section 21(1) of the OBCA. In La Fornareta v Diodati[9] the plaintiff had already obtained judgment against the company. In Watfield International v 655293 Ontario Limited[10] the court considered section 10 but not section 21(1) of the OBCA. I agree that La Fornaretta and Watfield are distinguishable.

[19] I find that the Pellicione case is more closely on point with the present case than are the cases relied on by Mr. Garforth, in which section 21(1) of the OBCA was not considered. Applying Justice Ferrier’s analysis from the Pellicione case I find that:

a) there is no “group” of companies in “Garforth Group, Inc.”

b) there is no company or registered business named “Garforth Group, Inc.”

c) there are two dissimilarities in the name used in the contract and the registered corporate name: “The” is part of the corporate name but was omitted from the contract. The use of “,” after “Group” is not part of the corporate name but was used in the contract.

d) The incorrect name was used elsewhere and not just in this contract.

[20] For these reasons I find that the incorrect naming of the company in the contract was not inadvertent, that section 21(1) of the OBCA applies and that Philip Garforth is personally responsible as signatory to the contract with Greyfield in respect of Ms Dyck’s property in the name of a non-existent corporation “Garforth Group, Inc.”. The motion is granted adding Philip Garforth as a defendant to this action and amending the statement of claim accordingly.

[...]

[25] Defendant’s counsel tries to distinguish Pellicione, supra, on the basis that in that case there was an intention to mislead by the corporate principal whereas in the present case there was not. There is no evidence before the me on this issue upon which I can make a finding either way. However, I find that whether or not there was an intention to mislead section 21(1) would nevertheless apply where an individual enters into a contract on behalf of a corporation that does not exist at the time of the contract and that never subsequently comes into existence.

In Randall Wood and Laura Brown v Clark (Re), 2019 CanLII 94000 (ON SCSM), parties engaged in a construction contract. One party sent the other letters on letterhead of CRC Motorsports. The party testified this was a brand name intended to market his business, but it was not a legal entity and so enjoyed no corporate status. Klertas D.J,, relying on Greyfield, held that the law is clear that parties to a contract cannot escape their contractual obligations by merely contracting in the name of a non-existent entity per s.21(1) of the OBCA:

32. As stated previously, CRC or CRC Racing and Research are not legal entities. While Clark testified that CRC and CRC Racing and Research were “brands” of the Company, he tendered no supporting evidence other than his own testimony to support this assertion. In fact, the CRC or CRC Racing and Research letterhead used by Clark to correspond with Wood and to issue receipts for payments made by Wood made no mention of the Company. The law is clear that parties to a contract cannot escape their contractual obligations by merely contracting in the name of a non-existent entity. See section 21(1) of the Business Corporations Act, R.S.O. 1990, c.B.16, as amended; Mexam Corp. v. Coffee, Tea or… Me Bakery & Café Inc., [2001] O.J. No. 3535 (Ontario Master) at paragraph 18; Pelliccione v. John F. Hughes Contracting and Development Co., 2005 CarswellOnt 4697 (Ont. S.C.J.), at paragraph 69 and following; and Greyfield Construction Co. Ltd. v. Dyck, 2007 CarswellOnt 10024, 2007 CanLII 79362 (Ontario Master), at paragraph 8 and following.

Pelliccione v. John F. Hughes Contracting and Development Company, 2005 CanLII 34822 (ON SC) involved a home renovation project gone wrong. The plaintiffs argued that the contractor was personally responsible because he contracted in the name of a non-existent corporation. The contractor contracted in the name of John F. Hughes Construction & Development Co. Ltd.. The actual corporate name was John F. Hughes Contracting and Development Company Limited.

Ferrier J. held that while the Ontario Business Corporations Act does not expressly deal with the situation of an incorrect name being inserted into a contract, section 21(1) is applicable by anaology. That section provides that a party who enters into a contract on behalf of a corporation before it comes into existence is personally bound by the agreement and entitled to benefits under it. The section does not appear to require that a corporation be eventually formed. The purpose of the section is, in large part, to ensure that parties do not escape their contractual obligations by contracting in the name of non-existent entities. Ultimately, the contractor was found personally liable due to s.21(1):

From Whom Are Damages Recoverable?

The plaintiffs argue that Hughes is personally liable for the damages they suffered, for two reasons. First, Hughes contracted in the name of a non-existent corporation. He is thus personally liable pursuant to sec. 21(1) of the Ontario Business Corporations Act, R.S.O. 1990, c.B.16 (OBCA).

Secondly, Hughes treated the corporation as a mere agent or sham.

The defendants argue in response that the plaintiffs knew they were contracting with a corporation. Furthermore, the corporation (Hughes Contracting) did in fact exist but the name on the contract with the Pellicciones was inadvertently incorrect – in effect a typographical error or an innocent mistake in the words making up the name of the company.

Concerning the piercing of the corporate veil, the defendants argue that Hughes did not treat the corporation as his mere agent; it was not a sham. Furthermore, fraud or some form of wrongful conduct causally connected to the plaintiffs’ losses must be established against Hughes, before he could be personally liable at law.

Section 21(1) of the OBCA

Section 21 of the OBCA provides as follows:

Contract prior to corporate existence

21(1) Except as provided in this section, a person who enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to the benefits thereof. R.S.O. 1990, c. B.16, s. 21 (1).

Adoption of contract by corporation

(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt an oral or written contract made before it came into existence in its name or on its behalf, and upon such adoption,

(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and

(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract. R.S.O. 1990, c. B.16, s. 21 (2).

Non-adoption of contract

(3) Except as provided in subsection (4), whether or not an oral or written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between the corporation and the person who purported to act in the name of or on behalf of the corporation, and, upon such application, the court may make any order it thinks fit. R.S.O. 1990, c. B.16, s. 21 (3).

Exception to subs. (1)

(4) If expressly so provided in the oral or written contract referred to in subsection (1), a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof. R.S.O. 1990, c. B.16, s. 21 (4).

In my view, this section applies where a person, in this case Hughes, enters into a contract in the name of a non-existent company.

In 1080409 Ontario Ltd. v. Hunter (2000), 2000 CanLII 22405 (ON SC), 50 O.R. (3d) 145, [2000] O.J. No. 2603 (S.C.J.), Justice Pepall held, in circumstances not materially different from those in the case at bar, that a purchaser of property who entered into an agreement of purchase and sale in the name of a non-existent corporation, was personally liable for failing to complete the sale.

In the Hunter case, the offer to purchase was in the name of Furama Investments Ltd. At the time the contract was signed, there was no such company, although Mr. Hunter had a company known as Furama Investment Company Limited, whose charter had lapsed. Mr. Hunter was mistaken as to the name of his company. He did not tell the vendor, Garth Drabinsky, that the company did not exist. Mr. Drabinsky knew nothing of Furama Investments Ltd. except that it was owned and controlled by Mr. Hunter. Mr. Hunter never intended to purchase the property personally.

Pepall J. distinguished the facts in the case before her from the appellate decisions of Westcom Radio Group Ltd. v. MacIsaac (1989), 1989 CanLII 4073 (ON SC), 70 O.R. (2d) 591 (Div. Ct.) and Szeckett v. Huang (1998), 1998 CanLII 4425 (ON CA), 42 O.R. (3d) 400 (C.A.), saying at paragraph 33:

The facts in this case are not identical to the facts in either Westcom or Szeckett. In Westcom, both contracting parties believed the corporation to be in existence when it was not. In Szeckett both contracting parties knew the corporation was not in existence. Here, Mr. Drabinsky believed Furama to be in existence and Mr. Hunter knew it was not. I do not believe that Mr. Hunter meant in any way to mislead Mr. Drabinsky; rather, he was inattentive to its status.

Here, there is no evidence that the Pellicciones learned that John F. Hughes Construction & Development Co. Ltd. did not exist at the time they contracted, or at any time prior to May 8, 2000. Hughes knew that there was no such company as John F. Hughes Construction & Development Co. Ltd., and that the correct name of the company was John F. Hughes Contracting and Development Company Limited. The printed cheques for the corporate account had the name John F. Hughes Contracting & Development Co. Ltd. On June 25, 1999, Hughes executed a Transfer/Deed of Land on behalf of John F. Hughes Contracting and Development Company Limited.

Pepall J. concluded at para.35: “… it also seems just that Mr. Hunter bear the burden…. [I]t is a fact that Mr. Hunter knew the status of Furama and inappropriately warranted its existence. In my view, he should be found to be personally liable both in the interests of justice and commercial expediency.”

The decision in Hunter was followed in Mexam Corp. v. Coffee, Tea or … Me Bakery & Café Inc., [2001] O.J. No. 3535 (S.C.J.), per Master Haberman. Her decision was not overturned on an appeal from it, and the appellate court did not specifically deal with the following passage in Master Haberman’s reasons. (See decision of A. Campbell J., [2002] O.J. No.4487 (S.C.J.)):

While the Ontario Business Corporations Act does not expressly deal with the situation of an incorrect name being inserted into a contract, section 21(1) is, in my view, applicable by analogy. That section provides that a party who enters into a contract on behalf of a corporation before it comes into existence is personally bound by the agreement and entitled to benefits under it. The section does not appear to require that a corporation be eventually formed. The purpose of the section is, in large part, to ensure that parties do not escape their contractual obligations by contracting in the name of non-existent entities. Thus, as Mexam was unaware that Coffee did not exist at the time they entered into the contract giving rise to this dispute, it should be entitled to seek recovery from Gnydjenko, the individual with whom Mexam negotiated and who ultimately executed the contract on Coffee’s behalf. This interpretation is consistent with Pepall J.’s findings in 1080409 Ontario Ltd. v. Hunter, 2000 CanLII 22405 (ON SC), 50 O.R. (3d) 145. There, it was found that the defendant who had executed on behalf of a corporation to be formed had been inattentive to the company’s status, and that, as such, he should be found personally liable on the agreement in the interests of both justice and commercial expediency.

Thus, even in a case where the court was prepared to state that there was no intent to mislead, s.21 of the OBCA was applied to render the signatory to the contract personally responsible for the debt of the non-existent corporation. There is no reason to expect that the results would be any different if this matter proceeded to trial.

See also Tato Enterprises Ltd. v. Rode (c.o.b. Scott Bradley Ltd.) [1979] A.J. No. 496 (Dist. Ct.), in which an individual was held personally liable where the company described never existed.

Like the defendant in Mexam Corp. v. Coffee, Tea or … Me Bakery & Café Inc. et al., John Hughes had a number of business style names, and used multiple corporate names, but he had only one company.

The defendants argue that s.21(1) of the OBCA has no application in that there was indeed a company in existence but it was inadvertently misnamed in the contract.

For the following reasons, I do not accept Hughes’ evidence to the effect that it was an inadvertent error.

I find as a fact that the name of the company, John F. Hughes Construction and Development Co. Ltd. (Hughes Construction) was deliberately made the subject of the contract.

Just as there was no “Group” in “The Hughes Construction Group”, there was no such company as Hughes Construction.

Just as there was no “Hughes Construction and Development Ltd.”, there was no Hughes Construction.

Furthermore, there are a total of four dissimilarities in the Hughes Construction name compared to the Hughes Contracting name: “Construction” (Contracting); “&” (and); “Company” (Co.); “Ltd.” (Limited).

Finally, there were many additional documents filed as exhibits bearing the name Hughes Construction, yet bearing dates far removed from the contract date. The use of the name was not a one-time occurrence.

The defendants referred to La Fornareta S.R.L. v. Diodati, [2000] O.J. No. 4094 (S.C.J.) and Watfield International Enterprises Inc. v. 655293 Ontario Ltd., [1995] O.J. No. 1146 (Gen.Div.), as standing for the proposition that a minor misdescription of the name of the corporation, where the plaintiffs knew and understood it was dealing with a corporation and were not misled into entering the relationship, would not attract personal liability for the principal of the company.

In the case at bar however, the company was not merely misnamed – rather, a non-existent company was made a party to the contract by John Hughes. John Hughes did have an existing company (Hughes Contracting) but he did not make that company a party to the contract.

Although the Pellicciones did believe that they were entering into a contract with a corporation and not John Hughes personally, this matters not in the context of s.21(1) of the OBCA. John Hughes is personally liable.

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