Signing Contracts as a Representative May Lead to Individual Liability in New York
Tharunidhar Narravula et al v. Perosphere Technologies, Inc. et al, Index No. 900410-21, Supreme Court, Albany County
In Narravula v. Perosphere Tech., 2021 NY Slip Op 50510(U) (Sup. Ct. Albany Cnty. 2021), Justice Richard M. Platkin of the Albany County Commercial Division reinforced the textbook rule that that an individual who signs a contract as an agent for an undisclosed entity can be held personally liable on the contract if the agency relationship is not disclosed.
Petitioners Tharunidhar Narravula and Arun Savkur (“Petitioners”) brought a proceeding pursuant to CPLR § 7501 to permanently stay any claims brought against them in an arbitration by Respondents Perosphere Technologies, Inc. and Dr. Sasha H. Bakhru. The arbitration arose from the Petitioners’ failure to close on the purchase of Perosphere Technologies, Inc. pursuant to a Share Purchase Agreement (“SPA”). Whether the arbitration would be permanently stayed hinged on whether Petitioners were signatories to the SPA in their individual capacity or whether they had signed as representatives for the buyer.
Pursuant to the SPA, the Petitioners represented an investor group referred to as the ‘Nominee’ for the Buyer. The term “Buyer” was defined in the SPA as “a Delaware limited liability company, yet to be registered, called Perosphere Tech (Delaware), LLC,” which “the Nominee shall (or cause to) form.” The SPA was signed by Petitioners on a signature block that identified them as nominees of the buyer Perosphere Tech (Delaware), LLC.
Despite several extensions of the closing date via letter agreements, the closing never occurred. Again, these letter agreements were signed by Petitioners as representatives of the Nominee, and Petitioner Narravula signed for “Buyer: Perosphere Corporation” in his capacity as the corporation’s president.
Respondents offered four theories to bind Petitioners to the SPA’s arbitration clause in their individual capacity: (1) that Petitioners should be estopped from denying their obligation to arbitrate under the SPA because they directly benefited from the SPA; (2) that equity requires piercing the corporate veil of Perosphere Corp.; (3) that Petitioners are bound by the SPA and its arbitration clause based on their role as the preincorporation promoters of Perosphere Corp.; (4) that Petitioners failed to disclose the identity of the “investor group” that they purported to represent “as the ‘Nominee’ for the Buyer.”
With respect to Respondents’ first argument the Court found that any benefit that Petitioners may have stood to gain from the SPA are indirect and, therefore, do not work an estoppel. With respect to its piercing the corporate veil arguments, the Court found that Respondents failed to prove that Petitioners abused the privilege of doing business in the corporate form through their alleged domination of Perosphere Corp. With respect to Respondents’ third argument, the Court found that petitioners did not become bound by Perosphere Corp.’s obligation to arbitrate under the SPA as the preincorporation promotors of the corporate entity that they caused to be formed.
However, with respect to the fourth argument, the Court found that the identity of the principal that Petitioners purported to represent, i.e., the “Nominee investor group,” was not adequately disclosed to Respondents. Although Petitioners argued that a general description of the principal and not specific names is sufficient, the Court disagreed and noted Petitioners’ lack of sufficient caselaw in support of that argument. Further, Petitioners’ own documents called into question whether the investor group even existed when the SPA was executed. Because “it is well settled that an individual who signs a contract as an agent for an entity will be held personally liable on the contract if the agency relationship is not disclosed,” the Court held Petitioners were bound to arbitrate any disputes arising out of, or relating to, the SPA.
This holding should serve as a reminder and a warning that individuals signing on behalf of entities may be liable for the actions or inactions of those entities in certain situations.