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The doctrine of corporation by estoppel may be summarized in general as follows: one who contracts and deals with an entity as a corporation thereby admits that the entity is a corporation and is estopped to deny its incorporation in an action arising out of the contract or course of dealing.
Plaintiff Pharmaceutical Sales and Consulting Corporation ("PSCC") sued Defendant J.W.S. Delavau, Co., Inc. ("Delavau"). PSCC and Delavau entered into a Sales, Consulting, and Confidential Disclosure Agreement ("the Agreement") whereby Delavau was to pay PSCC a commission for sales PSCC brought to Delavau from Lederle Laboratories, Inc. The Agreement was executed on July 1, 1992. PSCC alleged that defendant Delavau failed to pay commissions due and owing to PSCC pursuant to the Agreement. The Agreement was signed by John Sadlon, as president and on behalf of PSCC. PSCC had represented that it was a corporation, but while conducting discovery for the case, Delavau was informed that PSCC was not a registered corporation. Delavau filed its motion to dismiss PSCC’s complaint.
Should Delavau be estopped from relying upon PSCC’s failure to effectuate incorporation prior to the effective date of the parties' contract based upon the doctrine of corporation by estoppel?
The Court denied Delavau’s motion. PSCC maintained that the Court should afford it de facto corporate status. The Court disagreed and found that PSCC could not rely on the doctrine of de facto incorporation to demonstrate that it could sue Delavau for breach of the parties' agreement because PSCC had not made a bona fide attempt to incorporate before PSCC entered into the agreement with Delavau. But the Court refused to grant Delavau’s motion based upon the doctrine of estoppel. The Court found that Delavau was estopped from relying on PSCC’s lack of corporate status in order to avoid a lawsuit, which was contrary to New Jersey law and would have been a windfall to Delavau.