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Law School Case Brief

Stanley J. How & Assocs., Inc. v. Boss - 222 F. Supp. 936 (S.D. Iowa 1963)

Rule:

Three possible understandings that parties may have when an agreement is made on behalf of a corporation to be formed by one of the parties are as follows: (1) An offer or option to the corporation to be formed which will result in a contract if it is accepted when the corporation is formed. The correlative promise for the continuing offer or option is the promoter's promise to organize the corporation and give it the opportunity to pay the debt. (2) The parties agree to a present contract by which the promoter is bound, but with an agreement that his liability terminates if the corporation is formed and manifests its willingness to become a party. This is an agreement for a future novation. (3) The parties have agreed to a present contract upon which, even though the corporation later becomes a party, the promoter remains liable either primarily or as surety for the performance of the corporation's obligation.

Facts:

Plaintiff architect brought suit against defendant promoter to recover the balance of an unpaid fee for performance of architectural services for preparation and completion of specifications and general working drawings. The architect claimed damages under a contract with the promoter as an agent of a corporation that had not been formed.

Issue:

Is the promoter-agent of a corporation personally liable for the unpaid fees of the plaintiff architect, even if the corporation was not eventually formed?

Answer:

Yes.

Conclusion:

The court held that the promoter intended to be personally liable on the contract because the payment provisions called for payment to the architect before the corporation would have been formed. The court held that the reasonable interpretation of the contract was that the promoter was a present obligor under the contract. The court found that the promoters abandoned their purpose of forming the corporation, which made the promoter liable to the architect because the architect did not agree to look solely to the new corporation for payment, and the promoter had a duty under the contract to form the corporation and give it the opportunity to assume and pay the liability.

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