If a business is too careless in its use of a fictitious name or trade name, its agents can be exposed to liability when they would otherwise be protected by the corporate shield. In the course of litigating business disputes, we come across many different types of contracts. Some are highly detailed and formal. Others are not. One obvious piece of information that should be included in all contracts is the correct name of the parties to the contract. After all, how can you tell who is agreeing to do what if the “who” is not properly identified? Nonetheless, we have seen this seemingly simple concept ignored. As you might imagine, if the contract is not performed as planned, ambiguity as to the “who” can easily become a focal point in a business dispute that lands in court.
A common situation in which the identity of the parties to a contract becomes an important issue is when a business uses a trade name or a fictitious name. The difference between the proper name and a fictitious name can be small or large. For example, “XYZ Shoes, Inc.” may represent itself to the public as “XYZ Shoes” or “ABC Shoe Store” if it properly registers the fictitious names with the State of New Jersey. However, if these alternate names are not registered, a small difference between the actual name of the corporate entity and the alternate name can create a large problem. Individual agents of the business can become exposed to liability when the proper name of the business is not used in contractual agreements.
To be clear, the danger of liability described above due to a failure to register a trade name is not automatic. The problem arises when a company’s agents enter into a contract using a name other than the company’s actual name, and
a) the agents fail to disclose the company’s actual name at the same time,
b) the company has not been authorized to conduct business using an assumed name, and
c) the company has failed to register the alternate name.
See N.J.S.A. 14A:2-2.1.
Under New Jersey law, if all of these circumstances exist, whether the company’s agents are personally liable becomes dependent upon whether or not the other party to the contract is aware that the agents are acting on behalf of the company. The corporation’s agents are obligated to disclose to the other party which corporate entity the agents represent in order to avoid being held personally responsible for damages arising from the contract. These questions of awareness and disclosure are often not clear cut and can result in a lawsuit that is difficult to resolve. It is best to avoid this situation in the first place.
The good news is that this type of problem is easily avoided. Exposure to this type of liability can be minimized by either disclosing a company’s actual name in addition to its trade name when entering into a contract, or by making the effort to register a trade name.
Despite the obvious ways to avoid liability from the misuse of fictitious names or trade names, these issues do arise from time to time. As business disputes lawyers, we sometimes raise this issue when we are pursuing a breach of contract claim on behalf of a client and are seeking to hold individual owners liable for the breach. Being able to pursue enforcement and collection of a judgment against individuals can be preferable to pursuing a corporate entity when the entity has no assets.
The business disputes lawyers at the Law Office of Bart J. Klein regularly advises clients on issues relating to New Jersey business formation and in a broad range of business disputes, including collections. We represent both creditors and debtors and are well versed in the law governing judgment collection. We welcome you to call us at (973) 763-6060, email firstname.lastname@example.org, or complete our online contact form for more information.
© 2018 Law Office of Bart J. Klein