Case 36. 11 : Business Ethics John A. Goodman was a real estate salesman in the state of Washington. Goodman sold to Darden, Doman & Stafford Associates (DDS), a general partnership n apartment building that needed extensive renovation. Goodman represented that he personally had experience in renovation work. During the course of negotiations on a renovation contract, Goodman informed the managing partner of DDS that he would be forming a corporation to do the work.
A contract wa executed in August between DDS and “Building Design and Development (In Formation), John A. Goodman, President. The contract required the renovation work to be completed by October 15. Goodman immediately subcontracted the work, but the renovation was not completed on time. DDS also found that the work that was completed was of poor quality. Goodman did not file the articles of incorporation for his new corporation until November 1. The partners of DDS sued Goodman to hold him liable for the renovation contracts.
Goodman denied personal liability. Was it ethical for Goodman to deny liability? Is Goodman personally liable? Answer : Goodman informed DDS at the time the contract was signed that corporation was being formed to do the work.While the articles of corporation weren’t actually completed until after the work was supposed to be finished, at all time Goodman represented that a corporation was doing the work and signed the contract on behalf of the corporation. Even when DDS paid to Goodman first time with a check and put his name next to the corporation’s name, Goodman endorsed the check to him as a president next to the corporation’s name, and instruced DDS to make further payments to the corporation only. Whether he will successfully maintain a corporate identity throughout the lawsuit is unlikely, but ethically he is okey.It was not unethical for Goodman to deny personal liability.
The general rule is that promoters are personally liable for the acts made on behalf of a corporation in formation. There are exceptions, however, when the contracting party specifically exempts them from such liability, or the parties entered into a novation. Since there was no novation had occurred place, and DDS did not agree to release Goodman from liability on the renovation contract and silence of DDS does not mean acceptance, Goodman remained personally liable with the newly formed corporation.