When drafting a contract, you should be sure to include the names of all parties to the contract, especially where parent entities are involved. This is important in case of future litigation in which you could be limited to recovering from only the parties named in the contract, as was the case in the recent Michigan Court of Appeals case, City of Dearborn et al. v. Burton-Katzman Development Company, Inc. et al.
In Burton-Katzman, the City of Dearborn was unable to recover damages for breach of contract due to having contracted with a single-purpose entity (SPE) with no assets, and not including the parent entity as a party to the contract. Real estate lenders often require the creation of SPEs in development projects for ease of doing business.
When drafting a contract, you should include in the terms of the contract which party is going to perform, and also which party will pay in the case of breach of contract. When contracting with a subsidiary company, especially an SPE, it is important to make sure that the organization has assets. If it does not, you should join the parent company or the party you are relying on as a party to the agreement so that damages can be recovered in case of breach.
If a party to a contract breaches but has no assets to pay damages, there will most likely be no alternative way for the injured party to recover, even if the proprietors of the corporation have assets. It is possible, in rare cases, for the court to “pierce the corporate veil” and require some agents of a corporation to personally pay for damages. This action is uncommon and only available in cases of fraud or wrongdoing by the corporation. Therefore, it is very important to take steps to ensure you are contracting with parties that have assets so that you will be able to recover your damages in the case of breach or misconduct by other contracting parties.
For more information, please contact the attorneys at Demorest Law Firm.
This article was written by Laura Barrera, law clerk.
