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BFV Perspectives, Georgia Business Disputes, | Jan 31, 2014

How Corporate Novation Can Keep You from Getting Left out in the Cold

Imagine that you have a friend named Grady.  He comes to you one day and, with great excitement, explains a new business venture he is planning: a luxurious ski resort called the Overlook Hotel. 

The two of you walk through his plans in great detail and discuss working together on the project.  Grady will need a caretaker for the Overlook when it closes for the winter and you have a staffing company that could provide personnel for the job.  You enter an oral agreement that you will place the caretaker once the Overlook opens. 

Time passes and you and Grady lose touch about his project.  One day, you find out that Grady has moved forward without you.  You read online that the Overlook Hotel has held its grand opening, well-attended by all the best people, to great success.  Surprised and upset that you missed out on the opportunity to work with Grady, you call him and hear that he has provided the caretaker on his own and claims that he always will.  He explains that you and his corporation – Overlook Hotel, Inc. – have no agreement. 

Can you recover from either Grady or Overlook for not following through on your agreement with Grady?

Under Georgia law, a corporation does not automatically assume liability for contracts entered into by an officer before incorporation.  Unless or until Overlook, Inc. does something to affirmatively adopt or accept the benefits of a contract made by Grady before incorporation – a novation – it will have no liability.  Depending on the facts, you may have a claim against Grady as an individual for breach of the agreement between you or for promissory estoppel if you relied upon your agreement to your detriment. 

Otherwise, the lesson to Georgia business owners is perhaps harsh but certainly clear: if you make a deal with an individual before he incorporates a business in planning, keep tabs on him and make sure the corporation accomplishes a novation to make your agreement binding on it.  If you don’t keep an eye on Grady, it may come back to haunt you.

BFV Perspectives, Georgia Business Disputes, | Jan 31, 2014