You are a manager at McWitchin. McWitchin asks you to negotiate and execute a contract for new software it desperately needs. You read the contract, and it contains a provision saying if the software crashes, you are still obligated to pay the company, Shady Software, as long as they are trying to repair it. It also states that it will be the final and complete version of the contract. You dispute this provision, and Shady Software sends you an email stating they will never enforce that provision. Based on the email, you sign the contract.

McWitchin goes out of business/claims bankruptcy, still owing Shady Software $10,000. As you signed the contract, Shady Software files a claim against you for payment. Which of the following statements is true:

Question

You are a manager at McWitchin. McWitchin asks you to negotiate and execute a contract for new software it desperately needs. You read the contract, and it contains a provision saying if the software crashes, you are still obligated to pay the company, Shady Software, as long as they are trying to repair it. It also states that it will be the final and complete version of the contract. You dispute this provision, and Shady Software sends you an email stating they will never enforce that provision. Based on the email, you sign the contract.
 
McWitchin goes out of business/claims bankruptcy, still owing Shady Software $10,000. As you signed the contract, Shady Software files a claim against you for payment. Which of the following statements is true:

BlackTom AI · Accepted Answer

First, restating the core scenario helps ground the analysis: you as a manager signed a contract for McWitchin, a provision about payment despite a software crash was disputed, Shady Software emails that they will not enforce that provision, you sign the contract, McWitchin goes bankrupt owing Shady $10,000, and Shady sues you for payment. Now, evaluate each answer option in light of agency and contract principles.
Option 1: 'As you signed the contract, you are liable and are not legally entitled to reimbursement from McWitchin, regardless of the bankruptcy.' This view conflates personal liability with the bankruptcy status of the principal. Generally, an agent who acts within the scope of authority and discloses that they are acting for a principal is not personally liable on a contract made in the principal's name. The fact of McWitchin’s bankruptcy does not automatically create personal liability for the signer unless the signer acted outside authority, failed to disclose, or signed in a personal capacity or under a personal guaranty. Therefore, this statement likely overstates personal liability and ignores the agency rule that a properly disclosed authorized signature on behalf of a principal typically binds the principal rather than the agent.
Option 2: 'If you signed the contract stating it was on behalf of the company, you are not liable.' This aligns with standard agency doctrine: when an agent signs a contract in the name of the principal (the company) and clearly indicates that representation, and the signer acts within scope of authority, the principal is the party to the contract, and the agent generally is not personally liable. The explicit indication of acting for the company helps satisfy the requirement that the agent is not personally liable absent personal guarantees or undisclosed dual agency issues. The email from Shady Software stating they will not enforce the provision further supports that specific contract term, but it does not by itself create personal liability for the signer; the key factor is the principal-agent relationship and disclosure in the signature.
Option 3: 'Even if it is just your name on the contract, not McWitchin, as it was authorized by them, you are not liable.' This option hinges on the contract showing agency. If the contract clearly shows you signed on behalf of McWitchin, and you acted with authority, the principal bears liability, not you personally. However, the phrase 'just your name on the contract, not McWitchin' would imply you signed in a way that could create personal liability unless there is clear evidence of agency and disclosure. The critical distinction is whether the contract name identifies the principal and whether you disclosed your agency. Without that, this option risks ignoring the fundamental requirement for proper disclosure. If properly disclosed, this would typically be correct; if not, it could be misconceived.
Option 4: 'As you signed the contract, you are liable, but you are legally entitled to reimbursement from McWitchin (though may not be able to collect).'

This option blends two ideas: personal liability and a potential right of recourse against the principal. If the signer acted within authority but failed to disclose or signed in a way that creates personal liability, this could be possible. However, the core agency principle usually protects the agent from personal liability when the contract is signed in the principal’s name and the agent clearly represents the principal. The notion of reimbursement from McWitchin would require a separate right of indemnity or a specific contract provision; bankruptcy can complicate collection, but it does not typically convert the signer into a personally liable party if the agent’s authority and disclosure are proper. Thus, this statement risks conflating personal liability with potential remedies against the principal, which are not guaranteed by the mere signing of the contract.

In summary, option-by-option reasoning shows that the heart of the matter rests on whether the signer acted as a properly disclosed agent signing for the principal. Options 2 and 3 revolve around that agency concept, with option 2 being the clearest articulation that proper disclosure of acting for the company generally shields the signer from personal liability. Options 1 and 4 introduce blanket or mixed theories of liability and remedies that are less consistent with standard agency principles when authority and disclosure are clear. Note that the specific facts—such as whether the signer disclosed agency, whether the contract identifies McWitchin as the principal, and whether any personal guarantees exist—could tilt the analysis, but the general rule favors the agent not being personally liable if properly acting in an authorized capacity for the principal.

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