Legal Updates

Voluntarily contracting a company may only rarely impose personal liability on its officers

July 26, 2020

A company breached a contract with an investor, who sought to be compensated by the company's officers contending that they deceived him and acted in a negligent manner.
The Court held that the officers are not personally liable to the investor. In order to impose personal liability on company organs, they themselves must act fraudulently or negligently. Merely being organs in a company that so acted is not sufficient for imposing personal liability. In the case of a third party's contract with a company, such liability will be recognized only in rare cases. This derives from the need to respect a third party's contractual choice to enter into an agreement with a company and not with its officers and the apprehension from overdeterrence from taking risks by companies on the one side, and, on the other side, policy considerations that require personal responsibility of an officer to ensure personal responsibility for actions. These restrictions are intended to prevent a over-wide deviation from the concept of a 'limited liability company' and emphasize the economic significance of choosing to contract with a company. Here, the investor voluntarily chose to contact the company out of clear knowledge of the company's condition and despite the lack of personal guarantee of the officers who refused to be a party to the agreement. Thus, the officers are not personally liable to the investor.