WHEN CORPORATE OFFICERS ARE PERSONALLY LIABLE
by Elliott Joffe, Spring 2002
Any business, such as a corporation or a limited liability company, acts through its agents, including its officers and employees. Recently, New Jersey’s Supreme Court has revisited the question of when an officer is personally liable for his own conduct within the scope of his employment.
An officer of a corporation is liable for his own intentional wrongdoing, whether or not that wrongdoing occurred within the scope of employment and without regard to any benefit accruing to the officer. Thus, if an officer of a corporation, while acting within the scope of his employment, commits an assault, an act of fraud, or a theft, that officer will not be excused from personal liability simply because he was acting on a corporation’s behalf.
By contrast, an officer cannot be held liable for a corporation’s breach of contract, even if he is directly involved in the corporation’s efforts or failure to fulfill its contractual obligations. Only a party to a contract is liable for its breach, and an officer is not considered a party to the corporation’s contract, even if he negotiated and signed it, so long as he did so solely on the company’s behalf.
The more difficult question is what happens when the officer is negligent in the course of his employment? Clearly, the company is liable, but what about the officer?
New Jersey’s courts have rarely had occasion to address this issue. Other states have held that an officer is liable for negligence if he participated in the negligent act. New Jersey’s Supreme Court has not clearly ruled, although it did note recently that there is precedent in this state suggesting that this “participation” rule would be adopted.
There is, however, an important caveat. It is always necessary to distinguish whether the officer participated in a negligent breach of a contractual obligation or in a non-contractual act of negligence. Negligence consists of the breach of a duty of care. Where the duty of care exists solely because of a contract, the officer’s participation cannot be the basis for personal liability. However, if the duty of care is one imposed by law, then the question of personal liability of the officer remains open in this state.
These examples illustrate the difference:
Sometimes both kinds of duties exist at once. A good example is a law firm. Law firms enter into contracts with their clients that require that individual attorneys exercise due care in their representation of the client, while the law also imposes that duty upon the attorneys. No attorney is immune from personal liability for his own negligence because he is working for a law firm, even if that firm is a professional corporation or a limited liability company. The same rule applies for doctors.
The personal liability of officers for negligence occurring in the scope of their employment is a changing area of the law. While future cases will determine how it develops in this state, be aware that there is a national trend in favor of expanding the personal liability of corporate officers.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
Any business, such as a corporation or a limited liability company, acts through its agents, including its officers and employees. Recently, New Jersey’s Supreme Court has revisited the question of when an officer is personally liable for his own conduct within the scope of his employment.
An officer of a corporation is liable for his own intentional wrongdoing, whether or not that wrongdoing occurred within the scope of employment and without regard to any benefit accruing to the officer. Thus, if an officer of a corporation, while acting within the scope of his employment, commits an assault, an act of fraud, or a theft, that officer will not be excused from personal liability simply because he was acting on a corporation’s behalf.
By contrast, an officer cannot be held liable for a corporation’s breach of contract, even if he is directly involved in the corporation’s efforts or failure to fulfill its contractual obligations. Only a party to a contract is liable for its breach, and an officer is not considered a party to the corporation’s contract, even if he negotiated and signed it, so long as he did so solely on the company’s behalf.
The more difficult question is what happens when the officer is negligent in the course of his employment? Clearly, the company is liable, but what about the officer?
New Jersey’s courts have rarely had occasion to address this issue. Other states have held that an officer is liable for negligence if he participated in the negligent act. New Jersey’s Supreme Court has not clearly ruled, although it did note recently that there is precedent in this state suggesting that this “participation” rule would be adopted.
There is, however, an important caveat. It is always necessary to distinguish whether the officer participated in a negligent breach of a contractual obligation or in a non-contractual act of negligence. Negligence consists of the breach of a duty of care. Where the duty of care exists solely because of a contract, the officer’s participation cannot be the basis for personal liability. However, if the duty of care is one imposed by law, then the question of personal liability of the officer remains open in this state.
These examples illustrate the difference:
- Officer A is participating in the manufacture of a widgit. Due to his negligent mistake, the widgit is built to the wrong specifications and is, consequently, unusable. The Buyer sues the corporation that employs Officer A for economic losses and Officer A for negligence. However, Officer A only violated the duty of care pursuant to the contract and is not personally liable.
- Officer B is participating in the manufacture of a seatbelt for use in an amusement park ride. Due to his negligent mistake, the seatbelt is defective, and someone is physically injured. Officer B owed a legal duty to the public and may, depending upon future rulings in this state, be personally liable.
Sometimes both kinds of duties exist at once. A good example is a law firm. Law firms enter into contracts with their clients that require that individual attorneys exercise due care in their representation of the client, while the law also imposes that duty upon the attorneys. No attorney is immune from personal liability for his own negligence because he is working for a law firm, even if that firm is a professional corporation or a limited liability company. The same rule applies for doctors.
The personal liability of officers for negligence occurring in the scope of their employment is a changing area of the law. While future cases will determine how it develops in this state, be aware that there is a national trend in favor of expanding the personal liability of corporate officers.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
