Stanley J. How & Associates, Inc., an architectural firm, entered an agreement to prepare plans, working drawings, and specifications for a motor hotel and restaurant planned for Southdale in Edina, Minnesota. The agreement provided for a six-percent architectural fee, with payments totaling seventy-five percent of that fee due when the specifications and drawings were completed, calculated from a reasonable estimated construction cost or the lowest bona fide bid.
At the signing, Edwin A. Boss replaced the typed owner signature, "Boss Hotels Co., Inc.," with language stating that he signed as "agent for a Minnesota corporation to be formed who will be the obligor." How accepted that form of signature. How then completed the plans and specifications. The project was ultimately abandoned, although a corporation called Minneapolis-Hunter Hotel Co. was organized in some form and sent How two partial payments totaling $14,500.
Using an $850,000 construction estimate, How claimed that seventy-five percent of the six-percent fee equaled $38,250, leaving $23,750 unpaid. Boss contended that only the future corporation, not he personally, was liable. After trial, the district court entered judgment for How against Boss for $23,750, plus interest and costs.
Issue #1
Whether Boss, who signed as an agent for a corporation to be formed, was personally bound by the architectural contract.
Holding
Yes. Boss was a present obligor on the contract and was personally liable for the unpaid architectural fee.
Reasoning
A promoter who purports to contract for a corporation that does not yet exist is ordinarily personally bound unless the other contracting party agreed to look exclusively to another person or fund. The Restatement rule creates a rebuttable inference of personal liability because the other party knows that no existing principal can make the contract.
The phrase added by Boss—"agent for a Minnesota corporation to be formed who will be the obligor"—did not clearly displace that inference. The words "will be" ordinarily describe a future event; they identified a corporation expected later to assume an obligation but did not say that Boss lacked any present obligation.
The contract's payment structure reinforced this reading. It required monthly payments and required seventy-five percent of the fee to be paid upon completion of drawings and specifications—work that How was expected to perform before the proposed corporation was operating. Reading the agreement as imposing liability solely on a future corporation would make those present-payment terms difficult to reconcile.
Boss himself wrote the ambiguous signature language. Under the rule construing contractual ambiguity against its drafter, the language was properly construed in How's favor. The surrounding testimony and How's business records also showed that How did not intend to rely solely on the credit of the future corporation.
Issue #2
Whether the later formation of Minneapolis-Hunter Hotel Co. and its partial payments released Boss through adoption, novation, waiver, or practical construction of the contract.
Holding
No. Corporate adoption and partial payment did not discharge Boss, because no novation or waiver was pleaded or proved.
Reasoning
A corporation may adopt a promoter's contract after it is formed, but adoption alone does not release the promoter. Discharge requires a novation: an agreement among the relevant parties that substitutes the corporation for the promoter as the liable party.
Boss neither pleaded nor argued that a novation occurred. The fact that two checks bore the new corporation's name and were signed by Edwin Hunter was insufficient to establish an agreement by How to release Boss, particularly where there was no proof of proper corporate authorization or of an express substitution of debtors.
Treating How's acceptance of partial payments as a waiver would improperly penalize How for accepting payment without immediately demanding strict compliance. No waiver defense was pleaded, and the evidence did not show that How surrendered its rights against Boss.
Issue #3
Whether Boss would avoid liability even if How had agreed initially to look to the future corporation, given that the promoters abandoned the project.
Holding
No. Boss would remain liable because the promoters could not prevent the contemplated corporation from assuming the obligation and then rely on that failure to escape liability.
Reasoning
The court explained that an agreement concerning a corporation to be formed can sometimes leave the other party to bear the risk that incorporation and assumption may never occur. But that result depends on the parties' actual agreement, including whether the promoters undertook to organize the corporation and provide it the opportunity to assume the debt.
Here, Boss was the principal promoter and a central participant in abandoning the project. Thus, even under the more favorable interpretation proposed by Boss, he could not frustrate the future corporation's assumption of the obligation and then invoke the project's abandonment as a defense.
Issue #4
Whether Southdale Holding Co.'s alleged failure to approve the plans and specifications excused payment under the architectural agreement.
Holding
No. Southdale's approval was not a condition of How's contract with Boss, and Boss did not adequately plead nonoccurrence of a condition precedent.
Reasoning
Any requirement that Southdale approve construction plans arose, if at all, from the lease between the promoters and Southdale. How was not a party to that lease, and the architectural agreement did not make Southdale approval a condition to How's entitlement to payment for completed drawings and specifications.
Moreover, both Iowa procedure and Federal Rule of Civil Procedure 9(c) require a party relying on the nonoccurrence of a condition precedent to plead that defense specifically and with particularity. Boss's pleadings did not do so.
Issue #5
What construction figure governed the amount of the architectural fee due upon completion of the drawings and specifications.
Holding
The proper figure was $850,000, producing a total accrued payment of $38,250 and an unpaid balance of $23,750.
Reasoning
The agreement called for the fee to be computed from a reasonable estimated cost reflected in completed specifications and drawings, or, if bids had been received, from the lowest bona fide bid. When How completed the plans, $850,000 was the reasonable cost estimate used for the project.
Although the contractor initially gave a preliminary estimate of $965,000, that figure exceeded the intended budget and was later reduced to $850,000. The later $600,000 concept arose only after the original plans had been completed and the project had run into difficulty, so it could not reduce the fee that had already accrued.
Seventy-five percent of the six-percent basic fee on $850,000 equals $38,250. After crediting the $14,500 already paid, the court awarded How the remaining $23,750.