The owners of small or closely-held business enterprises should be cautious when making personal guarantees of payment to their suppliers. That was the lesson in an opinion issued by the Ohio Fifth District Court of Appeals on March 12, 2012 in Countywide Petroleum Co. v. El-Ghazal Gasoline Servs., Inc., 2012-Ohio-1009. In its decision, the Court determined that the doctrine of “promissory estoppel” permitted a supplier of goods to recover damages from a business owner when that owner had personally promised to pay for those goods.
In Countywide, the plaintiff was a wholesale supplier of gasoline. The Defendant was the sole owner of an LLC, “EGS”, which operated a gas station located in Massillon, Ohio. The parties entered into a business relationship, during which EGS submitted credit applications to the Plaintiff in which the Defendant and his wife personally guaranteed EGS’s account.
During an audit of the parties’ accounts, it was determined that the Plaintiff was owed approximately $82,000 for the delivery of gasoline that EGS had not paid for. The Plaintiff asserted that in addition to its contract with EGS, it could recover damages from Defendant personally because he had personally promised to pay the invoices. To support its position, the Plaintiff relied upon an affidavit filed by the Defendant during the trial. In his affidavit, the Defendant argued that a cognovit note entered into between the parties during the course of their business relationship was invalid because it had not been properly completed. However, the Defendant also admitted in the same affidavit that he had originally agreed to “pay each invoice within 30 days” of receiving it. The Plaintiff asserted that it expected the Defendant to be personally responsible for the payment of the invoices, which is why it continued to do business with him.
The Court decided that the principles of the doctrine of promissory estoppel applied to the Defendant’s promise and ruled that he could be held personally liable for the unpaid invoices. Promissory estoppel is a doctrine that attempts to prevent harm to parties which reasonably rely upon another party’s false promises. To establish a claim for promissory estoppel, a Plaintiff must show:
- A promise that is clear and unambiguous in its terms;
- The party to whom the promise is made (the Plaintiff) must rely on that promise;
- The Plaintiff’s reliance must be reasonable and foreseeable by the Defendant; and
- The Plaintiff must be injured by the reliance.
Countywide, 2012-Ohio-1009, ¶ 26. The Court determined that, despite the fact that the Defendant’s business was a limited liability company, because the Defendant had personally promised to pay the invoices, he was personally liable for the Plaintiff’s damages under the promissory estoppel doctrine because his promise was “reasonably relied upon” by the Plaintiff to its detriment. Id, ¶31.
If you are a business owner, the lesson that you need to take away from the Fifth District’s decision in Countywide is that you must be extremely careful when negotiating business arrangements with your suppliers or other parties you enter into contracts with. If, in an effort to get a deal done or to make sure that you continue to receive supplies on a timely basis, you promise that you will personally pay for any shortfalls that your business may run into, you may be forced to fulfill to that promise later even if you otherwise would be protected from liability because of the structure of your business.
The Defendant in Countywide was the owner of a limited liability company, meaning that he had substantial protections from the liabilities and debts of the company that he owned. However, because he admitted that he had personally guaranteed to pay the Plaintiff for any invoices which his company could not pay, the Court required him to live up to that promise because it believed that the Plaintiff had relied upon that promise and was injured as a result. This may lead to some hard decisions; because suppliers and lenders frequently require personal guarantees to work with small businesses, you may not have any other options, but you should at least be aware of the possible consequences to your personal bank account.
The temptation to enter into a deal with the Plaintiff caused the Defendant in Countywide to step beyond the protections offered by his company’s limited liability and led him to make a promise that he ended up regretting. Learn a lesson from the Defendant’s mistake – think carefully before you make a personal guarantee just to get a particular deal done and, if you do make a guarantee, understand the potential consequences of doing so.