Does it matter who you contract with?
In these real-life examples the names and businesses, and other non-material details, have been changed.
A basic principle is that you can only enter into a contract with a natural person (i.e. an individual) or a legal person (e.g. a company). If you contract with an unincorporated firm or partnership, you are contracting with several individuals, i.e. the partners or at least some of them.
What happens if you contract with an entity which is neither an individual nor a legal person? And what happens if you contract with an identifiable natural or legal person, but it’s the “wrong” person?
Case No. 1
A maintenance company signed a form of contract to provide services, using its standard form. The contract named the customer as “Marchmont Catering Co”.
No registered company with that name existed, but there was, undeniably, a catering business which used the name on its letter paper and business cards and which wanted the maintenance company to provide services to it.
The contract was signed on behalf of Marchmont Catering Co by one Anita Cook, Director. Subsequently Anita’s involvement in the business ceased and another individual, Harold Brown, stepped in to represent the customer.
The maintenance company provided the services but did not receive payment. Whom could it sue? Tricky, because Marchmont Catering Co didn’t exist as a legal entity and suing a non-existent entity would be a waste of time.
In this kind of situation the normal solution is to treat the non-existent entity as a trading name or partnership and to sue the people who were the principals of the business at the time when the contract was made, e.g. “AB and CD, trading in partnership as Marchmont Catering Co”; or at least the people who at that time were holding themselves out as being principals (even if they weren’t).
So the first step is to find out who the principals of the business were at the time when the contract was entered into. The maintenance company didn’t know for sure who those principals were, but they did know that the contract had been signed by Anita Cook, who had described herself as a “Director”.
So Anita was holding herself out as being one of the principals of the business, and the maintenance company could and should have sued “Anita Cook trading as Marchmont Catering Co.”
Instead, however, they sued Harold Brown, the man who had taken over from Anita as the catering company’s representative. This was a less sound approach, because the maintenance company couldn’t prove that Harold had been a principal of the business at the time when the contract was entered into. (They could of course have proved that Anita was holding herself out as a principal because she’d signed the contract and had called herself a director.)
Of course, Anita would not have been happy about being sued for money owed by a business which she had ceased to be involved in. However, that is the price you pay for signing contracts on behalf of an unincorporated business. (Do you do that, and are you comfortable about it after reading this story?)
Case No. 2
PQR Investments Ltd are buying a small office building, which the seller is converting and refurbishing, and they then plan to let each floor to a different tenant. As is quite normal, the buyer requires warranties from the designers and contractor doing the conversion and refurbishment. The seller gives the buyer a draft of the warranties, but because of some confusion on the part of the seller’s solicitor these drafts are in favour not of PQR Investments Ltd (“Investments”) but of its associated company, PQR Properties Ltd (“Properties”). Does it matter?
It might, from the point of view of the PQR group of companies. It’s Investments which will be granting the leases, and which will therefore be giving covenants to repair the common parts of the building (including the floors and ceilings). If the common parts fall into disrepair because of defective work, Investments will have to repair the defects. So they will want to sue the contractor. But the contractor’s warranty is in favour of Properties, so only Properties will be able to sue the contractor. This allows the contractor to say, “I’m not liable to Investments because my warranty is in favour of Properties. But Properties can’t recover any damages from me because they have no liabilties under the leases and therefore they’ve suffered no loss.”
The House of Lords case of Alfred McAlpine Construction Ltd v. Panatown Ltd (2000) suggests that Properties would not be able to recover more than nominal damages from the contractor, but might be able to recover the cost of remedial works on behalf of Investments. Be that as it may, it would make a lot of sense to keep things simple by recognising that two companies in the same group are not “the same company” and that it can really matter which one enters into a particular contract.
Business people entering into contracts need to be aware of the pitfalls of entering into an agreement with the “wrong” person, or even with no person at all. Here are some tips:
Groups of companies need to be careful as to which companies in the group enter into particular contracts. In the Panatown case mentioned above, the choice of company was determined by the group’s desire to reduce its VAT bill by £1.3m, but it cost the group “many millions of pounds” to make good defects for which its tax avoidance measures had inadvertently left it without a remedy. By all means avoid tax, if you can do so legally, but don’t overlook the possible side-effects. (We once had to advise a client that making its subsidiary enter into a particular contract in order to save VAT could cost it a six-figure sum.)