It may seem like an obvious question, but do you know the legal identity of the party that you are contracting with? Whether you are a principal or an agent, this is a key question and one that is not always straightforward to answer. There are three common mechanisms by which principals and agents operate. These are:
• A sole trader: this is where an individual trades by themself and in their own name. In this situation that individual has the benefit of any contracts but also has the sole obligation to perform under those contracts;
• A partnership: this is where a group of individuals trade together to share the benefits and obligations under any contracts.
• A limited company: in this situation it is the company (rather than its directors or shareholders) that enters into the contract and has the obligation to perform under the contract. That liability begins and ends with the company, unless the Directors are in breach of their fiduciary duties.
Each of the above is a separate legal person in the eyes of the law and, when entering into a contract it is very important that you identify the correct legal person. That is not always as straightforward as it seems. For example, if you enter into a contract with “ABC Agencies”, which of the above is the legal person that you are contracting with? It could actually be any of them, as “ABC Agencies” could simply be a trading name. It is important to clearly identify the party so that there is no doubt:
• For a sole trader: at the very least you would need to set out the full name of the individual, any trading name that they are using and their current address (eg John David Smith t/a J S Agencies, 1 Bright Avenue, Birmingham, B1 2PA). You might also want to consider setting out some piece of identifying information which leaves no doubt as to the identity of the individual, particularly if they have a fairly common name (eg NI number or passport number).
• For a partnership: you would need similar information to a sole trader, but you would need to identify at least some of the partners (eg John David Smith and Jane Elizabeth Doe trading as ABC Agencies (a partnership), 1 Bright Avenue, Birmingham, B1 2PA).
• For a limited company: you need to set out the full legal name of the company (along with any trading name), the address of its registered office, its registered company number and the country in which it was incorporated (eg John Smith Agencies Limited t/a John Smith Agencies, a company incorporated and registered in England and Wales with company number 12345678 whose registered office is at 1 Bright Avenue, Birmingham, B1 2PA).
It is very important to get this information right at the start of the agency contract, but it is just as important to ensure that things don’t change during the life of the contract. How can that happen? John Smith may get advice from his accountant that he would be in a better tax position if he operates as a limited company. He sets the company up and from that point on all invoices to the principal are issued by the limited company and all commission payments are made by the principal to the limited company. BUT what John Smith doesn’t appreciate is that by operating the limited company but not amending the agency contract to reflect that the limited company is now the agent he could be seriously affecting any ability to bring a claim for compensation or indemnity if the principal terminates the agency. The most likely scenario is that a new agency contract between the principal and the limited company takes effect from the date on which the limited company starts to operate as agent. If the principal decided to terminate the agency, any claim for compensation or indemnity would be limited to the period of the contract between the principal and the limited company. The limited company would not be able to benefit from the period of time for which John Smith ran the agency as an individual.
In this type of situation the agent should seek a formal novation of the agency contract from the individual to the limited company and should ensure that the novation makes clear that the agent is given credit for the period when they operated as an individual. A novation requires the consent of the principal and there are certain legal formalities which need to be observed.
If you are considering changing from one legal entity to another, it is very important to get legal advice on the implications for your contracts and what you can do to protect yourself. These are issues that we come across with surprising regularity!
© Kevin Manship
Blake Morgan Solicitors LLP
One Central Square,
Cardiff, CF10 1FS
T: 029 2068 6126