It seems both fundamental and self-evident that you should make sure that you are contracting with the legal person with whom you want to contract. From time to time what you would think should be obvious can become confused and problems can arise, as demonstrated by a recent construction dispute.
The facts
A building company sought payment of the balance of sums due to them under a contract, which sums had been retained. The party they sued was a property developer who carried out development activities both as an individual and through a limited company, of which she was a director.
The developer maintained that she, as an individual, had no contract with the builder. She contended that the contracting party was the limited company, on the basis that she had the same address as the company; the company owned the property being developed; and the bank was providing funding for the development to the company, not to her as an individual.
The decision of the court
The Court disagreed with the developer, highlighting that the critical time for dictating who is a party to the contract is the point at which the offer is accepted. The builder had been appointed on the basis of a written estimate for the works, based on drawings prepared for building warrant purposes by the developer, apparently acting as an individual. There was no evidence to suggest that the developer had communicated anything, expressly or impliedly, at this point from which it could be inferred that she was acting as an agent for the company. Other factors contributing to the court's finding were that:
(a) the first and last payments made to the builder were made by the developer as an individual, although intervening payments had been made by the company (even though the company made some of the payments, this did not mean that the builder accepted the company as a party obligated to make payments);
(b) the developer as an individual had appointed an architect to protect her interests, supervise the project, and issue instructions and certificates under the contract. During the course of the works, the architect, on behalf of the developer, issued nine formal variations to the contract by way of architect's instructions and various certificates. All documentation was copied to the developer and named her, in her personal capacity, as the employer; and
(c) the developer failed to give the builder, or the architect, any indication that she was contracting as a director or an agent of the company.
The court identified that there is sometimes a "misunderstanding in people's minds" that, if money is coming from a third party (in this case the company), the actual contracting party is not liable for the obligation. This is clearly wrong in law. For a third party to become obliged under a contract after its conclusion, the contract in question must be novated, with the result that the third party takes the place of the original party who is released from its obligation. There was no novation in this case. Indeed, the builder did not even seem to be aware of the existence of the company.
The lesson
Everyone involved in construction projects should ensure that the correct party is identified at the start, and it may not always be clear in the minds of all parties who is contracting. Contractors should be clear that their employer is the legal entity which has the funding to make payments under the building contract, and may wish to request additional security for payment. Funders need to ensure that the party to whom funds are being advanced is not only able to make repayments to the bank, but is the party liable as employer under the building contract and that the building contract is sufficiently robust. Directors of developers must surely wish to avoid the same situation as in this case, and so avoid being found personally liable under contract.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
