Company Director on the hook with personal liability – a reminder of the importance of stating the correct contracting parties
A Company Director could find themselves incurring personal liability if it is not expressly stated that they are entering into a contract on behalf of a limited company. A party seeking payment could also find that their claim is unenforceable if it is not clear which company or individual has entered into the contract.
In this recent case, the Technology and Construction division of the Business and Property Courts (the TCC) was asked to decide whether the contracting party was an individual or a limited company. In the absence of a formal written contract the TCC considered the wording of an estimate, an invoice issued by one of the parties and wider evidence such as email correspondence, previous dealings between the parties and one party's website. The TCC concluded that the contract had been entered into by an individual because he had at no point indicated that he was acting on behalf of a limited company. The individual therefore had personal liability for the sums due.
Mr Sayed operated various restaurants in Durham and Yarm through limited companies. Lebaneat (Durham) Ltd was the main operating company, alongside Lebaneat (Wrap House) Ltd and Lebaneat (Yarm) Limited. Mr Sayed was a director (or the sole director) and a shareholder of each company.
Mr Sayed engaged Mr Maftoon to carry out building works at a restaurant in Yarm, North Yorkshire. There was no formal written contract entered into. Mr Maftoon subsequently referred to adjudication a dispute against Mr Sayed for unpaid sums. In this adjudication, My Sayed argued that the contract had been entered into by him in his capacity as director on behalf of Lebaneat (Yarm) Limited, rather than in his capacity as an individual, and that consequently the adjudication against Mr Sayed had been brought against the wrong party and the adjudicator did not have jurisdiction to determine the dispute. The adjudicator was sufficiently persuaded by Mr Sayed's argument that he resigned.
Mr Maftoon then sought Part 8 declaratory relief in the Technology & Construction Division of the Business & Property Courts (the TCC) as to whether the correct contract party was Mr Sayed or Lebaneat (Yarm) Limited.
The TCC's Decision
In the Part 8 Proceedings Mr Sayed and Mr Maftoon both relied on the prior dealings between them in which Mr Maftoon had carried out building work for Mr Sayed at his restaurants. Mr Maftoon had no particular detailed knowledge of Mr Sayed's business structures, although he was aware that he operated a number of Lebanese style restaurants under the “Lebaneat" moniker.
In his submissions, Mr Sayed relied in particular on an invoice which was sent by Mr Maftoon to 'Lebaeneat Ltd', stating that this was a clear demonstration that Mr Maftoon intended to contract with a limited company. Mr Maftoon submitted that the invoice was issued in error, given that Lebaneat Limited does not exist. He stated that he addressed the invoice in this way at Mr Sayed's request, as Mr Sayed had needed to use a different account to pay the deposit and accordingly wanted the invoice made out in this way.
The TCC noted that various invoices from other suppliers were provided to Mr Maftoon, but there was no indication on them that Lebaneat (Yarm) Limited was involved. The 'Lebaneat Limited' invoice alone did not provide sufficient evidence that Mr Maftoon knew that Mr Sayed was contracting on behalf of Lebaneat (Yarm) Limited.
Mr Sayed also argued that he would have used "I" instead of "we" in correspondence if he had intended to contract with Mr Maftoon in a personal capacity. However, the TCC held that "The use of the word “we” is ambiguous... sole traders frequently use the first person (“I” or “my”) when referring to their business in dealings with other parties and also the third person (“we” or “our”)."
The TCC also found that the following facts were relevant in deciding the identity of the contracting party:
- Mr Maftoon has issued an estimate addressed to Mr Sayed without reference to any company name;
- The majority of email correspondence between Mr Sayed and Mr Maftoon had no text identifying any limited company;
- The email addresses used by Mr Sayed and others at 'Lebaneat' did not clearly identify the involvement of a limited company; and
- The website for Mr Sayed's restaurants also failed to mention a limited company.
HHJ Davis-White QC commented that "The significance of this is that these matters do not provide material from which it might be inferred that Mr Maftoon did in fact know that in his dealings with Mr Sayed, Mr Sayed was acting on behalf of the company."
The TCC then concluded that Mr Sayed had contracted with Mr Maftoon in his personal capacity and therefore was personally responsible for any sums due.
Best practice is to enter into a formal written contract before any works or services are provided. If no formal written contract exists, parties should ensure that any invoices are addressed to the correct entity. A director should expressly confirm in writing (such as an email) if he is contracting on behalf of a limited company.
This case is an encouraging example of a dispute being dealt with by the TCC in a swift timescale despite the Covid-19 pandemic. Proceedings were commenced on 22 April 2020, with judgment handed down just 2 months later on 26 June 2020. This shows that the courts are still able to offer a time and cost effective resolution to issues which may arise in adjudication by using the Part 8 Procedure.
This case is also a pertinent reminder that it is a breach of regulation 24 of the Company, Limited Liability Partnership and Business (Names and Trading Disclosures) Regulations 2015/171 for contracting documents to not contain the details of the relevant contracting company. It is therefore essential in any commercial agreement that there is total clarity as to who the contracting parties are, in order to avoid unnecessary complications later. This is particularly important for individuals who may act in different capacities at different times in the normal course of their dealings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.