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Breach of Contract establishing the correct party to sue |
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Many creditors have difficulty in establishing the correct party to be sued following a breach of contract. A counsel of perfection will always be to accurately establish the customers identity with typical variants being sole trader, partnership, or limited company.
A classic example where problems can arise and a possible solution can be seen in the Scottish case of John Stirling, t/a M&S Contracts v Westminster Properties Scotland Ltd. A decision by the highly respected Judge, Lord Drummond-Young, of the outer house of the Court of Session, serves a useful reminder to creditors.
The case involved a construction contract. Initially it had been entered into by John Stirling who carried on business as a sole trader. Later during the contracts duration he incorporated M&S Contracts Limited. He was the sole director of that company. Following a dispute about payments due by Westminster, M&S contracts limited commenced a formal adjudication process to which Westminster objected on the grounds that the Limited Company were not a party to the contract as opposed to John Stirling, with whom the arrangements had been made.
Ad-hoc Agency
Whilst there is no doubt there were two legal persona, the Judge resolved the issue by using the concept of ad hoc agency and, in so doing, introduced a common sense solution. He said, applying separate legal personality concept, with its full rigour would be too simplistic given that in common practice it is not uncommon to find the niceties regarding separate legal personality are not followed .
His Lordship gave two instances of this. The first was where a contract was made by a sole trader in his name, but the business is subsequently transferred to a company. In such a situation it is not uncommon for the correspondence to be in the companys name, although the sole trader is the party to the contract.
The second instance was where you had a group of companies, and one company in the group is a party to a contract, but another company deals with the correspondence.
Lord Drummond-Young said that if a liberal construction of the correspondence was applied, this would lead to a nonsensical result. The only sensible inference is that the company & is acting as an ad hoc agent for the contracting party (here, the sole trader) with regard to the correspondence and that this gave effect to the parties obvious intention.
If matters are addressed in terms of ad-hoc agency then the contracting party will be the person who is subject to the rights and duties under the contract.
Conclusion
This decision reflects a common sense approach which the Court has adopted.
However it should not be confused with the often thorny issue of establishing the correct identity of the contracting party. In a situation where the creditor has contracted with a limited company as opposed to an individual from which the evidence shows with whom they thought they had contracted with, then the contract will be with the limited company.
Where the ad-hoc agency argument will perhaps help creditors will be situations where they first contracted with a sole trader. Later that trader transfers assets to a limited company (often without advising the creditor). Thereafter the individual refuses to settle the creditors bill on account of the liability now being the companys.
It will be open to the creditor to argue the limited company was acting as an ad-hoc agent of the true debtor, being the sole trader, whose liability will, of course, be unlimited.
Questions?
This article, along with many other news articles can be found on our website www.debtscotland.com . Should you have any questions or comments then please dont hesitate to contact me using the details below.
Best regards,
Stephen Cowan
Managing Partner
Yuill + Kyle
Debt recovery + Credit control Lawyers, Scotland
scowan@yuill-kyle.co.uk
W: http://www.debtscotland.com/
T: 0141 331 2332
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