Legal notes The law recognises a company as a legal entity with an identity that is distinct from that of its directors or shareholders. This difference in identity can cause problems, as Stuart Pemble explains
Key points
• There are strict legal requirements designed to make it obvious when a company is acting in its own name.
• Very clear evidence will be needed to persuade a court that an individual who appears to have signed in their own name is in fact doing so on a company’s behalf.
In 2003, Dr Muneer Hamid wanted to build a new showroom for his furniture shop in Rochdale. That business was run through a company – Chad Furniture Store Ltd (Chad Ltd) – of which Dr Hamid was the sole shareholder and director.
On 8 October 2003, the land for the new store was acquired (by way of a 999-year lease at a peppercorn rent) by Dr Hamid personally and not his company. Dr Hamid then went about appointing a team to help with design and construction of the new shop, including architects (Primrose Designs) and a contractor (Barnfield Construction Ltd).
Primrose Designs in turn introduced Francis Bradshaw Partnership (FBP) to Dr Hamid to act as engineer for the project – a contractual relationship that was ultimately considered by the Court of Appeal in Hamid (t/a Hamid Properties) v Francis Bradshaw Partnership [2013] EWCA Civ 470; [2013] PLSCS 92.
The dispute
The case centred on whether FBP was liable to Dr Hamid for the alleged defective design of a retaining wall that separated the rear of the new showroom from some terraced houses further uphill. One of the defences raised by FBP was that it had no contract with Dr Hamid. It argued that the contract was between FBP and Chad Ltd. As Jackson LJ acknowledged in the leading judgment of the Court of Appeal:
“There were perfectly understandable tactical reasons for this defence. In particular, if Chad were joined or substituted as claimant it could be argued that Chad suffered no loss because it did not own the property.” [23]
At first instance, HHJ Raynor QC directed that the question of whether the correct claimant was Dr Hamid or Chad Ltd should be dealt with as a preliminary issue which he then decided in Dr Hamid’s favour. FBP appealed.
Companies Act 1985
The rules governing what companies can and cannot do are lengthy and complicated. Although since replaced by the Companies Act 2006, the relevant set of statutory rules so far as Dr Hamid and Chad Ltd was concerned were to be found in the Companies Act 1985 (the 1985 Act).
The 1985 Act placed a number of strict requirements (breaches of which were criminal offences punishable by fines) on companies all to the broad effect of ensuring that it was clear to any third party that they were dealing with the company. These included the making sure that the company’s name was clearly legible outside every office or place of business (section 348) and on letters and other publications (section 349). All correspondence from the company had to include details such as its registered address and company number and the fact that the organisation was a company and not some other form of legal entity (section 351).
The contract with FBP
Dr Hamid met with Simon Preugschat of FBP on 8 March 2004. That meeting was followed up two days later by a phone call and then a letter. At first instance and on appeal, it was accepted that the contract was therefore part oral and part written.
The letter was written and signed by Dr Hamid and was on notepaper headed Moon Furniture, which was (although this was not known by Mr Preugschat) the trading name of Chad Ltd. There was no mention of Chad Ltd’s name, nor any of the other details required by the 1985 Act. When a building contract was subsequently entered into with Barnfield Construction, the name of the employer was given as Dr Hamid and not Chad Ltd.
Who was the contracting party?
Jackson LJ helpfully reviewed the leading authorities concerning contracts where the identity of the parties is in dispute, including the earlier decision of the Court of Appeal in Internaut Shipping GmbH v Fercometal SARL [2003] EWCA Civ 812. He summarised a number of key themes:
? There is an exception to the parol evidence rule – the common law principle dating back to Victorian times that oral evidence cannot be used to vary the terms of a written contract – where there is a dispute as to the identity of a party to a contract in writing. In that instance, extrinsic evidence is permitted to help to resolve the dispute.
? The court’s approach is objective and not subjective. The answer will be what the reasonable person who had all of the relevant knowledge would decide was the correct contracting party. The thoughts of the people involved – in this case Dr Hamid and Mr Preugschat – are irrelevant.
? A court can correct the name of a party as a matter of contractual construction. No formal variation or rectification of the contract is needed.
? Perhaps most importantly for this case, and following Internaut, there is no relaxation of the parol evidence rule where the dispute is about whether the individual signing the contract was doing so in their name or as agent for a third party. The person who signed is deemed to be the contracting party unless it is clear on the face of the document that the signature was as agent; or there is compelling evidence that all of the parties to the contract knew that the person signing was doing so as an agent or representative of that third party.
Applying these principles to the facts, Jackson LJ had no difficulty in agreeing with Judge Raynor that Dr Hamid had signed the contract in his own name:
“I approach this issue in the manner set outin Internaut. Dr Hamid’s signature at the foot of the letter is, as it were, his seal upon the contract. He therefore became a contracting party unless he qualified his signature or otherwise made it plain that the contract did not bind him personally.” [64]
Jackson LJ did not think the fact that the letter of 10 March 2004 was written on Moon Furniture notepaper was of itself sufficient qualification, not least because there was no mention of Chad Ltd anywhere in the letter. The letter’s non-compliance with any of the 1985 Act requirements and Mr Preugschat being unaware that Moon Furniture was the trading name of Chad Ltd also influenced the decision.
Finally, the judge felt that justice was best served by finding in Dr Hamid’s favour:
“It would be a distinctly odd state of affairs if the law compelled the conclusion that a company with no interest in the building was the employer” [72].
The judgment gives clear guidance to parties looking to raise a disputed identity argument. They should ignore it at their peril.
Stuart Pemble is a partner in Mills & Reeve LLP
