In the world of commercial contracting, accuracy is fundamental. A crucial, yet frequently overlooked, aspect of contract drafting is correctly identifying the legal entity of the party you are intending to contract with, be it a customer, agent, or even a supplier.
The risks of incorrect legal entity identification
Whether your counterparty is a limited company, partnership or sole trader, incorrectly identifying the party, for example, by using a trading name instead of the registered legal entity or reflecting initials rather than a full name, can undermine the entire contract, leading to consequences. If a contract is entered into with a name that does not correspond to the correct legal entity, it becomes difficult, if not highly unlikely to enforce.
If, for example, your customer is ABC Limited trading as Great Goods, but your contract only refers to “Great Goods” as the contracting party, then you have not contracted with the correct legal entity. This means you may not be able to enforce the contract against ABC Limited or obtain a valid judgment in its name. Even if you secure a judgment against “Great Goods,” enforcement is likely to fail unless corrected because the judgment debtor’s name would not match the legal entity that owns the assets.
Beyond enforceability, misidentification can also create regulatory risks, for example, leading to a breach of anti-money laundering regulations if the necessary regulatory searches have been carried out against the incorrect or incomplete legal entity name.
Common legal entity identification mistakes
Common pitfalls include:
- assuming a trading name is the registered company name without verifying it on an official register or simply using a trading name instead of the registered company name.
- confusing group companies or subsidiaries or contracting with dormant companies.
- not reflecting the complete or correct identity of a sole trader. For example, use full name: “Peter Edward Smith t/a Perfect Plasterer” rather than just “P Smith” or “Perfect Plasterer”.
- not identifying the correct name and status of a partnership or failing to correctly identify all individual partners (where relevant).
- Entering into a contract reflecting the partnership name only means enforcement is then typically limited to partnership assets (i.e. assets owned in the name of the partnership, which may be appropriate where it is, e.g. an LLP). However, individual partners may also become personally liable depending on the type of partnership; therefore, identifying each partner correctly and separately may give the ability to pursue them and enforce against their personal assets.
To mitigate risk, organisations should consider, for example, implementing robust onboarding procedures, including verifying legal status through official registries, capturing complete legal entity names, company numbers, and registered addresses (or home addresses in respect of individual partners and sole traders) and checking formal identification documents.
Comment
Ultimately, knowing your client is not just a compliance exercise; it is a cornerstone of sound commercial practice. Accurate legal entity identification protects your organisation, strengthens your contracts and enforcement position when it matters most. It is important, therefore, that both the introduction to the contract identifying the contracting parties and the signature block (reflecting the contracting parties signing) are accurate and consistent.
In an increasingly complex business landscape, precision in contracting is not optional. It is essential. And it begins with knowing who you are legally carrying out business with.
How can we help?
Cathy Clark is a Legal Director in our Commercial & IP team, specialising in commercial work (including contract drafting and advice).
For more information on the subjects discussed in this article, please contact Cathy or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online enquiry form.
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