For a construction contract to have a point beyond just the joy of paperwork, it needs to be enforceable.
And of the many common issues that might affect enforceability, one seems to rear its unpleasant head fairly often: you don’t actually know who your contract is with.
This is because contracts can only be enforced, and lawsuits can only be brought, against legal entities.
So let’s find out what to do and what to avoid in the “party” details on your next contract.
The Problem of Non-Entities
A human being is a legal entity. That means one of your inalienable rights as a person is that you can be sued – which probably isn’t that comforting.
However there are plenty of things with names that you might think are legal entities, but actually aren’t.
The issue here is that sometimes figuring out who or what the legal entity is can be painful, especially if there is no public database of information that helps you figure it out.
So, if you end up in a dispute or needing to collect a debt, you come to your lawyers and they actually have nobody to chase. They can write letters or make phone calls, but ultimately if they need to commence Court proceedings, they won’t be able to unless they can reason out who the actual defendant is going to be.
And that isn’t always as easy as it sounds.
That being the case, let’s take a look at a few common types of entity and what information you want to be double-checking.
Humans are easy – you get their name, they are your customer, and you can sue them.
Companies are probably the most common form of business structure used for running a business.
A company is a legal entity – you can sue it.
But you want to be sure that the company named on the contract is actually the “person” you are dealing with – so how do you do that?
While it’s not always this obvious, you’ll notice that you’re dealing with a company if your customer fills out their details like:
- Company Name Pty Ltd
- I’m A Company Ltd
- Companies R Us ACN 123 456 789
One common mistake we see is where the contracting parties are identified by Australian Business Number (ABN). Contrary to common belief, an ABN does not always give you a meaningful identification for the party you are dealing with – it’s more a taxation issue than an identification issue (we’ll discuss this more below in relation to business names and trusts).
The identification number you want for a company is its Australian Company Number, or ACN. This is unique to the company and cannot be changed. You can identify the company by its ACN whether it changes its name or details or anything else.
So if you even think you’re dealing with a company, ensure you get the ACN, not just the ABN.
I might run a business called Chris’ Cricket Clothes.
So, you enter into a contract with me and I fill out Chris’ Cricket Clothes in the details.
But who is your customer?
If you have a dispute, who are you suing? If I haven’t registered my business name (which, let’s be honest, most people don’t) then you might have a real challenge trying to figure that out.
Now if I gave you an ABN you might be able to look that up, but not always. If, for example, that ABN simply shows a trust (see below) then you’re out of luck.
Of course, you might assume that you get to sue me, but what if that’s not right? What if it’s a partnership, or a company, or my wife owns the business, or it’s completely fictitious? You’re going to waste a bunch of money finding out the hard way.
Business Names are simply a label that is owned by, or used by, an actual legal entity.
So I could have a business name, my company could have a business name, a partnership can have a business name, and so on.
But just knowing the business name isn’t usually good enough. Find out who owns the business name, and ensure that they are your customer.
If ever there was an operating structure that accountants used to confuse their own clients, it was the trust.
You might notice you’re dealing with a trust if your customer indicates they indicate their customer or trading name is:
- Company Name Pty Ltd as trustee;
- The Such and Such Trust; or
- Company Name atf the Company Name Trust (atf stands for “as trustee for”)
A trust is not a legal entity. Rather, a trust is a relationship where the legal ownership of something is split from the beneficial ownership of something.
Instead, when you contract with a trust you are actually contracting with its trustee – that is, the entity (usually a person or company) who has the legal ownership of the trust assets. It is the trustee that owns things, the trustee that does things, and the trustee that sues or gets sued.
Beyond the lack of legal entity though, having a trust only named on a contract (like in example 2 above) is deeply unsatisfactory for a number of other reasons:
- Inevitably they are identified by ABN. This gives you no useful information, since a trust can actually have a completely different ABN from its trustee.
- Trusts can change their trustees and you wouldn’t even know.
- There is no public register of who is the trustee of a trust – so if there is a dispute and your other party decides to abscond, good luck finding out who they are and where they are.
If you are dealing with a trust it’s imperative that you identify the (current) trustee.
It can also be useful to ensure that your contract contains a clause requiring the other party to notify you of any change to the trustee. Of course your contract should probably have some other clauses about trust assets and the like, but that’s a conversation for another day.
A partnership in its true form is just as the name suggests – a group of people (or entities) acting in concert. However, despite acting in concert they have not formed a single entity through which to function – they remain separate from each other.
If you contract with them, or deal with them, then you are strictly entering into a contract with all of them.
Often a partnership will have a registered business name or style under which it operates. Provided you are satisfied that the identity of your other party is clear, then it’s probably OK to have that label in your contract rather than filling in 32 different names of all the partners.
But the primary point here is the same as all the others: be clear both in your own head and on your contract who you are dealing with.
There are two (main) types of joint venture:
- Incorporated joint ventures – you can treat these like companies (or trusts, or both depending on the specifics);
- Unincorporated joint ventures.
If you aren’t sure which it is, then ask.
In an unincorporated joint venture you need to ensure that you know the actual legal entity of each JV partner. This is because, like a partnership, you are effectively entering into a contract with each JV partner.
So, if one of the JV partners is identified only as a trust, then you need to read that section and check that information. If it identified only by business name and ABN then you need to drill down to the underlying entity running that business. And so on…
Practical Paths to Avoiding Pain
The problem of having non-entities on your contracts is that it’s going to cost you money.
Money spent doing searches, reasoning out entities, writing letters and generally attempting to do things that were fairly easy to sort out right at the beginning.
Here’s our suggestions for some simple checks on the most normal entities you’ll likely come across:
- If your contracting party identifies itself as a company, then do a quick free ACN search at ASIC to ensure that the ACN provided matches the name provided.
- If your contracting party identifies itself as a business, search the ABN provided here: https://abr.business.gov.au . You can also search by business name at https://asic.gov.au to find out who the “holder” of a business name is.
- If there is a clear answer from that search who owns the ABN or business name then:
- For individuals, name the individual as the customer (you can put “trading as” the business name if they prefer – eg, “Chris Hargreaves trading as Chris’ Cricket Clothes”);
- For companies, name the company and its ACN as your customer details (again with trading as, if required)
- If the result says “the trustee of the [insert name] trust” then you’re dealing with a trust – move on to step 4.
- If your contracting party provides only a trust, insist that they identify the trustee and provide a relevant ACN if it is a company. That company is your customer. You would complete it as “Company Name as trustee for the Company Name Trust”.
Once you know them these steps take only a few seconds for each contract, and will save you innumerable headaches down the track in the event of a dispute. Of course there are more complicated searches you can do to investigate details, but these simple free searches can help a lot.
Need help knowing who your contract is with? Give us a call and we’ll see if we can help you out.