DO YOU KNOW WITH WHOM YOU ARE DOING BUSINESS? -Cox Yeats Attorneys

Companies are an excellent way to pool capital and to embark on business ventures whilst minimising personal exposure to business risks. Without them, many a budding entrepreneur would not be prepared to take the leap of faith necessary to change the world. However, the use of companies can also create confusion about who it is that can be held to account, particularly when companies are incorporated to conduct service businesses (or businesses with a service component).

Relationships are important in business. You may have a very good relationship with Mr A. You may trust him implicitly. You may engage him to provide a service, only to receive a contract in the name of his company, ABC (Pty) Ltd. That doesn’t seem like a problem, and you sign the contract on the back of your relationship with Mr A.

Unfortunately, there may be a problem. Legally speaking, your business is in no meaningful way being conducted with Mr A. You are now a customer of ABC (Pty) Ltd. The default position, broadly speaking, is that you cannot hold Mr A directly responsible for the contract, regardless of whether he is a shareholder, director or employee of ABC (Pty) Ltd. Furthermore, unless the contract contains the necessary language, you cannot require that Mr A provides the service on behalf of ABC (Pty) Ltd.

You might also, to your horror, learn that Mr A has decided to retire the day after ABC (Pty) Ltd signs the contract. Mr A resigns from all his positions and sells his shares in the company to Mr X, whom you have never met and with whom you have no relationship whatsoever. Absent specific wording in your contract, the fact that you do not know Mr X is irrelevant. You have a contract with ABC (Pty) Ltd, and Mr X can make the company hold you to that contract.

You might say that your contract prevents a cession of rights. That again is of no assistance, because a change in the shareholding of ABC (Pty) Ltd does not result in any cession of rights – the rights were originally held by ABC (Pty) Ltd and continue to be held by ABC (Pty) Ltd after the sale. What is required is what is commonly called a “change in control” clause; namely, one which allows you to terminate the contract (or take other action) if Mr A sells his shares in ABC (Pty) Ltd without your consent.

Assumptions can once again result in trouble if ABC (Pty) Ltd is a brand-new subsidiary of a large multinational group. You may be tempted to assume that you can rely on the financial position of the group and turn to other group companies if issues arise with ABC (Pty) Ltd. Once again, by default, that is not the case. It would be necessary for a group company to guarantee the performance of ABC (Pty) Ltd, or otherwise be bound to an obligation which you can enforce. Assumptions can compound, and it would be dangerous to assume that ABC (Pty) Ltd can bind that group company to your contract. Unless you have a piece of paper signed on behalf of the company you intend to hold accountable, you may find yourself unable to proceed against that company in the future.

A similar issue arises when dealing with restraints of trade. If you have a restraint signed by Mr A, that does not mean that you have a restraint signed by ABC (Pty) Ltd, and vice versa. You may find yourself in the undesirable position of having to proceed against the party whose conduct you care about less, in connection with the conduct of the party you care about more.

All of which is to say, it is very easy to nod along when told that companies have a separate personality. However, in the cut and thrust of day-to-day commerce, it is not always easy or natural to hold in mind the distinction between the company you are dealing with and the individuals you know and trust. Particularly when contracts are of long duration, it is crucial to make sure that those contracts bind all of the right people in all of the right ways and protect your position when people you know are replaced with people you don’t. 

DO YOU KNOW WITH WHOM YOU ARE DOING BUSINESS? - Cox Yeats Attorneys