What's in a Name?
Below is an article written by Allan Donovan on the subject of capacity to enter contract.
What's in a name?...well, quite a lot actually. Especially if that name happens to be the name of your limited company.
The Issues. My instructions from a local authority were to prepare the terms and conditions of contract that were to go out with the Invitation to Tender and would eventually form the basis that the Parties were to contract upon. Following the return of tenders and evaluation process I was instructed to draw up the contract. It was fairly obvious that the company that had been awarded the contract were using a trading style or name that was evidently not capable of entering into a contract by itself.
Sure enough, a trawl through the correspondence file revealed that the contract should have been awarded to the "parent" Limited Company. A quick check on the Companies House website confirmed this and I proceeded to draft the contract with the Limited Company "trading as". Some time after the contracts had been sent out for signatures the client department contacted me to say that the company which would be carrying out the service would not be the parent company trading as but, rather, an altogether different limited company that had, until now remained a dormant company as part of the group and could I simply change the name on the face of the contract to reflect this, if it wasn't too much trouble?
I had reviewed the file and was comfortable that the contract could be drawn up with the parent company "trading as". This was acceptable because it was obvious from the correspondence and in any event, a trading name or style could never have the capacity to enter into a contract by itself, so, nobody had been misled or disadvantaged. However, a new limited company was a completely different ball game. I explained to the client the intricacices of company law and why an entirely separate limited company that had played no part in the tender process could not be awarded the contract. The client was going to have to explain to the company that the contract would have to be entered into as the parent company "trading as", or not at all. Meanwhile, I set about trying to find an alternative solution that I might be able to offer.
Fortunately, the contract allowed for the services to be "subbed out". But that is always a risky exercise so I also invoked another clause to obtain a parent company guarantee.
The Solution. The contract was entered into by the parent company "trading as", as it could only have been. A novation agreement was entered into along with a parent company guarantee so as to obtain some protection for the local authority.
Lessons to be Learnt.
Local Authority Officers; take time to find out who it is that you are proposing to enter into a contract with at an early stage. It takes a matter of minutes to do a web check on a company using the Companies House services at www.companieshouse.gov.uk - any limited company that is using a trading style or name that is different from the name of the limited company should, as a matter of company law, state that is the case somewhere on their stationery. However, this doesn't always happen. If you are in any doubt about the trading status, ASK! It could save your council a lot of time, effort and money at a later date.
Tenderers; There may be perfectly legitimate and acceptable reasons for wanting an hitherto dormant company within the group to undertake the provision of the service, rather than the parent company. That is between you and your accountant. However, you should also know that each limited company is an entirely separate legal entity in it's own right. If you are using a trading name that is different to the name of the limited company then you should make that clear on your stationery. But if one limted comapany tenders for work it is only that limited company that may enter into the contract. You may not be able to rely upon a clause allowing assignment, subcontracting, or novation. Or, indeed, the genorisity of the local authority concerned. They will be under no obligation to award the contract to anyone other than the limited company that was awarded the contract following the successful tender by THAT limited company.
Allan J. Donovan
Allandon Services Limited
