August 21, 2023
August 21, 2023

Essential Considerations for Contracting with Legal Entities

Back to news archive

When entering into a contract, it is essential to be well-informed about the identity of the other party. Both you and the counterparty will have responsibilities and obligations under the contract, such as providing goods or services, or making payments, or both. Ensuring that you are contracting with a legal entity or “legal person” will mean that you can sue them if they breach the contract. Likewise, it is important to be aware of those who have the ability to take legal action against you.

Here, we provide some tips to help you navigate the complexities of contracting with various types of legal entities.

Tip 1: Always contract with a legal entity

You should only enter into a contract with a legal entity (or ‘legal person’), being one that can, under the law, sue and be sued. For example:

  • Individuals and companies - both are legally recognised entities capable of entering into contracts. When contracting with an individual or a company, it is essential to clearly identify the party’s legal name and their capacity to act.
  • Trusts - although not legal entities themselves, trusts will have trustees that are. Therefore, when dealing with a trust, the contracting party should be the trustee, whether it is an individual or a company. In the contract, the trustee can be identified as “ABC Pty Ltd as trustee of the XYZ Trust” or simply as “ABC Pty Ltd”.  A company quoting an ABN where the last 9 digits of the ABN are different from its ACN may indicate that it is acting as the trustee of a trust (the ABN may be that of a trust).
  • Partnerships - unlike individuals and companies, a partnership is not a legal entity separate from its partners. Therefore, all the partners would be parties to the contract. However, in the case of a large partnership, it may not be practical to name each partner as a party to the contract. Instead, because each partner is treated under the law as an agent of the partnership and the other partners for partnership business purposes, any partner, acting as an agent, can enter into the contract on behalf of the partnership. In some instances, a partnership may have a “nominee company” that is owned or controlled by the partners. This separate legal entity serves as a vehicle for entering into contracts on behalf of the partnership. The nominee company can sign the contract as an agent, nominee, or on behalf of the partnership.
Tip 2: Contract with the right party

Apart from ensuring that the other party is a legal entity, it is vital to confirm that you are contracting with the intended party. Mistakenly entering into a contract with the wrong party can lead to complications and difficulties, particularly in cases involving businesses operated through different entities. For instance, if an individual operates a business through a company, and you are a customer or supplier of the business, any contract with the business should be entered into by the company (as the supplier of goods or services, or your customer, as applicable), and not the associated individual (who may be a director or shareholder of the company). Contracting with the individual in this example could give rise to complications, such as if you needed to make a claim for defective goods or services supplied, or a claim for money owed to you, under the contract.  

To safeguard your rights, it is good practice to:

  • gather Information - before finalising the contract, enquire about the structure of the business of the other party. This will help you correctly identify the appropriate party with whom to enter into the contract. Questions to ask would include whether the counterparty’s business is operated through a company, trust, or another type of entity; and
  • conduct research - utilise online resources to identify and verify the legal entity you are dealing with. This could include conducting searches of ASIC’s database for company and business name information, using the Australian Business Register for ABN searches, running searches of the applicable domain name registry, and checking registered trademarks through IP Australia. These searches can provide valuable insights into the legal entity with whom you are dealing.
Tip 3: Confirm authority to contract

While verifying a party’s authority to enter into a contract may not be necessary where they are an individual or a company, it becomes crucial when dealing with trusts or partnerships, particularly in high-value or high-risk contracts. Consider taking the following steps:

  • Trusts: If an individual or a company is contracting with you as the trustee of a trust, you can request a copy of the trust deed to verify their power or authority to contract in that capacity. This verification is essential to ensure that the trust’s assets will be available to fulfil the party’s contractual obligations and any future claims you may have against them.
  • Partnerships: When entering into a contract with a person on behalf of a partnership, it may be necessary to obtain evidence of their partnership status. This can be achieved by requesting a copy of the partnership deed or a document appointing them as a partner. Alternatively, you can ask for a power of attorney, or a similar document signed by all partners, authorising the person (or nominee company, if applicable) to enter into contracts on behalf of the partnership.

By verifying that the counterparty is a duly recognised legal entity, possesses the necessary authority to act and meets your satisfaction as the intended contracting party, you can mitigate risks, protect your interests, and establish a solid foundation for successful contractual relationships. For more information or to seek specific advice tailored to your unique circumstances, please contact any member of the Sierra Legal team, whose contact details can be found here (LINK).

Other articles you may be interested in