What is a legal person?

What is a legal ‘person’ – and why does it matter?

Ever wondered why we lawyers are at pains to clarify who exactly the other party is that we’re dealing with? Well, apart from being pernickety (a trait that tends to go with the territory, to be fair), here’s the thing: doing business safely and effectively includes knowing which legal person you are dealing with.

In law, a legal ‘person’ means an entity that the law recognises as having the capacity to hold rights and obligations. That includes individual human beings, of course, who can enter into contracts in their own name, and be personally liable for debts and legal claims. Then there is the corporate legal person – companies incorporated under statute, such as limited companies, who have a separate legal ‘personality’, distinct from their owners and directors. Companies can contract, sue, and be sued in their own name. Crucially for risk management, liability generally rests with the company, not with the shareholders personally.

Other types of legal ‘persons’ include limited liability partnerships, or LLPs. There is an important distinction here with a traditional partnership – where each person is responsible for the whole amount, not just their share (known as ‘joint and several’ liability).

Knowing who you are dealing with affects the risk assessment of a deal. Contracting with an individual is legally and financially different from contracting with a company – it is important to do your due diligence, or you could inadvertently end up dealing with a party who doesn’t have much in the way of assets or cash. Properly identifying the legal person allows businesses to assess credit risk, confirm authority to sign, and understand who carries the can if obligations are not met.

These distinctions really matter in contracts. If a contract names the wrong party, enforcement may become difficult or impossible. For example, let’s say a contract refers to a trade name (e.g. “Top Motors”), rather than the underlying legal entity (e.g. Dave Smith trading as Top Motors, or Top Motors Ltd.). Because a trading name has no legal personality, if a dispute arises, you may have nowhere to go to hold someone responsible.

Can you assume that an agreement signed by a company is valid?

I’m afraid not. Most companies are able to legally enter into a wide range of commercial contracts, unless the rules of the company (its articles of association) specifically restrict it. This is known as ‘capacity’. If a company enters into a contract without the requisite capacity, the contract may be void because it is acting beyond its powers (known as the ultra vires doctrine). So worth checking.

If a company does have the capacity to contract, another other thing to watch out for is whether the person who signed it was authorised to do so. The right to bind the company to a contract is known as authority. Authority can be actual (express or implied) or apparent. Actual authority arises from internal arrangements, such as board resolutions or delegated powers. Apparent authority arises where the company represents, through words or conduct, that an individual has authority, and a third party relies on that representation. Authority matters because without it, the contract may well be unenforceable.

Doesn’t the law give us some assurances here?

Yes – UK law does provide some protection for third parties doing business with companies. The Companies Act 2006 (s.40) allows a person dealing with a company in good faith to assume that the directors’ powers are free of internal limitations. So, if a director signs a contract on behalf of the company, the contract will generally be valid, even if internal approval procedures were not followed. But where the person who signed is not a director, this is where things can get a bit tricky.  If an exclusive supply contract is signed by the “Head of Procurement”, the signatory may appear to have authority. However, unless the role customarily includes that power, or there is a delegation of authority in place, the contract may not be binding. This can leave the other party without the expected contractual protection.

What are the checks we should make?

Some due diligence on who you are dealing with is essential to manage business risk effectively. Ask yourself:

• Who is this legal person exactly?
• Can this business enter into this contract?
• Is the person signing the contract entitled to bind the company?

Business letters, emails and websites must by law include corporate details – so use these details to check Companies House records, and to confirm that someone is a director. If you need to, request evidence of delegated authority. These basic checks will help to ensure that you know who you’re dealing with – and that contracts are enforceable and commercially reliable.