Is the contractor a limited company or a sole trader?
“Houston, Helix Law, we have a problem”. Unfortunately, the question above is one that you usually only ask yourself when something has gone wrong and you need to know who you can hold accountable. The answer can have extremely significant ramifications but it’s not always clear and obvious.
If you are dealing with a problem with a contractor, or you are a contractor looking for advice, the construction team at Helix Law have decades of experience dealing with disputes. Our team is well positioned to help in cases where something has gone wrong. If you need advice on the next best steps for your situation, reach out to us today.
What is my Contactor’s Status?
Although you may be on first name terms with the builder, perhaps having been introduced to him by an acquaintance and so you just consider that you are in a contract with that person, from a legal perspective, who you have contracted with is assessed objectively rather than subjectively.
In either case, you will have dealt with at least one human person. That person may have been a sole trader – a self-employed individual. Alternatively, that person may have been the director of a limited company, which is a separate legal entity owned by a single or multiple shareholders that, because it’s a legal entity, can itself enter into contracts.
It’s also possible that the person you’ve dealt with is an employee of either a sole trader or a limited company – both can hire them – who has contracted with you on the sole trader’s or limited company’s behalf.
Perhaps though, you found the builder on a trade checking or review website and it wasn’t a person’s name but a business name, for example “Southern Renovators” or ”London Top Extensions”. To add convolution, both a limited company and a sole trader is free to use a separate trading name subject to some narrow restrictions in what the name itself can and can’t include.
The first and obvious step in attempting to answer the question is to turn to the documentary evidence. In a perfect world, you have a written, signed contract in which the contractor is expressly defined both as a party to the contract and the capacity of the signatory is also clearly stipulated. For example, the contractor is stated to be [person’s name] and the contract has also been signed in the name of the individual or, the contractor is stated to be [name of company] Limited and the contract is signed by [individual’s name] for and on behalf of the company.
What if I have no Written Contract?
Often though, life isn’t simple and the builder wasn’t highly conscientious – which is why you have a problem – and they didn’t present you with a detailed written contract at the outset. In this case, often people can think that they don’t have a contract at all. However, legally enforceable contracts can be entered into by agreeing a written quote or by an exchange of WhatsApp messages, or even orally with no written evidence of the terms agreed.
Sometimes invoices can give clues. A limited company is legally required to include specific information on its invoices for example the company’s full registered name (this therefore must include “Ltd” or “Limited” at the end, the registered company number and the address of the company’s registered office (it must have a registered office). But what if the legal requirements haven’t been complied with or you’ve simply paid on demand and without an invoice having ever been issued.
There are all sorts of other permutations that don’t fit neatly and tidily or have changed during the project and that therefore lead you to asking yourself the question and arriving at this webpage.
Why Contractor Status Matters
So, why does it matter? The main reason why it can be of huge importance when something goes wrong is due to the extent of liability. The clue is in the name. A sole trader has full unlimited liability for their business debts – they are essentially personal debts.
A limited company, though, has liability ‘limited’ only up to the share capital of the company. Shareholders of a company are not liable for the debt of the company beyond the value of their shares. Directors, if they are not also a shareholder, generally have no liability whatsoever, although this is discussed further below.
This means that if you have a claim against a sole trader and you ultimately obtain a judgment against them, you can seek to enforce the judgment against not only the business assets such as vehicles or tools but also personal assets such as any interest in property that the sole trader owns, including their home. On the other hand, if you have a judgment against a limited company then you can only seek to enforce it against the assets of the company – this may not extend beyond tools and a van (which may even be on finance). If the company goes into liquidation, then you may be one of many creditors standing to receive little to nothing. The director(s) can then incorporate a new company that you don’t have any claim against. Whilst a sole trader can go into bankruptcy, due to the more serious negative impacts that stay with the individual for a number of years, this is far less common.
The Key Differences Between Sole Traders and Limited Companies
The financial standing and whether there’s any relevant insurance policy needs to be considered at an early stage therefore, since pursuing a claim is a big commitment – even if you don’t employ solicitors, you will pay dearly with your time and in stress. With a company you can get some indication of its financial position from the accounts it is mandated to file annually with Companies House and which are publicly available. A company is also required to register any legal charges it has granted over company assets with Companies House, and this again is publicly available information. A sole trader does not have any public filing obligations though, and so understanding a sole trader’s financial position can be extremely difficult or even impossible.
Even if you’re deadset on pursuing a claim regardless, there can be practical issues. A limited company is required to have a registered office, which can be looked up on the Companies House website. Service of documents, such as a claim form, sent by first class post to the registered office is valid service, as stipulated in the Civil Procedure Rules Part 6. You may have no idea where the sole trader lives, however, and service by email is not valid service (unless the recipient expressly gave permission beforehand to be served by email or the court has granted permission).
How to Tell Which Structure You Are Using?
This assumes, of course, that you have correctly identified whether your builder is a limited company or sole trader to be able to initiate your claim correctly. If you’ve got this wrong and you proceed to issue a claim against the wrong entity, then you’re at risk of not only failing in the claim but if the other side has instructed solicitors, being ordered to pay those legal costs. By default, you’d also be liable to pay their legal costs if you found out before trial that you’d got it wrong and you filed a withdrawal of the claim.
Adverse cost risk is also an issue where you know the contracting party is a limited company but you want to pursue a claim not against the company but against an individual director i.e. get behind the limited liability of a company or “piercing the corporate veil” as it’s commonly known as.
In certain circumstances, it is possible to do but whether it’s possible is extremely fact sensitive. It typically relies upon the director acting outside of their director duties and personally committing a tort or criminal act. The primary concept behind limited companies and the reason for the system’s existence, however, is to allow people to take business risk without the fear of losing their personal assets – which would otherwise stifle economic progress.
This means the law has been designed to create a shield from personal liability and it’s inherently difficult to get behind. Unfortunately, therefore, whether you are able to do so is not something that someone can just answer over the phone or you could rely on Chat GPT for. You will need professional legal advice. If you wrongly bring a claim against a director and the court deems that the director didn’t commit any tort or criminal act then you will most likely be ordered to pay the director’s legal costs for successfully defending the claim.
Get Clear Advice on the Right Structure for your Contracting Business With Helix Law
What should be clear from this article is that the question of who you’ve contracted with can be difficult to answer and often requires a careful review by a qualified expert. Getting it wrong or not thinking about it at all and also not thinking about the prospects of being able to enforce a judgment can be extremely expensive and time consuming – leaving you in a worse position than you’re in now.
Because this question is so common, we are extremely experienced in providing advice and the answer. In either case, it’s important you don’t delay. We would love to help you to resolve the problem and avoid any mistake that worsens your position. Contact Helix Law today.
