Which Group Company Should Sign a Customer Contract - and What If the Wrong Entity Already Signed?

If your business operates through more than one company under the same ownership, you may need to decide which company should actually enter into customer contracts.

For example, you might have a holding company and an operating company, or an operating company and another company that owns your intellectual property. These related companies are often referred to as a corporate group.

So, does it really matter which company enters into the contract if they are all part of the same business?

Yes.

Under section 15 of the Companies Act 1993, a company is a legal entity in its own right, separate from its shareholders. That also means separate companies within the same group aren't automatically interchangeable.

The company that enters into the agreement will generally be the one taking on the contractual rights and obligations.

And if the wrong company has already entered into it? That doesn't necessarily make the contract invalid, but it can create a problem that needs to be properly understood before you try to fix it.

Why Does The Contracting Company Matter?

When you own several companies, it's easy to think of them as different parts of one business.

Legally, however, each company has its own identity.

If Kiwi Operations Limited enters into a Customer Contract, Kiwi Holdings Limited doesn't automatically become a party simply because it owns the operating company.

The contracting company may be responsible for providing the goods or services, receiving payment and meeting the obligations set out in the agreement.

That might include confidentiality requirements, warranties, indemnities, liability provisions and commitments around intellectual property.

So, the contracting entity shouldn't just be whichever company happened to appear in the last version of your template.

It should match how you've deliberately structured the business.

Which Company Should Enter Into The Customer Contract?

Usually, you want the contracting company to reflect the role that entity is supposed to perform.

There isn't one company that will always be the right choice.

One company might employ your team and provide services to customers. Another might own your intellectual property or sit above the operating business as a holding company.

You should consider which entity is intended to deal with the customer, provide the goods or services, receive payment and take on the associated contractual risk.

The promises in the agreement matter too.

If the customer is being granted rights to use your software, brand or another piece of IP, for example, the contracting company needs to own those rights or have appropriate permission to grant them.

Your Customer Contract should therefore line up with how the wider business actually operates.

What About A Dual Company Structure?

A Dual Company Structure is a good example.

A common arrangement might involve:

HoldCo owning important assets such as IP.

OpCo operating the business, dealing with customers and taking on trading liabilities.

Keeping those functions separate can help isolate valuable assets from some of the risks involved in the day-to-day business.

But that separation needs to be reflected in the actual legal arrangements.

If OpCo has been set up to enter customer agreements, having HoldCo sign those contracts instead can expose HoldCo directly to contractual liabilities that the structure was designed to keep within OpCo.

Similarly, if HoldCo owns IP that OpCo needs to provide its goods or services, an Intercompany IP Licence can document OpCo's right to use it.

The important point isn't that OpCo must always contract with customers.

It's that the contracting arrangement should match the structure you've actually chosen.

Is The Wrong Company Named - Or Did The Wrong Person Sign?

These are two different problems.

You might have:

the wrong company identified as the contracting party, or

the correct company identified, but a question about whether the person signing had authority to act for it.

Section 180 of the Companies Act 1993 deals with methods by which a company can enter into contracts and other enforceable obligations, including circumstances where a person acts with the company's express or implied authority.

So, if Kiwi Operations Limited is correctly identified throughout the agreement but there is a question about the person who signed it, that's primarily an authority or execution issue.

That's different from Kiwi Holdings Limited actually being identified as the supplier when Kiwi Operations Limited was supposed to enter the contract.

If you're unsure which problem you're dealing with, it can be worth getting the agreement reviewed before making changes.

What If The Wrong Company Already Entered Into The Contract?

Don't assume the contract automatically fails - but don't ignore the mismatch either.

For example, perhaps the written agreement identifies Kiwi Holdings Limited as the service provider.

However, Kiwi Operations Limited has actually provided the service, sent invoices and received every payment.

The first step is working out what the agreement says and how the arrangement has operated in practice.

Sometimes a problem might simply involve the intended company being incorrectly described.

That's different from an agreement that actually identifies another existing company within your group as the contracting party.

In that situation, questions can arise about which company owes the contractual obligations, which company can enforce the agreement and where any contractual liability sits.

Having the same shareholders or directors doesn't necessarily answer those questions.

Where the position isn't clear, legal advice can help establish what the existing agreement actually does before you make changes.

Can You Just Change The Company Name?

Generally, you shouldn't simply edit an existing signed agreement and assume the contract has moved to another company.

Replacing one contractual party with another can change who holds the rights and who owes the obligations.

Depending on the situation, the parties may need to agree to a novation or use another appropriately documented arrangement.

A novation is commonly used where the intention is to replace one contracting party with another, rather than merely transfer certain contractual rights.

The existing agreement may also include requirements or restrictions around assignment, transfers and consent, so it is worth checking the contract itself before deciding what document is needed.

What If You Restructured After Signing?

Sometimes there was nothing wrong with the original agreement at all.

Perhaps Kiwi Limited originally ran the entire business and entered into customer contracts.

You later established Kiwi Operations Limited to take over the trading side of the business.

Creating the new company doesn't, by itself, move the old company's existing contracts across.

The original company remains a separate legal entity, so its existing agreements need to be considered as part of the restructure.

Depending on their terms and the circumstances, contracts may need to be novated, transferred or otherwise dealt with.

Your Customer Contracts should also be updated so new customers contract with the intended entity going forward.

If customer or supplier agreements are important to the business, getting legal advice before completing a restructure can help identify which contracts need attention and whether third-party consent is required.

What If Your Contract Only Uses Your Trading Name?

A customer-facing business name isn't necessarily enough to identify the legal company behind it.

For example:

Kiwi Labs

might actually be operated by:

Kiwi Labs Operations Limited.

Section 25 of the Companies Act 1993 requires a company to ensure its name is clearly stated in written communications sent by or on behalf of it and in documents that create legal obligations for the company.

You can still use your brand throughout the agreement.

The contract might identify Kiwi Labs Operations Limited trading as Kiwi Labs, before using “Kiwi Labs”, “we” or “us” as a simpler defined term throughout.

The important part is that the legal entity behind the brand is clear.

Getting The Contracting Company Right From The Start

If you operate through several related companies, decide which one should enter customer contracts and then make sure the rest of your setup follows that decision.

Your contract templates, invoices and payment arrangements should be consistent with the structure.

Any necessary arrangements between your companies - including an Intercompany IP Licence where one company owns IP used by another - should also be properly documented.

It's particularly important to revisit this when the business restructures or introduces another entity.

If you've already discovered that the wrong company is named in existing agreements, getting legal advice before changing them can help make sure you're actually fixing the problem rather than creating another one.

Key Takeaways

Companies within the same business group remain separate legal entities.

The company entering into a customer agreement should therefore reflect the role that entity is intended to perform and the contractual rights and obligations it is supposed to take on.

If the wrong company appears on a contract, that doesn't automatically mean the agreement is invalid. However, there is an important difference between an incorrectly described entity, another existing company actually entering the agreement and an issue with the authority of the person signing.

And if you've restructured your business, don't assume old contracts automatically moved to your new operating company.

Getting the contracting company right from the beginning - and properly dealing with existing agreements when the structure changes - can save a much messier problem later.

If you would like a consultation on which business entity should sign a contract, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.