Legalese: April 2014

When renting equipment, it is crucial that you be aware of the correct person or legal entity that will be responsible for paying the account with you. If your company is renting the goods to the wrong legal entity, it may be unable to recover payment later. Should a problem arise, you will need to know with whom you are dealing and against whom your legal actions can be taken. 

In contract law, there is a doctrine called privity of contract. Distilled to its essence, it means that only the person or legal entity with whom you are dealing is legally responsible under the contract. Generally speaking, if you enter into a rental contract with one person, you cannot recover against a different person or entity. This is ever more critical when you are dealing with companies and other types of organizations.

One of the main reasons people carry on business as corporations relates to liability issues – they will not be held personally liable with respect to the transactions taken by the corporation. When a  business is incorporated, it is considered a person at law. It can enter into contracts on its own accord; it can sue and be sued. With certain limited exceptions, this means that the property of a corporation is its own property. If you are contracting with a corporation, you must be aware of the fact that the individuals with whom you are dealing will not be responsible to pay your accounts if something goes awry.

My experience in the rental industry, however, has taught me that many “companies” are really not companies after all. If a company is not incorporated this means that it is not a separate legal entity and you are actually dealing with an individual proprietor. In order to find out if the company you are dealing with is incorporated, you can turn to your Provincial Corporations Branch or contact a lawyer in your jurisdiction to assist you. Every province maintains a database of companies in its jurisdiction and keeps records of many important pieces of information, such as whether a company is in good standing, who is behind the company, and the registered office address.

Other organizations vary in structure, such as associations, charitable organizations and not-for-profit organizations. Some of these types of organizations can be extremely difficult to recover against, so before you enter into a contract with them you would be best advised to do your due diligence as to their legal identity and ability to pay.

When doing business with someone it is always good practice to identify who exactly you are carrying on business with. That way, you can assess your risks better and know how much credit to extend. For example, if you knew that you were renting to a corporation that did not have assets, you would want to consider insisting upon a written personal guarantee of indebtedness from the owners of the corporation as a condition of doing business.

Unless you know exactly who you are dealing with, you will be unable to properly assess the business risks you are undertaking in renting your property to them and extending them credit. Your lawyer in your jurisdiction can be very helpful to you in terms of determining the identity and legal status of your clients. It is usually a simple set of searches that can be done the same day of your request, and shouldn’t cost much money. It may prove to be the best money you spend, if it means your finding out that you shouldn’t be renting to a certain client.