The Party: Who in the World Is This Person?
A common question contract lawyers are often asked is, ‘What exactly is a party?’ A party to a contract could be a person, group of people, or an organisational entity such as a company, local authority, charity or a government department. A party must be a legal entity that is capable of entering into contractual obligations. For example, if the party is an individual they must have sufficient mental and legal capacity to be entering a contract . It is important that all parties are identified correctly in contract to ensure that it is clear whose rights and obligations are being contracted.
We regularly advise individuals, including charities, on whether they are entering into a contract with a legal entity as opposed to an individual or group and ensure this is clear within the contractual document. There are some circumstances where one party may act on behalf or as the agent of another party; in this case it is essential that the relevant person is party named provided it is clear who is the principal and who is the agent.
The 4 Types of Parties to an Agreement
A single contract can involve a multitude of parties and each may play different roles. The following is a quick breakdown of some of the different types of parties that might be involved in a contract and how they are recognized by law.
Individuals
Individuals, whether acting alone or on behalf of a formal business, are the most common type of contracting entity. This can encompass everything from a current business owner to a stay-at-home parent trading services to friends.
Businesses
Corporations and other business entities can enter into contractual agreements. Unless a business has been previously dissolved, it is considered to be a legal entity. Within this umbrella, there are numerous subsets depending on the business’ structure. The most important thing to note is that they are treated as individual entities under the law.
Government Entities
All levels of government can enter into contracts as well. Federal, state and municipal authorities each have their own regulations regarding the particularities of contracts, so these types of parties should always consult with a legal professional before proceeding.
Partnerships
There are two general types of partnerships: general partnerships and limited partnerships. Both of these are governed by the Uniform Partnership Act, which lays out the requirements for the existence and functioning of partnerships in business. Like businesses and individuals, partnerships are considered to be individual entities under the law that can enter into contracts.
The Role & Responsibilities of the Parties in a Contract
The rights and obligations of contracting parties often vary depending on their roles in the contract. Typically, parties to a contract are one of several roles as follows.
The Description of Parties
The Contracting Party – The party who is legally bound under the terms of a contract. A contracting party enters into a contract and has the right to require that its obligations be fulfilled by the other party.
The Obligee – The person to whom something is owed. The obligee party should be identified in a construction contract such that all parties know their obligations with respect to the contract.
The Obligor – The obligated person. The obligor party has a contractual obligation to provide a service or pay a debt.
The Indemnifying Party – The person who is acting to indemnify another party against any damages that are suffered. This is most common between an indemnifying party and an indemnified party in construction contracts. The indemnifying party may be required to assume the legal responsibility of any problems that occur that would cause the party being indemnified to suffer damages.
The Indemnified Party – The person who is indemnified. The indemnified party is the intended recipient of a contract’s good faith promise to pay a debt, or to bear the financial burden of loss as a result of a breach of contract.
The Surety – A person who promises to be responsible for the debt, default, or delinquency in the payment of another under the terms of a contract. The surety is a person who agrees to be liable for the acts of the obligor.
The Guaranty – A contract between a surety and a creditor or lender to guarantee payment. Typically, a guaranty is an agreement by a third party to accept the responsibility to satisfy a debt or performance obligation of another party when the latter fails to fulfill it.
Parties Broadly Defined in a Legal Document
Identifying the parties is an essential part of the contract execution process. Properly listing all parties will help determine which parties are bound by the agreement’s terms and obligations. Depending on the type of contract, there may be additional parties beyond the obvious, including some legal entities that may not be immediately obvious. To ensure all parties are properly identified, it is best to name everyone involved.
A legal entity is any legally recognized organization with its own rights and liabilities. In a business contract, for example, the legal entity may be the company itself and not the individual or group of people that make up the company. For example, that sentence would read "XYZ Corp, a Co., and John Smith, individually and as an agent for XYZ Corp and his partner Jane Doe," instead of just "XYZ Corp, John Smith and Jane Doe, individually."
If your company is a corporation , limited partnership, limited liability partnership (LLP), limited liability corporation (LLC) or similar entity, this process helps prevent disputes over whether someone acting as an agent for your company was bound by the contract or not. This is true even if the agent is correctly signed on behalf of the company.
In addition to the companies, other entities that may be involved and need to be listed are:
• Agents
• Representatives
• Principals
• Sureties
• Contractors
• Subcontractors
• Subsubcontractors
• Assignees and assignors
• Subordinate lien holders
• Lien claimants
• Third parties
To determine whether more parties should be named, consider all role holders and people who have obligations and rights in relation to the contract. It is important to set out who is responsible for completing all contract duties accurately and ensuring they are done on time.
What Happens When Parties are Identified Incorrectly
Misidentifying or misnaming a contracting party seems harmless enough, but such errors can have significant legal and practical consequences. Contract interpretation principles mandate that contracts be interpreted holistically according to four guiding factors, including resolving any ambiguity in the parties’ respective obligations in light of their intent. Such interpretations are much easier when the parties’ identities are not at issue. A misidentified party can make a contract’s enforceability cloudier than needed.
There are a couple common types of misidentification. First, one party may be identified as a different party—it is still the same individual or entity, but the name on the contract is inaccurate. This will not generally affect the contract’s enforceability, particularly in the event of an intentional or unintentional sloppy mistake. A classic example is an inaccurately named drafter or contractor. A contracting party that is inaccurately named in a contract may still sue for breach. A creditor might be able to attach, for example, where the debtor is intended to be the party with whom it contracted, but the contract listed the other party as the debtor subject to a personal guarantee, and not the actual debtor.
However, an improperly listed party cannot meet its contractual obligations. The courts will not permit an unauthenticating signatory to bind a purported principal or entity to a contract.
Another common misidentification may be omitting a party altogether. For example, is it a contract between A & B and not ASBC, signed by A as the managing member of B? What if B had 10 other members, and all were also required to sign? What if B entered the contract and then subsequently withdrew? If the person is also a principal of the limited liability company, that may not be material. But if the contract is specifically with that person and not B, that may be a very big deal.
Misidentifying a party can also mean misidentifying the identity of the individual at issue—a self-made corporate executive, for example, who "creates" herself by "resigning" from her current job and "forming" a new parent company with herself as CEO and her previous employer as its sole member. This can be an issue if a lawsuit is later filed against that individual in her capacity as CEO; was she that a mere "agent" of the company, or a full-blown "official." Her status as an "officer" is likely to matter.
Still another misidentification can be a missing out a signatory—a proposed independent contractor workplace agreement, signed only by the company and not by the executive. The attorney defending against a subsequent suit based on that document needs to demonstrate not only authentication (i.e., it was not forged) but also that the contract was not entered into under duress.
In general, though, the failure to identify a party to a contract correctly does not affect enforceability unless the named party lacks contractual rights, powers and privileges, in which case even the intended contract fails. Another rare, but possible, scenario could be a misidentified charity in an operating agreement or winding up of a limited liability company or a distribution or a gift of a bequest in a will. As a general matter, however, the enforcing party need only show proof of authenticity of the signature of the alleged party and of the party’s intention to be bound.
The Negotiation Process with Specific Parties in the Contract
Once the parties have decided on the fundamental aspects of a contract, it is time to consider how who is going to be liable for what. Who do you want paying you at the end of the job? Who do you want to be able to sue if something goes wrong? The answers to these questions are pretty obvious. And you will probably want the other party to be responsible for things which are not your fault.
In practice, however, negotiating these terms can be a bit more complex, with both parties (or more) pushing for a deal that looks like (and ideally is) the best deal they can get. A few pointers on negotiating party terms in contracts: Keep in mind that the contract itself does not dictate parties’ obligations in absolute terms. However, it does provide an absolute defense if the obligations which are defined in the contract are not completed. For example, if Party A has a contractual obligation to carry out works, but the parties agree that Party B will carry out those works, then Party A is breaking the contract if the works are not completed. This is useful when negotiating party terms in a contract because it allows you to push for party A to be responsible for the works , but in a way that looks like an agreement on behalf of party B. What party A will be looking to do is get the works done on behalf of party B, so simply defining the scope of works can allow both parties to have what they want (to an extent). The general rule when discussing party terms in a contract is that a party should only take liability for what is its fault. Therefore, ensuring that party A is only ever responsible for things that party a did is generally good practice, and vice versa.
Still, there are exceptions: if the contract is long-term or particularly resource-intensive, then it might be worthwhile to remain jointly responsible for certain things. For example, if the contract has a lot of working at height, it might be worthwhile ensuring that both parties are jointly responsible for injuries to a person if it is caused by either party, rather than just the legally responsible party. Similarly, if there is a lot of construction work, the parties might want to share responsibility for carrying out their duties until they are satisfied that what has been built is in the best condition possible.