So you think you know who you're dealing with? Lisa Haywood explains why doing your diligence is the only way to stay protected in your business

Taking on new customers is exciting.  We all love new work and just want to crack on with it.  But cutting corners on your onboarding process might leave you exposed if things don’t work out the way you hope. 

Trust us, as litigators we’ve seen firsthand the rough end of inadequate customer diligence or lack of a robust onboarding process that allows you to really know who you’re doing business with.  Contracts issued with the wrong customer name, inadequate information taken to identify or later track down a customer or missing financial checks can all limit your options when you want to pursue a customer for non-payment or breach of contract.  Issuing claims against the wrong entity, or where it isn’t clear who the customer was is only likely to end up costing more, delaying things and, on a really bad day, leaving any claim you do issue at risk of being dismissed.

Every business will have a different risk appetite, so onboarding processes are never a one size fits all.  When we get involved in a business’s onboarding process (usually when reviewing terms and conditions or credit control policies), we recommend making sure the business takes all steps necessary to satisfy them that the specific customer and work they plan to do fit within their risk parameters.  There is no ‘right’ process or exhaustive list of questions to ask new customers, provided you make sure you can satisfy yourself that the customer and work fits your cashflow, bad debt and credit risk levels. 

Recently Lisa Haywood gave a talk about why taking the time to really get to know your customer on day one is the best use of your time when taking on new customers or work.  It was a really practical guide on what information you need to really focus on, what are the best questions to ask, and how to interpret the answers to make sure that you have the right data in place to give you maximum protection in case of future issues.

Here, she runs through the different customer ‘structures’ you’ll most commonly come across and what information you’ll want to make sure you take before starting work.

Individuals

This one is easy.  These customers are personally liable to do and pay what the contract tells them to.  If they fail to do or pay you can sue them.  You’ll want their full name, current residential address and, depending on how large the contract is and whether there is a deferred payment, possibly a date of birth to perform a credit check, personal insolvency register check (to see if they have an IVA, bankruptcy or other debt arrangement) or a pre-sue report from an enquiry agent. 

Businesses

This is where it becomes more complicated, and where it is worth making sure you have asked all the right questions to make sure you know precisely what type of structure the business is.  Here are the most common types and what information you’ll want to take:

 Sole traders – these are individuals, but often using a business name.  They are personally liable for all contracts they enter into and it is their own assets that are at risk if they fail to do or pay what the contract tells them to.  You’ll want the same information you’d take for individual customers

Limited companies – these are formal structures set up to limit the liability that the individual owners would have if the company fails to do or pay what the contract tells it to.  The company is a separate legal entity from the owners (shareholders) and is run by directors.  If a company fails to do or pay what the contract tells it to it is the company that must be sued and only the company’s assets can be recovered (it’s outside of the point of this article, but there are very limited circumstances where directors could be ordered to pay).  You’ll want to make sure you know the company’s full name (check Companies House Register and make sure you include the entire name exactly as it appears, including all punctuation and using either ‘Ltd’ or ‘Limited’ (Ltd is NOT a shortening of Limited.  The Register will tell you who the directors and major shareholders are and will also tell you if the company is active (trading).  You can also check if it is solvent – either by interpreting the company’s last filed accounts where you can or by making sure there is no insolvency tab showing that it is in an insolvency process.  The full company name, registered address and company number should be recorded on your paperwork.

Partnerships – there are a few different types, but the word partnership describes the relationship between separate individuals.  A partnership is not a separate legal entity and so all individual partners can be sued and their assets will be at risk if they fail to do or pay what the contract tells them to.  You’ll want the same information you’d take for individual customers, but for each partner.  Each partner should be invited to sign your paperwork. 

Limited Liability Partnerships – these are like limited companies, but are a much more flexible structure, run and owned by Members.  The Members don’t draw dividends like shareholders in a limited company; they share the profits and each pay their own income tax through the self-assessment process.  The LLP is a separate legal entity from the Members and so it is the LLP that must be sued if it fails to do or pay what the contract tells it to.  You will want largely the same information as for a limited company, available from the Companies House Register, except LLPs have company numbers beginning with OC.  The full LLP name, registered address and OC number should be recorded on your paperwork.

There are lots of technical reasons to make sure you get it all right.  If you slip up, don’t panic, but it’s always worth keeping your onboarding process in constant review, particularly when you do have an issue you want to avoid happening again.

We’re always happy to give fractional support to any business that needs a ‘litigator’s eye’ on their paperwork, contracts or risk profile, as part of a general overhaul or on a retained basis.  Get in touch to discuss how we can support your business