The claim
The defendant, Forum, was an architect's firm, which reorganised its practice in 1989 to operate through various service companies so that it was more tax-efficient. McAlpine contracted with one of the service companies, Forum Architects (Cambridge) Ltd (FACL), in the same year for the design work for a building project.
FACL went into receivership in 1991. It was not disputed that the design drawings were prepared without reasonable care. Since McAlpine had no effective remedy against FACL, it sought to establish before the court that Forum was the undisclosed principal of FACL and that Forum therefore owed a duty of care to McAlpine in the preparation of the drawings.
McAlpine's case was that FACL acted as agent for Forum in making the preliminary and substantive contracts for architectural services in 1989 and that it was Forum, not FACL, that prepared the drawings and other material used by McAlpine.
Under the law an undisclosed principal can sue and be sued by a third party provided that the relationship of principal and agent exists in which the parties intend that the agent is authorised to act and contract on behalf of the principal. The relationship of principal and agent can only be established by the consent of each of them – given expressly or by implication from their words and conduct: Lord Pearson in Garnac Grain versus Faure & Fairclough 1968 (AC 1130, at 1137). There is, however, a presumption that a company is not the agent of its members: Salomon versus Salomon 1897 (AC 22). In order to succeed, McAlpine needed to show that the arrangements made by Forum for transferring its business to the service companies in 1989 were not genuine and that Forum authorised FACL to make the contracts with McAlpine in 1989.
The outcome
His Honour Judge Humphrey Lloyd QC found that the evidence on which McAlpine argued that Forum was the undisclosed principal of FACL was weak. Although some initial correspondence with McAlpine during the tendering stage had been written on Forum's headed notepaper (rather than that of the company), Forum had later corrected McAlpine, pointing out that this had been an administrative error. McAlpine was well aware that it was dealing with a limited company and not the partnership.
The moral is to make insurance claims quickly and, if a company goes into liquidation, secure an undertaking that the professional indemnity policy will be maintained.
Moreover, the arrangements between Forum and its service companies were genuine and the companies were orthodox trading entities and not merely devices or the alter ego of the partners. If anything, Forum was an agent for FACL in terms of bringing work to the companies and Forum was remunerated for that. There was no evidence that Forum had performed the architectural services in question.
Protecting against insolvency
So was there anything that McAlpine could have done to protect itself against FACL's insolvency? If McAlpine had felt any anxiety about the solvency of FACL at the time of contracting it would have been wise to procure either a performance bond, parent company guarantee or personal guarantees from the directors. Many contracting parties demand these as a matter of course.
It should also have been protected by FACL's professional indemnity insurance under the Third Party (Rights Against Insurers) Act 1930, the purpose of which is to provide a third party with the right to make a direct claim against the insurers where the insured is insolvent.
Unfortunately, while the service companies did have professional indemnity insurance at the time the services were carried out, by the time McAlpine brought its claim the insurance documents were "far from complete". One can only assume that the insurance had lapsed by the time McAlpine sought redress.
Make claims quickly
The moral of this aspect of the tale is to make insurance claims quickly and, if a company goes into liquidation, to secure an undertaking from the liquidator that the professional indemnity policy will be maintained.
Source
Building Sustainable Design
Postscript
Kevin Greene is a partner and Kirstin Warley is a construction professional support lawyer in the construction and engineering department of Nicholson Graham & Jones. Tel 020 7360 8188 or 020 7360 8124. E-mail: kevin.greene@ngj.co.uk or kirstin.warley@ngj.co.uk
No comments yet