Although name borrowing may seem like a simple concept, it can lead to conflicting issues for all parties involved
Name borrowing is not a new concept and, in theory, it is a relatively simple one. What happens is that a subcontractor borrows the name of the main contractor to pursue a claim against an employer with which it has no contractual relationship. The benefit for the main contractor is clear – it passes the risk of dealing with claims to the subcontractor.
Over the years, however, the unique legal relationships this process creates have left the courts grappling with some difficult questions.
The recent case of London & Regional Properties vs the Ministry of Defence (MoD) and the secretary of state for defence (18 March 2008), is just one example. London & Regional agreed to refurbish St George’s Court in London for the MoD, and employed Shepherd Construction to do so. Shepherd claimed additional payment for tenant variations from London & Regional. Shepherd and London & Regional agreed that Shepherd could borrow London & Regional’s name to pursue such claims against the MoD and how any sums recovered would be split between them. Proceedings were duly commenced by Shepherd’s advisers in the name of London & Regional.
This arrangement caught the MoD unawares and it challenged the whole name-borrowing process. It argued that Shepherd was an “officious inter-meddler with complete control of the litigation” and that the claims were “champertous” – basically that Shepherd had no legitimate interest in the outcome. The court had to decide whether the claim could proceed. Mr Justice Coulson rejected the plea of champerty. Shepherd was not a “previously disinterested third party” and it had an “entirely legitimate financial interest in the outcome of these proceedings”.
In setting up such an arrangement what are the key points to consider? For the name borrower, the shopping list is relatively simple:
• It must ensure that any funds recovered are received. If the funds are to pass through the main contractor’s hands, as they typically will, how can the subcontractor avoid the main contractor exercising set off? This would involve the main contractor waiving any such rights – something it may not be keen to do
• What if the employer counterclaims in the proceedings on a matter that has nothing to do with the subcontractor? This cannot be stopped simply because of the artificial nature of the name-borrowing arrangement. How will it be dealt with and how can the subcontractor ensure it recovers the gross sum, unaffected by an unrelated counterclaim?
• The co-operation/assistance of the main contractor is likely to be necessary in order to get access to documents and witnesses. How does the subcontractor achieve this?
If the employer has to pay out to the main contractor, but goes under before it does so, the main contractor may still have to account to the subcontractor for the sums in question.
• Is the consent of the employer required?
The answer to this is no, unless of course the contracts provide otherwise.
These are all matters that are typically included in the name borrowing (often called “conduct of claim”) clause. The extent to which the subcontractor manages to deal with these issues will depend on the bargaining power of the parties.
For the main contractor, there are some real issues:
• The main contractor will be looking for an indemnity from the subcontractor as to any liability for costs. This is because any orders for costs, if made, will be against the main contractor, not the subcontractor. The indemnity the main contractor seeks may extend to all claims, proceedings, loss, damage and costs that arise out of the claim
• Reputational damage – the main contractor will want to ensure that the subcontractor does not conduct the claim in a way that brings the main contractor’s name into disrepute. This can be done by providing, for example, that the subcontractor will not act in a manner inconsistent with the main contractor’s interests. It is also common to provide that the subcontractor may not settle or compromise the claim without the main contractor’s prior written consent
• The risk of insolvency can make name borrowing dangerous. If, for example, the name borrowing results in the employer having to pay out to the main contractor, but the employer goes under before it makes payment, the main contractor may still, depending on the contract, have to account to the subcontractor for the sums in question. In the case of Co-operative Wholesale Society vs Birse Construction, the main contractor was bore the risk of the employer’s insolvency.
Although name borrowing can raise complicated issues, it can be a sensible commercial arrangement for resolving multiparty disputes, and it has become prevalent in PPP projects where the contractual hierarchy lends itself to such proceedings.
Lindy Patterson is a partner in Dundas and Wilson