The reluctant litigant: name borrowing

What form of procurement can boast approximately 80% of projects coming in on time, a similar number on budget (with the over-budget ones being almost entirely due to user changes) and a satisfaction rate of 96% among clients? Partnering, alliancing and frameworks are the types of contracting that readily come to mind. But the answer, for all the controversy it engenders, is in fact PFI.

Nevertheless, disputes on PFI projects, either at the build phase, or (more often) in the services phase, have not been unknown. High-profile ones have included the Dudley Group of Hospitals and the National Physical Laboratory. The latter was an early PFI in which substantial problems during the construction phase actually led to termination of the contract.

One feature of PFI disputes is the peculiar position of the project company. This is the consortium that signs a contract with the authority to carry out the work and services (and then subcontracts these obligations to the builder and the facilities management contractor). In traditional procurement, the main contractor is well-used to managing claims. In contrast, the project company is a special-purpose vehicle whose shareholders are mainly banks and financial institutions. The “financial model” or budget does not envisage paying fees for the army of quantity surveyors, delay analysts and lawyers needed to deal with disputes. These fees will eat into the project income stream.

For this reason, project companies adopt a number of methods to keep disputes at arm’s length. These include making the entitlements of the building and facilities management contractors contingent upon similar rights against the public authority (“equivalent project relief”) and ensuring that any disputes with the authority are decided in parallel with the subcontract disputes. This second point can be tricky. Following Treasury guidance, authorities will resist dealing with more than one party in a dispute. So joinder is often not possible.

If the project company has done all it can, but still has a dispute on its plate, how does it proceed with it? Often, it will run the case on the contractor’s behalf. The contractor then provides the project company with the information it needs, and agrees to meet the legal and expert costs. In return, the project company agrees not to settle the action without discussion, and to keep the contractor informed of progress at all times.

The contractor is unhappy. Some other party, with its own lawyers and consultants, is putting its case forward, and running up costs

The basic problem with all this is that the project company is a reluctant litigant, doing someone else’s dirty work. Meanwhile, the contractor is also unhappy. Some other party, with its own lawyers and consultants, is putting its case forward, and running up costs that it will have to pay, but which it cannot directly control.

A better solution may be that of “name-borrowing”. This is not a new idea (it featured in the old nominated subcontract forms, though often led to problems because of the complexity of those forms). Here, the contractor “borrows” the name of the project company, steps into its shoes and runs the case itself. The advantages are clear. The contractor gets to run the case as it wants, and can spend as much or as little money as it pleases. It has the freedom to settle on whatever terms it thinks fit. The project company meanwhile stays on the sidelines, and keeps its revenue stream intact. Even the bankers are smiling.

There are also advantages for the authority. It gets to deal directly with the “real” opponent, rather than with a team of consultants who are trying to face in two directions at once. Compromise discussions can be held face to face. And the authority is still only involved with one other party, thus achieving one of its key objectives.

Why is this not used more often? Project companies sometimes feel that contractors, if let loose, will damage their relationship with the authority. However, this should not be a problem. Provision can be built in for the project company to step back into the dispute if it reasonably believes that the contractor is running the case in a way that is likely to damage the relationship with the authority unduly, or threaten the long-term viability of the project. Borrowing someone else’s name in any other walk of life might be regarded as a dubious practice. In PFI, it should become the norm.