Understanding who you are contracting with may seem simple. However, particularly in the case where you are contracting with a company within a larger group the position may become more complicated.
There can be particular concerns where the specific group company concerned has very limited assets itself. It is possible to correct a simple misnomer in respect of the company name but correcting the situation once there is a dispute may not be straightforward.
The case of Liberty Mercian Ltd v Cuddy Civil Engineering Ltd emphasises the problems which may occur. Liberty sought to enter into a contract with an entity which traded under the name “the Cuddy Group”. Negotiations took place and Liberty’s solicitor sought to identify the actual company name for the Cuddy Group. Their investigations identified a company known as Cuddy Civil Engineering Limited (“CCEL”). They raised the issue with Cuddy’s representative who raised no objection to the contract being in the name of CCEL.
In fact, CCEL was a dormant company within the Cuddy Group. The correct company with whom Liberty should have contracted was Cuddy Demolition & Dismantling Limited (“CDDL”). Problems arose in respect of the contract and Liberty sought to terminate the contract. Presumably, Liberty then intended to seek to recover its losses from the Cuddy Group. Liberty sought a declaration from the court that its contract was actually with CDDL.
The court considered whether Liberty could successfully argue that there had been a misnomer. The test which was applied was:
- Was there a clear mistake on the face of the contract – the court was entitled to look at the background to negotiation of the contract in reaching a decision; and
- if so, was it clear what action was required to rectify the mistake?
In this case, the court concluded that, taking into account the background to the contract, there was not a clear mistake. The court’s reasoning was that Liberty had made a clear and unequivocal request to the Cuddy Group that the contract be made in the name of CCEL. The fact that CCEL was dormant did not mean that it would have been unable to perform the contract – all that would have been required was for it to commence trading.
In the circumstances, Liberty is left with a contract against a dormant company, with the associated difficulties with recovering any losses it has suffered in respect of the contract. It is imperative that, particularly when contracting with a group company, that checks are conducted to ascertain the status of the particular group company. If there are concerns, then a parent company guarantee should potentially be sought to ensure that you are properly protected.