PFI: a round-up from the courts

by Ted Lowery, Partner

Introduction

In a PFI/PPP project, a public authority enters into a project agreement with a special purpose vehicle project company to finance and construct new infrastructure assets and to, thereafter, maintain and service the assets for a fixed period, usually 25 years. The project company engages a design and build contractor to construct the assets and a facilities management contactor to maintain and service the assets following completion. At the end of the services period, the project company and the FM contractor depart, and the public authority assumes full control of the assets – usually known as “handback”.

PFI/PPP project agreements are notoriously complex and the extended suite of associated contracts for each project frequently fail to achieve the intended seamless dovetailing of interlocking rights and obligations. Despite this apparently fertile ground for squabbling, in the experience of Edward Lowery, comparatively few PFI disputes (from the 850 or so UK PFI projects) have reached the courts; this is because almost all PFI projects include sequential dispute resolution procedures that can act as a brake on disputes, but also because these procedures invariably prescribe private fora for disputes – expert procedures, adjudication and arbitration.  

Hence, thus far, there has been little specialist guidance from the bench as to how PFI contracts are to be approached. The courts have previously confirmed that PFI contracts are relational in nature and, therefore, subject to a duty of good faith1 but this has not been massively helpful. Many PFI contracts already include express obligations of good faith and, in practice, an obligation to act in good faith does not greatly assist resolving complex contractual disputes on particular facts where both sides will have acted in good faith when arriving at contrary positions.

Whilst the number of PFI project disputes coming before the courts is increasing, it is still something of a trickle; of the half dozen or so PFI dispute judgements handed down over the last 12 months, the following are worth a look.

Solutions 4 North Tyneside Ltd v Galliford Try Building 2014 Ltd2

S4NT entered into a PFI project agreement with North Tyneside Council for the construction of new sheltered housing blocks, refurbishment works to existing properties and the provision of services at the sites for 27 years following completion. 

S4NT sought various declarations as to the proper interpretation of the design and build contract with Galliford, including that for the refurbishment works. Galliford had to achieve the design life and residual life expectancy required at the date of handback. 

The judge found Galliford was obliged to carry out the refurbishment works to the standard for completion specified in the design and build contract and bore no responsibility for the condition of the properties at the end of the services period.

St James’s Oncology SPC Ltd v (1) Lendlease Construction (Europe) Ltd (2) Lendlease Construction Holdings (Europe) Ltd3

Here, the project agreement and design and build contract set out a long list of technical and construction design criteria for a new Oncology Centre at St James’ Hospital in Leeds, encompassing various NHS health technical memoranda including HTM 81 (fire precautions) and HTM 2007 (electrical services supply and distribution). Non-compliance with these criteria was permitted as long as the design could be justified on the basis of a fire-engineering approach and the design standard achieved was equal to or better than HTM 81. 

The design criteria required 60-minute fire compartmentation for each of the spaces within the electrical plantroom housing the transformers, the generators, and the switch gear. However, no discrete compartmentation was installed; instead, the electrical plantroom formed a single fire compartment.

The judge found that Lendlease could neither justify the plantroom compartmentation installations as part of a fire engineering approach nor explain how these installations would achieve the necessary standard of safety. The judge further concluded there had been no meaningful approval of the “as built” design by the Hospital Trust, Building Control or the fire and safety authority, and that any such approvals would not have excused Lendlease who remained responsible at all times for achieving compliance with the requirements of the design and build contract. 

Kajima Construction Europe (UK) Ltd and Anor v Children's Ark Partnership Ltd4

This case concerned the enforceability of the sequential dispute resolution procedure in the design and build contract made between the project company, Children’s Ark Partnership, and Kajima.

In order to avoid limitation issues, the project company commenced court proceedings that Kajima contended were premature where the pre-litigation steps in the dispute resolution procedure had not been completed. The Court of Appeal agreed with the lower court that the dispute resolution procedure in the design and build contract was unworkable and, therefore, unenforceable where it: 

(i) adopted the procedure in the project agreement and, thereby, transposed mechanisms that Kajima could not comply with; and

(ii) was insufficiently certain to be enforceable given that there was no meaningful description of the process to be followed and no unequivocal commitment to engage in any particular form of ADR. 

The Court of Appeal also endorsed the lower court’s finding that if the project company’s claim form had been struck out, this would have been a draconian remedy that was unsuitable for the circumstances of this case; and, thus, even if the design and build contract dispute resolution procedure had been enforceable, a stay would have been granted.

Sheffield Teaching Hospital Foundation Trust v Hadfield Healthcare Partnerships Ltd & Ors5

Hadfield was the project company engaged by the Trust to design, build and, thereafter, operate a new wing for the Northern General Hospital. Hadfield engaged Kajima as design and build contractor and Veolia as hard services provider for the wing during the services period.

During 2017, some 10 years after completion, the Trust began to identify defects in the fire protection installations and commenced court proceedings against Hadfield alleging design and construction defects. Hadfield commenced Part 20 proceedings against both Kajima and Veolia. In response. Kajima issued an application for reverse summary judgment and/or to strike out elements of Hadfield’s pleading. Veolia applied for security for costs against Hadfield.

The judge found that Kajima had not satisfied the test for summary judgment and dismissed the strike out application on grounds that Kajima had not demonstrated that Hadfield’s statement of case disclosed no reasonable grounds for bringing the claims. The judge concluded that it would be just to make an order for security in favour of Veolia where this was unlikely to lead to Hadfield’s claims being stifled and/or insolvency. 

Summary

Although these four cases cover typical and contemporary PFI issues, it is only Kajima v Children's Ark Partnership that can be said to provide some meaningful general guidance on a key issue common to PFI projects, that is the need for compliance with and/or enforceability of sequential dispute resolution procedures.  

During August 2023, HM Government published the White Fraiser report with the informative subtitle, “A report into the status and behaviours, relationships and disputes across the Private Finance Initiative (PFI) Sector”.6 Having noted that the predominance of private dispute resolution procedures meant that the same disputes were being decided again and again behind closed doors, the authors recommended that anonymised versions of adjudicative decisions should be made publicly available, thereby allowing a body of “PFI common law” to develop. Unless and until this library of anonymised PFI decisions is established, it looks as if we are going to have to continue to rely upon PFI scraps from the judicial table.

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• 1. Essex County Council v UBB Waste (Essex) Ltd [2020] EWHC 1581 (TCC)
• 2. [2022] EWHC 2372 (21 September 2022).
• 3. [2022] EWHC 2504 (TCC) (12 October 2022)
• 4. [2023] EWCA Civ 292 (17 March 2023)
• 5. [2023] EWHC 644 (TCC) (22 March 2023)
• 6. For more information on the White Fraiser Report, refer to the article by Gemma Essex and Laura Bowler.