In almost every PFI and PPP project, the principal contracts – the project agreement, the D&B contract and the services contract – will include bespoke dispute resolution procedures. In addition to providing for sequential and escalating processes (typically good faith negotiations followed by adjudication followed by arbitration or litigation), these dispute resolution procedures will also provide for the determination of what are usually characterised as “related disputes”. However, as Ted Lowery explains, the way these procedures work, is not always straightforward.
Introduction
Where the primary obligations of the project company, to design and build the infrastructure asset and thereafter to deliver services to the asset for 25 years or so, are stepped down to the D&B contractor and the services contractor respectively, it follows that any failure of the asset, or in the delivery of the services, is likely to raise common issues across the project agreement and the D&B contract or the services contract. The objective of related disputes mechanisms is to ensure that cross-contractual issues can be considered in a common or related forum, thus eliminating the risk (particularly significant for the project company) of conflicting outcomes.
PFI contracts usually seek to achieve this objective by providing for adjudications under the project agreement and the D&B contract or services contract to be linked – to varying degrees – if common issues are raised:
- Some contracts will provide for straightforward consolidation of related disputes so that the same issues under different contracts are considered in the same adjudication.
- Others provide for parallel but discrete adjudications with the same adjudicator appointed in each dispute and given powers to enable the procedures to be dovetailed.
- Other arrangements may provide only that the project company can insist upon the same adjudicator being appointed in both adjudications, in the expectation that this will be sufficient to achieve consistent outcomes.
Albeit varied in form, most related disputes mechanisms are cumbersome and place the onus firmly on the project company to drive the processes forward, for example, via the issue of timely notices. As such, these mechanisms often create a number of hurdles for any project company that seeks to protect itself against the spectre of conflicting outcomes on cross-contractual issues:
- Firstly, there is an inherent dichotomy within related disputes insofar as the project company will usually find itself having to defend claims against a public body but pursue the same claims against its D&B contractor and services contractor. Therefore, related disputes adjudications can be vulnerable to challenge:
- The D&B contractor and services contractor may assert that there is nothing to resolve on grounds that they and the project company both deny the public body’s claims. Hence jurisdictional objections on a “no disputes” basis can be raised.
- Claims against the D&B contractor and services contractor may be undermined by the not unreasonable defence that the project company is approbating and reprobating.
- Secondly, related disputes often involve issues of contested liability between the D&B contractor and the services contractor, for example, where it is not clear if the asset failure has been caused by design or workmanship errors or because of post-completion deficient maintenance. In this event, the project company will have to try to bring both the D&B contractor and the services contractor into the related dispute process with the public body, creating a higher level of complication.
- Thirdly, related disputes mechanisms can be imprecisely worded. This can cause problems because the mechanisms in the project agreement and in the D&B contract or services contract must be sufficiently reciprocal in order to be enforceable.
It follows that any project company contemplating related disputes adjudication will need to get its ducks in a row in advance and ensure that in its preliminary exchanges with the public body, the D&B contractor and the services contractor, it sets out the related disputes it wishes to pursue and avoids any open statements – for example, unqualified admissions or denials of liability – that might prejudice its position against any of the other parties. To this extent, the project company’s correspondence and submissions will frequently resemble Janus undertaking an exercise in doublethink: simultaneously pursuing and defending the same claims whilst looking towards and away from the public body and the D&B contractor and the services contractor.
There are alternatives to these minefields for the project company but they ordinarily lie in the gift of the D&B contractor and the services contractor:
- The contracts may provide for name-borrowing: with this option, the D&B contractor or the services contractor stands in the shoes of the project company in a dispute with the public body. The project company usually has limited involvement, should be indemnified for any legal costs incurred, and will obtain an outcome binding under the relevant contracts. Given that the D&B contractor and services contractor bear the bulk of the workload and risk, name-borrowing is infrequently used.
- The suite of PFI and PPP contracts will normally include an interface agreement providing for horizontal dispute resolution as between the D&B contractor and the services contractor, with the project company assuming the role of an interested spectator. Again, this option is largely risk free for the project company and will deprive the D&B contractor and the services contractor of the opportunity to deploy some of the tactical arguments in related disputes outlined above, hence the use of interface agreements is likewise uncommon.
- The project company could enter into an informal alliance with either the public body or the D&B contractor and services contractor along the lines that, as allies, they would each accept the outcome of a bilateral adjudication. However, public bodies are consistently hostile to this sort of arrangement and a working alliance between the project company and the D&B contractor and the services contractor will generally require a level of trust and cooperation that is frequently lacking, a situation often superinduced by the underlying dispute.
Generally speaking then, with related disputes, the project company will find itself tied to a procrustean procedural bed that is time consuming, expensive, laboured and susceptible to substantive challenge. Nonetheless, a decision handed down by the Technology & Construction Court in January 2024 offers some small hope of easing this burden for project companies: that decision is Lancashire Schools SPC Phase 2 Ltd v Lendlease Construction (Europe) Ltd & Others.[1]
The Lancashire Schools dispute
This decision concerned a series of PFI project agreements entered into with Lancashire County Council for educational premises in Burnley. The project agreements provided for disputes to be resolved by adjudication with the option to go to court within 90 days of any adjudicator’s decision. For related disputes, the project agreements provided that the project company could include in disputes with the council any submissions made in any similar issues disputes with the D&B contractor and the services contractor. In respect of those issues, the decision of the project agreement adjudicator would be binding on the D&B contractor and the services contractor.
When defects began to occur in the new schools, the project company was threatened with deductions by the council and notified claims against the D&B contractor who, in reply, asserted that the defects had been caused and contributed to by maintenance failures by the services contractor.
The project company commenced court proceedings against the D&B contractor, the services contractor and the council, contending against the council that the defects issues should be properly resolved in a manner consistent with the resolution of the position under the D&B contract or the services contract, with the council being bound by the relevant findings of the court. The council issued an application for the court proceedings to be set aside, or struck out, in circumstances that they had been commenced in breach of the contractual requirement that all disputes must first be determined by adjudication.
The judge agreed with the council that the project agreement made adjudication a condition precedent to the commencement of litigation, but exercised his discretion to decline to enforce this requirement, allowing the proceedings to continue, including on grounds that:
- The provisions for related disputes in the contracts could be, “… particularly difficult to apply and could well lead to procedural complications”. The judge questioned how effective or useful adjudication would be where the project company would have to simultaneously provide submissions against the D&B contractor and the services contractor, who were each likely to respond that the other was responsible for the defects.
- Both the D&B contractor and the services contractor were content to have the disputes resolved in court and in contrast to the council, were not demanding adjudication first.
- There were parallel proceedings underway in relation to the other project agreements and all proceedings would be delayed if adjudication – which would not be a short process – had to be completed first. Likewise, the prospects for multi-party mediation could be impacted if the council was allowed to first complete adjudication against the project company.
- The complexity of the disputes made it likely that the parties would end up in court after an adjudication in any event.
Summary
Given the hurdles and risks associated with related disputes mechanisms, the prospect of consolidated court proceedings should appear attractive to project companies. Whilst court proceedings will take much longer than adjudication, and cost more upfront, legal costs may be recoverable and any judgement obtained will unquestionably provide a singular outcome that is binding across all of the contracts.
To be clear, the Lancashire Schools decision does not create a precedent entitling project companies to substitute court proceedings for contractual related disputes mechanisms. Each case will still be decided on its own facts with reference to the particular terms of the contracts, which may make court proceedings a distant prospect (for example, where there is an obligation to go to arbitration after adjudication). Nonetheless, this decision should, at least, give project companies food for thought and an opportunity for encouraging public bodies, D&B contractors and services contractors to consider the alternative merits of multi-party court proceedings.
[1] [2024] EWHC 37 (TCC).
