Infelicities and oddities in PFI contracts

As Ted Lowery explains, the private finance initiative programme commenced in the 1990s and was conceived as a means of reducing public borrowing. The private sector, in the form of a special purpose vehicle project company, assumes the risk of financing and constructing new infrastructure assets and thereafter manages the assets and provides complementary services for a fixed period, usually 25 years. In return during the services period the project company receives a monthly amount from the public authority – the unitary charge – intended to cover the project company’s profit, capex and financing costs. At the end of the services period the assets are handed back to the control of the authority and the authority assumes responsibility for continuing delivery of the services.

Introduction

PFI contracts are notoriously lengthy and complex. Examination of the arrangements for a medium sized PFI hospital project will typically show a project agreement with around 20 schedules totalling some 2000 pages. In addition, the project company will simultaneously enter into comparably sized sub-contracts for the construction of the assets and for the delivery of services during the services period. The PFI documents suite will also include a host of satellite arrangements such as collateral warranties, guarantees, financing instruments and interfacing agreements.

In these circumstances it is not surprising that PFI contracts frequently include anomalies and discrepancies and often fail to achieve the intended seamless dovetailing of interlocking rights and obligations. In one of the few PFI contract disputes to come before the Court of Appeal, Lord Justice Jackson’s judgment included the following warning:

I do, however, make this comment. Any relational contract of this character is likely to be of massive length, containing many infelicities and oddities. Both parties should adopt a reasonable approach in accordance with what is obviously the long-term purpose of the contract. They should not be latching onto the infelicities and oddities, in order to disrupt the project and maximise their own gain.1

Problems caused by the infelicities and oddities referred to by Lord Justice Jackson can be compounded by one particular aspect of PFI contracts that arises out of the long-term nature of the arrangements i.e., the tendency of the parties to enter into ancillary agreements over the lifespan of the project.

Ancillary agreements

Given the duration of PFI contracts, it is not surprising that the parties’ respective rights and obligations are not expected to remain immutable over a 25-year period. Ancillary agreements entered into during the services period usually fall into three broad categories (albeit that whatever the label they may cover similar ground):

• Variations;
• Supplemental agreements; and
• Settlement agreements

Variations

PFI contracts will ordinarily provide for variations (in the sense that the word “variation” is commonly understood in construction contracts) during the services period that concern physical works to change or enhance the infrastructure assets. These variations will typically encompass works such as the installation of new IT services and cabling, upgrading ventilations systems and the internal reorganisation of functional spaces. In some cases, the authority will require substantial new constructions and extensive works may also be required to ensure that the asset reflects developments in statutory requirements, for example concerning fire safety legislation. As well as confirming the capex sum to be paid to the project company for procuring the physical works, the variation documents will usually provide for any necessary consequential adjustments to the scope of the services, the unitary charge and the amounts payable to the services sub-contractor.

Supplemental agreements

It is also common for the authority and the project company to enter into substantive supplemental agreements during the services period in order to alter the services provision, for example where the  authority wants to take cleaning back in-house or in consequence of any benchmarking or market testing exercises. If the services provision is altered there will need to be like for like amendments to the project agreement and to the services sub-contract and again, supplemental agreements will usually provide for any necessary adjustments to the unitary charge and the amounts payable to the services sub-contractor.

Settlements

In a PFI context, the outcomes of formal dispute procedures can have disproportionately detrimental effects on the project overall given that save in (rare) cases of termination, the parties will still be required to work together for several years to come.2 In these circumstances formal settlement agreements that look to confirm the impact of any adjudication decisions, arbitration awards and judgments on the project going forward (and hopefully palliate any post-dispute rancour) are common in the PFI sector.

Surrey v Suez

Where detailed variations, supplemental agreements and settlements are intended to overlay what are already complex and lengthy PFI contracts there is an enhanced risk of ambiguity. The recent judgment in Surrey County Council v Suez Recycling and Recovery Surrey Ltd3 provides a good example of how ancillary agreements can inadvertently create fresh uncertainty.

Background

During 1999, Surrey County Council entered into a PFI project agreement with Suez for the management of elements of its domestic waste services to include the construction and operation of two mass burn waste-from-energy plants. In the project agreement, the dispute resolution schedule established an expert procedure for specific types of disputes for example in connection with accountancy and planning issue but otherwise provided for arbitration. Clause 63 in the project agreement stated that English law applied and confirmed that the parties submitted to the exclusive jurisdiction of the courts of England and Wales.

In the event the plants were never built due to planning difficulties and in consequence, Surrey and Suez entered into successive deeds of variation that re-focussed the project upon the construction of an Eco Park in Sunbury. In relation to disputes, these deeds of variation generally provided for court proceedings.

The construction of the Eco Park was significantly delayed and in early 2021, Surrey commenced court proceedings, relying upon the dispute provisions in the deeds of variations. In reply, Suez cited the arbitration clause in the project agreement and applied to have the proceedings stayed to arbitration.

The decision

The judge found in favour of Suez on the grounds that notwithstanding the references to court proceedings, the deeds of variation essentially remained servants to the master project agreement. Therefore, looking at the documents overall then the references to court proceedings in the deeds of variation could be construed as merely re-stating the provision in clause 63 of the project agreement that the courts of England and Wales would have exclusive jurisdiction, and this would be the case should court intervention ever be necessary to supervise any arbitration or expert procedure.

Comments

The background facts in Surrey v Suez were unusual given that the principal PFI assets were never built but the judge’s approach of scrutinising all relevant documents in an effort to make the contract work is still of general application. Of course, the idea of seeking to reconcile ostensibly competing provisions in order to identify a clear and sensible commercial interpretation that avoids ambiguity is not unique to PFI contracts. However, it is worth noting the judge’s characterisation of the project agreement as the “master” document and the deeds of variation as the “servants”, (notwithstanding that one of the key objectives of the project agreement had been thwarted by planning issues). If in accordance with Lord Justice Jackson’s warning set out above, the parties should adopt a reasonable approach in accordance with what is obviously the long-term purpose of the contract then in a PFI scenario, the primary source of those purposes should always be the project agreement.

The judgment in Surrey v Suez was consistent with an earlier decision in RWE Npower Renewables Ltd v JN Bentley Ltd4 when in relation to a contract based upon the NEC 3 Engineering and Construction Contract conditions, Mr Justice Akenhead observed as follows:

What one cannot and should not do is to carry out an initial contractual construction exercise on each of the material contract documents on any given topic and then, so to speak, compare the results of that exercise to see if there is an ambiguity. If it is possible to identify a clear and sensible commercial interpretation from reviewing all the contract documents which does not produce an ambiguity, that interpretation is likely to be the right one;

Whilst not made with reference to a PFI contract, Mr Justice Akenhead’s observations clearly chime with Lord Justice Jackson’s warning in Amey v Birmingham.

Summary

PFI contracts tend to prove the rule of thumb that the longer and more numerous the contract documents the greater the likelihood of inconsistencies. The decisions cited above cannot amount to a panacea for chronic ambiguity but should render some comfort for those faced with ambivalence on the face of PFI contract documents, including where complications arise because of subsequent variations, supplemental agreements and settlements. Lord Justice Jackson’s recommendation that the parties should (at least try to) adopt a reasonable approach and not seek to exploit infelicities and oddities for their own commercial gain amounts to manifestly sound advice for everyone involved with PFI contracts.

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• 1. Amey Birmingham Highways Ltd v Birmingham City Council [2018] EWCA Civ 264 (22 February 2018). At paragraph 93 in Jackson LJ’s judgment.
• 2. An apt analogy would be a couple who divorce after 10 years of marriage but find themselves obliged to live together in the same house for the next 15 years.
• 3. [2021] EWHC 2015 (TCC) (16 July 2021). Before Mr Alexander Nissen QC sitting as a judge of the High Court.
• 4. [2013] EWHC (TCC) – upheld on appeal and cited with approval in Alexander v West Bromwich Mortgage Company Ltd [2015] EWHC 135 (Comm).