Summary: Tees Esk & Wear Valleys NHS Foundation Trust v Three Valleys Healthcare Limited and Bank of Scotland PLC highlights the complexities around PFI arrangements and the necessity of checking all the contract documents before exercising rights under a PFI project agreement. This also applies to non-PFI construction projects where funders are involved.

PFI arrangements

The PFI arrangement in question was for the design and construction of Roseberry Park Hospital in Middlesbrough. The Trust entered into a Project Agreement with Three Valleys Healthcare Limited (TVHL), a special purpose vehicle, in December 2007.

Under the Project Agreement, TVHL would finance, design, construct and commission the new hospital and thereafter provide maintenance and operational services until 2040. At the same time, the Trust, TVHL and the Bank of Scotland (BOS) entered into a funder’s direct agreement (FDA) in respect of financing the project.

Disputes

Disputes arose between the Trust and TVHL and there were at least two adjudications in 2016. The Trust won both adjudications and was awarded monetary deductions and Service Failure Points in both. The findings of the adjudication triggered the Trust’s right to terminate the Project Agreement, a point that was not disputed.

However, the FDA provided that, before the Trust could terminate the Project Agreement, it had to serve two notices on BOS. The first notice had to state that a Project Co Event of Default had occurred, the proposed Termination Date and the grounds for termination in reasonable detail.

The second notice had to provide BOS with “details of any amount owed by [TVHL] to the Trust, and any other liabilities or obligations of [TVHL] of which the Trust is aware (having made proper enquiry)” (emphasis added).

This provision was intended to give BOS the opportunity to consider whether it wished to exercise its step in rights to assume TVHL’s rights and obligations under the Project Agreement and pay any outstanding debts. This would allow BOS to preserve its interest in the project in the event of termination of the project agreement for any reason.

Termination notices

The Trust decided to terminate the Project Agreement and on 1 June 2017, it sent BOS the first notice required by the FDA. The validity of this notice was not in dispute. On 29 June 2016, the Trust purported to give BOS the second notice. BOS claimed that this notice was invalid, and commenced Part 8 proceedings in the TCC to decide the issue.

BOS argued that the second notice was invalid because the table the Trust had attached to the notice was lacking in sufficient detail for it to adequately weigh up its option to exercise its step-in rights. It objected to the notice including a large number of heads of claim which were “TBC” (i.e. not quantified). BOS also argued that there was no evidence of the Trust making a “proper enquiry”, and so the notice was invalid on that ground too.

Decision

Mrs Justice O’Farrell was not too troubled by these arguments and found, in favour of the Trust, that the notice was valid. In reaching her decision, she found that, whilst details of amounts owed to the Trust by TVHL had to be quantified, the “other liabilities and obligations” need not be quantified. However, if the funder chose to exercise its step in rights, it would only be liable to repay those amounts which had been quantified.

She also found that the Trust did not have to provide evidence that it had made proper enquiry for the notice to be valid.

Commentary

The decision shows that whilst notices are important and the court requires parties to comply with any contractual notice requirements, it will take a practical approach to their content. In this case, it is likely that the Trust was under quite rigorous requirements to keep the bank informed about the project. Therefore, although it is not clear from the judgment, the bank may well have already had a good idea of the status of the project and this could have had some bearing on the court’s decision.

The court may also have had in mind that it would not allow the bank to prevent the Trust from exercising its right of termination unless the information provided by the Trust was seriously lacking. It is not clear from the case but I wonder if the bank was really intending to prevent termination, or whether it was merely attempting to buy more time to consider its options.

Although it is rare for a bank funding a construction project to exercise its step-in rights, it might be more motivated to do so in the case of a PFI arrangement. Under a PFI arrangement, there is typically very limited recourse for the bank in the event of termination of the Project Agreement due to the limited nature of its security.

The court’s decision that the bank would only be liable for those losses which had been quantified if it did exercise its step in rights means that, even if the notice was deficient, the bank would not suffer any loss.

Take away points

Key points to take away are:

  1. In PFI arrangements, or any construction projects where funders are involved, it is essential to consider your obligations under direct agreements or other funding arrangements before exercising any termination rights.
  2. Where banks have the option to step-in, contract drafters should consider exactly what information is required by the banks in order to decide whether to exercise those rights.