Nearly a decade after the 2008 economic downturn, the age of austerity continues. With 18 months of Brexit negotiations and economic uncertainty ahead, cash-strapped public bodies are likely to see further decreases in their income streams. PFI and PPP contracts entered into before 2008 are, in many cases, becoming unaffordable and public bodies, such as national health trusts, are actively searching for ways to make savings. This is not good news for those in contract with public bodies under the PFI or in PPPs.
Unfortunately for PPP/PFI project companies, this focus on costs savings channels the public body's attention on to the contract's terms. The result is a change in the dynamics of the PFI/PPP contract, which often means an erosion of the "partnering" element of the contractual relationship. As the need for savings increases, the public body exploits technicalities in the project agreement as a means to reduce expenditure (such as levying availability deductions or even exercising termination rights to avoid future contractual liabilities). Disputes become inevitable and – having managed many in the last few years – we are seeing distinct approaches emerge. We have set out some examples below (in all of which we acted in for project companies).
Common types of PFI and PPP disputes
A PPP/PFI contract allows the public body to award service failure points against the project company when it has an issue of genuine concern. However, the public body can exploit this procedure by identifying arguably spurious grounds to award or increase the number of service failure points with a view specifically to:
- retain money from the project company; or
- seek a renegotiation on more favourable terms, or, in extreme cases, to terminate the project agreement.
Clawing back payments
The public body undertakes a "reconciliation exercise" to claw back historic payments made to the project company that, it argues, should not have been made.
The public body relies on disclosure or audit provisions in the project agreement to request historic documents. In reality, this is a fishing exercise: the public body is "fishing" for evidence that the project company failed to meet its obligations in any original investment period. Such a breach will enable the public body to demand a refund or set-off against the unitary charge. The project company is in a no-win situation: if it refuses to supply the documents, the public body treats the refusal as a ground for withholding payment or effecting deductions.
The public body seeks to renegotiate the nature of the project agreement through the procedure for instructing variations to the works, rather than a formal deed of amendment or an agreement to vary the terms of the project agreement. The project agreement tends to give the project company only limited reasons and time to object to a variation order. These limitations can enable the public body to force through a change without the project company having a proper opportunity to object. (In one example, where the parties adjudicated their dispute, the public body was not entitled to change the risk/reward profile for lifecycle maintenance by way of a variation enquiry. Such an amendment would have made the project economically unsustainable for the project company and had to be agreed as an amendment to the terms of the project agreement.)
"Defects" arising from technical requirements
Public authorities can also bring claims for alleged defects which are not defects but rather the natural effect of technical requirements being agreed with regard to budget and not "buildability". (Examples we have handled in the healthcare sector include temperature issues due to compliance with mechanical and electrical design and flooding due to compliance with agreed drainage design.)
Dispute resolution mechanisms in PFI/PPP contracts
When disputes do arise – whatever their basis or the merits of the parties' arguments – the way in which they must be managed is set out in the project agreement. Dispute resolution mechanisms in PFI and PPP contracts are usually tiered to allow parties to work through an escalating series of alternative procedures before going to court. Typical mechanisms involve:
- an informal consultation to attempt to resolve the dispute in "good faith";
- referral to a project board or liaison committee;
- reference to adjudication or expert determination. (The parties would have the right to refer the dispute to adjudication at any time provided the dispute is a construction dispute under the Housing Grants, Construction and Regeneration Act 1996 (as amended); and
- litigation proceedings (or arbitration).
In our experience, it is rare for PFI disputes to be resolved at the early, informal, stages of this tier. More and more disputes are being resolved using adjudication or expert determination, which provide a binding decision if only on an interim basis. Quite often, there can be a series of contested court applications either to challenge adjudication decisions or to see declarations on the meaning of contract terms.
Avoiding PFI/PPP disputes
The costs of resolving a PFI/PPP dispute using this tiered approach can quickly mount up and will soon eat away any profit margin. Disputes can also have serious reputational ramifications for the parties. All those involved in pre-2008 PPP and PFI projects should therefore take seriously the risk of these austerity-induced disputes and try to minimise their occurrence. In particular:
- be vigilant: ensure that those who deal with the day-to-day management of the contract are aware of warning signs such as a rising number of service failure points or requests for historic documents to justify payments. If they are not, train them;
- maintain communication between the parties at all levels to keep the spirit of partnership in the agreement strong;
- even if the contract is running smoothly, consider opening up a dialogue to ensure the contract terms are still suitable;
- arrange for senior managers to meet regularly to discuss the project – and that includes affordability and budget issues;
- if funding issues do arise, review whether there is any scope for costs savings on the project; and
- weigh up the effect of any contract changes in comparison to the potential cost of protracted disputes. Disputes are expensive and time consuming for all. If the cash really has dried up, are there compromises that can be reached?