In March 2009 the Treasury announced that it would lend £2 billion of public money to private firms building schools and other projects under private finance initiatives (PFI). The tax payer is now funding PFI directly. In November 2009, the Chancellor, George Osborne spelt out the Conservatives' plan, if elected. It included a modified PFI which preserves the arrangement of private sector investment for public infrastructure projects in return for part-privatisation, while ensuring proper risk transfer to the private sector along with transparent accounting. We await the new coalition government's detailed plan for PFIs.

Litigation involving local authorities

Traditionally it has been uncommon for there to be disputes between the Authority and the Consortium or SPV. The current trend is for fewer PFI projects to be delivered late and over budget. The usual dispute resolution provisions in PFI head contracts are by reference to SOPC4 (Standardisation of PFI Contracts Version 4), the current Treasury standard form and the CEDR (Centre for Effective Dispute Resolution) dispute resolution procedure for PFI and long-term contracts.

PFI contracts adopt a tiered dispute resolution process where typically there is an emphasis on senior executive negotiation and flexibility. The courts will not compel parties to negotiate in good faith to try to settle disputes (Walford v Miles). However, Petro-Deep Societa Armamento Navi Appoggio SpA v Petroleo Brasiliero SA, suggests that making such a provision may in some circumstances, may be enforceable. Local authorities should always consider mediation or other forms of alternative dispute resolution (ADR). Litigants can be penalised for not doing so.

As regards adjudication, PFI head agreements are exempt from the provisions of the Housing Grants, Construction and Regeneration Act 1996 but the SPV's subcontracts are not. However contractual adjudication provisions in the head agreement can be agreed by the parties.

There has been an increase in the last few years in the number of PFI/PPP disputes, most notably the London Underground refurbishment PPP and the collapse of Metronet, the maintenance provider. The M6 Toll Road PFI/PPP project gave rise to major disputes in the construction phase of the project. MEL, the claimant, entered into the a concession agreement with the Secretary of State for Transport to design, build and operate the 27 miles of the M6 Toll Road until 2054. Notably MEL was not part of the consortium of construction companies engaged by MEL to design and build the toll road and therefore the commonality of interest between the authority and the SPV did not exist.

Problems may also arise regarding state of the art projects. The National Physics Laboratory project in Teddington was the first PFI/PPP project to be terminated for non-performance. The SPV had difficulties in complying with the technical design and consequently both parties agreed to terminate the contract in 2004 because of concerns regarding the financial impact of the design difficulties.

In Aquatron Marine (t/a Aquatron Breathing Air Systems) v Strathclyde Fire Board (Scottish Court of Session), the authority accepted a tender which did not conform to the specification published in the notice in the Official Journal. The court decided, on the facts, that Aquatron's bid should have won and awarded it compensation for loss of profits.

Challenges to the award of PFI contracts, in the UK have increased dramatically in the last few years. Recently, in Sita UK Limited v Greater Manchester Waste Disposal Authority), Sita was an unsuccessful bidder in GMWDA's tendering process for a PFI project to provide waste disposal facilities for Greater Manchester that used the negotiated procedure. Following the Uniplex (UK) Limited v NHS Business Services Authority case, the court in Sita decided that the three month time limit for bringing a claim started to run when the complainant knew or ought to have known that there had been a breach of the rules. All that was required was infringement of the rules without any knowledge of damage. The court decided that the claim should have made its claim in April 2009 when it had knowledge of the infringement (and not August 2009) and its claim was therefore time barred. For more information on possible challenges to procurement contracts, please see Part 5 of our 'before you charge in' series.

Impact of this litigation on local authorities and tips on avoiding falling into common traps

The SOPC4 contractor distress section provides an overview of the structural and contractual protection available to a contracting authority against the consequences of contractor distress. It includes general and specific warning signs which an authority should be monitoring.

Most contracts require contractors to issue notices of events or circumstances when they happen as a first step in claiming extra time or money. It is becoming increasingly common to see such notices being drafted as 'conditions precedent' with non-compliance preventing the contractor from recovering its claim in full. This is a useful tool for contracting authorities. Traditionally such clauses had to spell out the consequences that rights would be lost if notice was not given on time. However, in Steria Limited v Sigma Wireless Communications Ltd, where there was no precise number of days given nor any warning as to the consequences of non-compliance, the court held that the notice was a valid condition precedent. In Education 4 Ayrshire Ltd v South Ayrshire Council, the authority argued that the contractor was not entitled to an extension of time or additional costs because the contractor had failed to comply with the condition precedent notices. The court held that where parties have laid down in clear terms what has to be done by one of them in order to claim certain relief, the court should be slow to seek to relieve that party from the consequences of failure to comply. So long as the requirements set out in the notice provisions are absolutely clear, they should be upheld.

Contracting authorities need to be aware that notwithstanding statutory adjudication does not apply to the head agreement, the contracting authority may still contractually be involved in statutory adjudication proceedings between the SPV and its sub-contractors.

The private sector's designs must be tested so as to ensure financial certainty.

Contracting authorities must seek to limit their exposure to the potentially onerous remedies regime by adhering strictly to procedural and fundamental requirements of the procurement rules including fair and equal treatment of all bidders with the utmost transparency.

As with any contract, the best way to avoid disputes is to be clear at the outset what the service is that is to be provided. One example we know of involves an NHS Trust signing up to a service contract for equipment which it did not know it had which led to claims for extra costs from the FM provider.

In summary, you need to be clear as to what you are contracting to do and in particular the scope of the services. You should also seek to stipulate as many conditions precedent as possible for the bringing of claims. Make sure you are aware of the impact of adjudication provisions down the line and finally, avoid 'agreements to agree' or other provisions which are unclear, uncertain or undefined so as to expose you to further cost or complications.