PPP contracts – how to avoid bringing long-term contracts from the boardroom into the courtroom

The jury is once again out on whether PFI contracts are worth entering into or whether the government should put an end to such arrangements. This unfavourable attention comes hot on the heels of construction giant Carillion’s insolvency in January 2018.

The question for many businesses now is therefore: how do you avoid becoming the next ‘Carillion’? Our analysis of the future for PFI contracts including top tips for running them effectively, is available in edition 21 of our newsletter, Sharpe Focus. In the following article we take a closer look at two recent cases concerning PFI/PPP contracts, and the lessons to be learned from them.

Always err on the side of caution when issuing notices – follow the rules!

The judgment of Mrs Justice Keegan in Glen Water Ltd v Northern Ireland Water Ltd [2017] NIQB 20 highlights that the wording used in any notice must be clear and unambiguous.  A contracting party that adheres to this rule will significantly reduce its chances of being subject to legal proceedings on the basis of a defective notice.

In brief, this case concerned a 25-year PFI contract to upgrade, operate and maintain wastewater treatment works and pumping stations in Northern Ireland.

The project agreement allowed Glen Water to claim compensation for a breach by Northern Ireland Water (NIW) of its obligations, provided that Glen Water notified NIW within 21 days of it becoming aware that a compensation event had caused or was likely to cause delay, breach of a contractual obligation, additional cost or loss of revenue. Glen Water was then required to give full details of the event within 14 days of notification.

Several compensation event notices were issued by Glen Water during the construction phase. The “notice” at issue in this case was in relation to an allegation by Glen Water that NIW was failing to maintain the existing line 1 incinerator which was to be handed over in good operating condition to the O&M sub-contractor on service commencement. Glen Water relied on a letter it sent to NIW on 20 October 2009 in which it raised this concern, claiming that it constituted a compensation event notice. This was disputed by NIW.

The letter of 20 October 2009 addressed more than NIW’s alleged failure to maintain existing assets. It was part of a chain of previous correspondence and so also referred to an existing claim (relating to the line 2 cooling system). The letter asserted that Glen Water considered a compensation event to have occurred.

The Court considered whether Glen Water had notified its claim to NIW in accordance with the project agreement. The letter of 20 October 2009 was submitted as key evidence that proper notification had occurred.

The Court held that the letter was not entitled as a compensation event (unlike other claims) and so the letter was read as part of a chain of correspondence in respect of the existing claim rather than constituting notice of a new event. Although correspondence between the parties after the 20 October letter referred to various claims, there was no clear and consistent thread that a line 1 claim had been formally notified.

Lessons learned

The rationale behind the Court’s decision was that a “notification should be clear and unambiguous” and that any discussions between the parties about issues concerning the project during the relevant time period could not equate to contractual notification of a specific compensation event.

We would therefore urge clients to ensure that any required notices are submitted in the appropriate form using clear and unambiguous wording. Merely making the other party aware of the risk of a claim is not enough to constitute proper notification.

Do not assume that the other party agrees with your interpretation of the wording

The recent case of Connect Plus (M25) Ltd v Highways England Co Ltd [2018] EWHC 140 (TCC) shows that where there are two contradictory provisions in a PFI contract, the Court will adopt a ‘commercial common sense’ approach in deciding the procedure to be followed by parties.

This case concerned a 30-year DBFO (Design Build Finance Operate) contract under which monthly payments were to be adjusted in accordance with Schedule 25 of the contract. One of these adjustments was the ‘critical incident adjustment’. However, a dispute arose as to the meaning of ‘critical incident’ under the contract; whilst Connect Plus relied on post-contractual discussions and its belief that it was allowed to declare the existence of ‘critical incidents’ in accordance with paragraph 7.3.2 of the Network Management Manual which sets out an objective criteria for determining critical incidents, Highways England was of the belief that a critical incident was “an incident declared as such by or on behalf of the Secretary of State in accordance with applicable emergency procedures” in accordance with Schedule 25 of the contract.

The Court held that both provisions were clear and unambiguous in their wording. However, the definition listed in Schedule 25 accorded with commercial common sense and was therefore held to be the provision which correctly stated the definition of ‘critical incident’. In coming to this conclusion, Mrs Justice O’Farrell considered the tender documentation for this contract where it had been agreed that Highways England would be the one to declare critical incidents. The Court also considered that the alleged post-contractual discussions did not go as far as to give Connect Plus the right to declare critical incidents under the contract.

Lessons learned

We would urge clients to ensure that the wording contained within their PFI contracts is clear, unambiguous, and sufficiently detailed. This will prevent alternative interpretations from being formed either by the other party to the contract in the first place. In any case, when carrying out contract management discussions, it is important not to gloss over discrepancies and not to make assumptions about any ambiguity, without clear and written agreement by the parties, particularly where it involves a change or addition to the original contract wording.

Conclusion

Through careful drafting of the main contract and any notices required under that contract, some of the pitfalls of entering into PFIs can be avoided. It is also important for both parties to such contracts to be well-versed in running and managing a PFI contract and to understand not just the commercial issues but also the contract management processes, including notice mechanisms. In light of the longevity of these contracts, it is worth spending time making sure provisions are clear and well-understood.

We explore another recent dispute in a PPP contract that reached the courts, in our case summary on Amey Birmingham Highways Ltd v Birmingham City Council.

Juli Lau is an Associate in the Infrastructure team at Sharpe Pritchard and advises on all aspects of PPP and PFI. Jasmine Mahboobani is a trainee solicitor in the Construction team.