The Infrastructure and Projects Authority reported, as of summer 2021, there are over 550 PFI contracts expiring over the next 20 years. As reported in the White Fraiser Report, there is “broad concern” in the PFI sector about the “scope for significant disputes” nearing the expiry of PFI contracts.
A PFI dispute resolution forum
The White Fraiser Report recommended a dedicated PFI dispute resolution forum to hear “any type of PFI dispute”. However, establishing a PFI dispute resolution forum would realistically need to be government led, and take time to set up. It would also be a challenge to imply any such significant dispute forum retrospectively into all PFI project contracts. Indeed, the industry specifically excluded Tier 1 PFI disputes from the statutory adjudication provisions established by the Housing Grants, Construction and Regeneration Act 1996, as amended, which would have provided a quick resolution method for disputes referred to technical experts. Therefore, the intention of the industry was for disputes relating to PFI contracts to be dealt with in normal existing dispute resolution forums.
Reviewing PFI contracts
In light of the above, the expiry of PFI contracts including public authorities’ rights, the condition of the assets on handback and dispute resolution, is a matter of contract law. Its important for public authorities to review PFI contracts to establish whether contractors are fulfilling i obligations, and available remedies. There are key contractual points public authorities should review and start implementing now for an orderly end to PFI Contracts, including:
- Auditing rights: contractors monitor their performance through a quality control system. What contractual rights does the public authority have to conduct audits? Check if availability and performance criteria are being met.
- Deductions: where availability and performance criteria are not met, the public authority should check if deductions can be made from the unitary charge under the payment mechanism.
- Maintenance: contractors are normally under a continuing maintenance obligation to ensure the asset achieves its full working life. What rights does the public authority have to undertake surveys and inspections to establish whether there are maintenance issues?
- Treatment of the asset on expiry: the asset may be handed back to the public authority or remain with the contractor. Does the public authority have to exercise an option to take the asset? What provisions govern transfer of title and interests in the assets?
- Final survey: when is the final survey due and can it be brought forward? This is important where there are concerns about compliance with maintenance obligations, and there is potential for a dispute. Is there a dual mandate to appoint a surveyor? What liability rests with the contractor if assets are not as per handback conditions?
- Handback: other key considerations include checking finance has been repaid and not extended, ability to use all intellectual property (e.g. software), assignment of licences, contracts and warranties, handback conditions, TUPE and provisions for re-tendering for services.
- Retentions: where an asset is being handed back to a public authority, it will usually be at zero cost. Can public authorities retain sums from the unitary charge in the final years, or the contractor providing a bond, to cover the cost of rectifying maintenance issues revealed in the final survey?
- Set off: can the public authority deduct liquidated damages, debts and liabilities (including those relating to the contactor’s failure to comply with maintenance obligations) from the payments the public authority is obliged to pay to the contractor?
- Dispute resolution: this is usually a stepped process, and public authorities need to understand what steps need to be taken, and evidence gathered, to support and ultimately resolve a dispute under a PFI contract.
In the absence of a fast track dispute resolution process, public authorities need to take practical steps to manage PFI contracts and streamline the route to expiry. The earlier public authorities review PFI contracts, and seek specialist legal advice on their contractual rights, the more time they will have to resolve issues and settle disputes without resorting to expensive and lengthy litigation.
Hetty Tombs is a Professional Support Lawyer in the Public Sector Team at Ashfords LLP.