PFI contracts: Chain of fools

’You as subcontractor shall observe and perform all of the obligations that we have under our main contract (even if they have nothing to do with your works); you shall comply with all project documents (even though most of them haven’t been drafted yet); and you shall co-ordinate your work with all other subcontractors on site (details of trades and their programmes to be supplied as and when available).”

That’s a parody of the sort of clause that subcontractors are sometimes asked to sign. Such clauses can turn up in draft contracts on almost any construction job, but they are particularly prevalent in the lower tiers of the supply chain on a PFI project. They may also be seen on large projects such as waste-to-energy plants or process plants, where PFI-type principles sometimes apply.

With PFI, the public sector client enters into an agreement with a project company. This is a bank-funded special purpose vehicle. Having no assets as such, it will wish to ensure that all of its obligations are passed on to its contractors and consultants. This is fair enough, but often the design-and-build contractor (which is not a special purpose vehicle) adopts the same approach of passing everything on. This approach continues down the supply chain. The difficulties come when onerous obligations that at least make some sense when issued by a project company, are passed down wholesale to a small subcontractor. Parodies aside, here are three examples of such onerous clauses.

Using a find-and-replace function to substitute ’subcontractor’ for ’contractor’ in the main agreement should be the starting point, not the end of the job

First, subcontractors are sometimes asked to observe and perform obligations not only in the contract “above” them but in the one above that. This is usually unrealistic. What sort of obligations are covered? Parties need to be clear whether the subcontractor is supposed to take on administrative duties such as the serving of notices, as well as obligations regarding work and materials. Read literally, these clauses sometimes mean that the subcontractor is to serve notices direct on parties further up the supply chain - and that is rarely what is intended.

Second, “equivalent project relief” clauses are often used, even on non-PFI projects. These basically tell the subcontractor “you only get whatever I am entitled to”. In Midland Expressway vs Carillion, Mr Justice Jackson held that such a clause was in breach of the Construction Act. That has not stopped project lawyers from drafting ever more ingenious versions of it.

In my experience, many subcontractors will actually buy into the “equivalent project relief” approach in principle, if it is clear that the project cannot proceed without it. What they object to are clauses that are drawn so widely as to cover any sort of claim, even ones where the main contractor is the guilty party.

Other clauses require the subcontractor to await the outcome of proceedings two or three tiers above their level, or to become involved in large “interface agreements” involving parties in other tiers. I have seen clauses where it would be virtually impossible for the subcontractor to commence any form of legal action, such is the labyrinthine procedure that applies.

Third, the subcontractor is often required to co-ordinate and programme its works with the various other contractors on site. These clauses are sometimes drawn so widely that the subcontractor is effectively at the beck and call of the main contractor. Some clauses doing the rounds even allow the main contractor to supplement the subcontractor’s labour if it falls behind (even non-culpably). This raises interesting questions as to the responsibility for any subsequent defects in workmanship.

On PFI schemes and other similar large projects, step-downs are often done on a bespoke clause-by-clause basis. However, using the find-and-replace function to substitute “subcontractor” for “contractor” in the main agreement should be the starting point, not the end of the job. It is then essential to go through each clause and make sure that it is workable and reasonable. A sensible main contractor has to accept that some risks cannot be passed on, and price its head contract accordingly.

Parcelling up all the PFI risks and throwing them unthinkingly down the supply chain creates problems. The subcontractor and its lawyers may waste a lot of time negotiating. Alternatively, clauses such as those above may be accepted, but then only under duress - and that is not a good way to start a working relationship.

Ian Yule is a partner in Shakespeare Putsman