PFIs: Do your paperwork

Most standard form PFI contracts require parties to resolve any disputes by adjudication in the first instance. This inevitably means that the interim, temporarily binding determination of what can be high value and increasingly complex disputes occurs in a confidential vacuum. As a result, parties to a PFI contract do not have the same access to the wealth of published judicial precedent that is available in construction law.

PFI construction projects are different to standard construction projects and PFI is still a relatively undeveloped section of the contentious legal arena. The prevalence of adjudication means that contracting parties lack guidance from the judiciary on key areas of contractual interpretation arising from the standard form PFI contracts. One such area where PFI-specific judicial consideration is lacking is the effect of the final or acceptance certificate issued by an independent certifier or employer’s agent at the end of the construction phase of a project.

The exact effect of the issue of an acceptance certificate is determined by the (often standard form) contract that governs the project. However, it is an accepted principle of English construction law that the issue of an acceptance certificate at the completion of the project has critical implications for employers and contractors alike.

As a general position, the courts have held that the issue of such a certificate can act to prevent an employer from seeking compensation for defects that were covered by the certificate. Essentially, the certificate (particularly in JCT type contracts) acts as an evidential bar which precludes an employer from later being able to establish a liability on the contractor for patent defects (defects which are detectable either at practical completion or during a defects liability period). In practice this means that an adjudicator, arbitrator or judge determining a dispute arising from such an issue would not be able to consider evidence that contradicted the certificate.

In PFI projects, the acceptance certificate has an entirely different purpose and effect. The main purpose of the PFI acceptance certificate is to act as a trigger for payment of the unitary charge by the employer to the contractor from the date on which the acceptance certificate is issued. This is essentially the payment for the work completed by the contractor.

The PFI structure allows for unavailability deductions to be levied against the unitary charge payable to the contractor where some element of the project does not meet the specification required by the employer. Such unavailability deductions can be levied as soon as the day after the date of the PFI acceptance certificate regardless of the fact that no physical change to the project has occurred.

Consequently, a contractor can receive a PFI acceptance certificate that concludes the construction phase of a project on day one but can be on the receiving end of financial deductions on day two as a result of construction failures. A minor construction failure could produce unavailability deductions running into the millions of pounds, irrespective of the existence of the PFI acceptance certificate. The acceptance certificate simply triggers a payment from the employer to the contractor but does not affect the employer’s ability to deduct from that payment for any defective works.

The PFI acceptance certificate can therefore have a different effect to the construction acceptance certificate issued on a traditional construction project and contracting parties should be aware of this distinction in the run up to final certification. Once the PFI acceptance certificate is issued, the trigger for payment of the unitary charge has been reached and the moment passes (that is, it cannot be “untriggered” as a result of the existence or discovery of a patent defect). From this point, the employer can deduct sums payable to the contractor as a result of the existence of defects, irrespective of the fact that the defect existed at the time that the PFI acceptance certificate was issued.

Ultimately, a PFI acceptance certificate remains a crucial document for the contractor as it triggers payment of the unitary charge. However, the contractor should not consider the issue of the acceptance certificate to be the end of the story.

Alison Fagan is an associate at Addleshaw Goddard