Service with a smile

Many private finance initiative projects are now well into their operational period and disputes about the construction phase are being replaced by disputes about the operational aspects. This can manifest itself as a dispute about the way in which service points, leading to deductions from payments to the private sector operator, are awarded by the public authority. 

The latest such decision to come before the Technology and Construction Court is Portsmouth City Council vs Ensign Highways Limited (2015) in the Technology and Construction Court. This case concerned a PFI contract originally made in 2004 between Portsmouth City Council (PCC) and Ensign Highways Limited (Ensign) for the rehabilitation, maintenance and operation of PCC’s highway network. Although relationships between the parties were good during the early stages of the contract, following financial pressures on PCC during the recession, PCC began to operate the service point mechanism under the contract in a more aggressive manner, awarding the maximum number for every default and storing up points over several months to “ambush” Ensign with a large award of service points in one go. Perhaps not unsurprisingly, the parties ended up in dispute and the court was asked to consider the manner in which service points should be awarded under the contract and the nature and extent of the duty of good faith which was expressly referred to in clause 44.4.1 of the contract. 

A great deal of reference was made in this case to the earlier decision in Mid Essex Hospital Services NHS Trust vs Compass Group (2013) BLR265, a case not in fact involving a PFI contract but a contract which had a service points mechanism very similar to those found in  PFI agreements. In fact the court in PCC came to the conclusion that a distinction could be drawn between Mid Essex and the present case in that the Mid Essex mechanism required the NHS trust to decide whether or not to award service failure points, whereas in the PCC case if the authority decided to award service points, it then had to decide how many to award. It was the nature of that second, discretionary decision that led the court to examine the good faith obligations contained in the contract, and in particular clause 44.4.1.

It is commonly accepted that there is no general duty of good faith in English law so a good faith obligation has to be expressly included in the contract.  In the PCC case clause 44.4.1 expressly required PCC and Ensign to “deal fairly in good faith and in mutual co-operation with one another”. The court held that the obligations set out in clause 44.4.1 did not apply to the contract as a whole and, further, that there was nothing in the contract that would specifically apply clause 44.4.1 to clause 24 of the contract, which dealt with the award of service points.     

This, however, is not the end of the story. The parties had agreed that if clause 44.4.1 could not be extended to the operation of clause 24, then some form of term would have to be implied into the contract in relation to the manner in which service points could be awarded (as opposed to a decision as to whether to award them or not). The court followed the approach taken in Mid Essex and came to the conclusion that, in exercising its discretion in relation to the number of service points that should be awarded, PCC should act honestly and on proper grounds and not in a manner that is arbitrary, irrational or capricious. 

To summarise, in relation to the operation of service point award mechanisms in PFI contracts:

• There is little room, if any, in such contracts to imply a general duty of good faith
• The decision as to whether to award service points or not may, depending on the precise words of the contract, be a unilateral decision which does not require the implication of any terms as to fairness or impartiality on the public authority’s part 
• In the absence of anything specific in the contract, an obligation not to act in an arbitrary, irrational or capricious manner and to act honestly and on proper grounds may well be implied when the authority is exercising its discretion as to the number of service points to be awarded.

As I mentioned above, we can expect to see more such disputes on the operational aspects of PFI contracts and as such the decision in the PCC case is a helpful and lucid summary of the issues that will almost certainly arise again. 

Simon Lewis is partner, construction and engineering team, Bond Dickinson LLP