Codifying PFI contracts: Sticking to the letter

“How well do PFI contracts integrate with orthodox construction law concepts?” The provenance of this question from an architect became clearer when she explained that she had been told that a recent High Court case had demonstrated that the express words or pre-conditions in the contract trumped her professional discretion or assessment on whether the building was complete. She wanted to know whether there was a legal distinction between an “independent certifier” (common in PFI transactions) and an architect; she wanted to know whether her certification duties under orthodox JCT arrangements could be fettered or controlled by express words in PFI contracts; and she wanted to know if she had to now read all the specifications and legal terms before she certified something as being complete.

Sophisticated readers will note that the above raises a number of discrete, complicated and interrelated questions. Sophisticated readers may also be aware of two PFI cases: Laing O’Rourke Construction Ltd vs Healthcare Support (Newcastle) Ltd & Newcastle upon Tyne Hospitals NHS Foundation Trust, and Compass Group UK and Ireland Ltd (t/a Medirest) vs Mid Essex Hospital Services NHS Trust.

Common with all PFI arrangements the rights and obligations in the project agreement had been “flowed down” into the construction contract

In O’Rourke, the PFI arrangements related to the Royal Victoria Infirmary and the Freeman Hospital in Newcastle and there was a dispute about whether a certain phase had reached practical completion. Common with all PFI arrangements the rights and obligations in the project agreement had been “flowed down” into the construction contract and there was an independent tester (rather than an architect) who had the obligation to issue a phase certificate of practical completion. The independent tester had identified five areas of work which he said prevented the issue of the completion certificate.

The fight between the trust, the PFI project company and the construction company was whether the independent tester was allowed to take into account any breach of contract relating to quality or conformity when issuing the completion certificate, or, if he could only take account of the completion criteria set out in the contract. The court held that it was the latter - “[The contract] requires the independent tester to issue that completion certificate when he is satisfied that completion of a phase has occurred in accordance with the completion criteria.”

This appears to suggest that the independent tester is bound by the terms of the completion criteria but then the court went on to add that: “[…] in my view if the independent tester reasonably considers that a departure from the specification or the [trust’s construction requirements] has not had and will not have any material adverse impact on the ability of the trust to enjoy and use the buildings for the purposes anticipated by the contract, then he may conclude that the completion criteria have been met. As a matter of business efficacy and commercial common sense, I can see no justification for importing a requirement that any breach of the specification, however technical or minor, must prevent the phase certificate of practical completion from being issued.”

This additional comment from the court appears to put power back into the hands of the certifier, albeit that the certifier needs to find a departure (or departures) from the specification that support a material adverse impact to occupy.

So does this mean that the express terms and conditions in the contract are more important than the certifier’s expertise?

The Compass case appeared to make light of the detailed express terms and performance deduction scheme in the project agreement and so it appears understandable why my architect is concerned. It appears that the written terms
of the already complex PFI project documents will continue to become more prescriptive and in turn seek to trump the certifier’s discretion and expertise.

This area is not easily codified and perhaps the case law generates more questions than answers: would it make a difference if the independent tester was an architect? What if there are patent defects that do not compromise the completion criteria but do not preclude occupation? What if the completion certificate is stated to be conclusive of quality, workmanship or compliance?

It is almost irresistible to conclude that PFI contracts do not actually integrate well with orthodox construction law concepts … And we haven’t even discussed the pay when certified or parallel-loan issues.

Hamish Lal is head of construction at Jones Day London