PFI hand-back – are you at risk?

PFI was introduced by the UK government in 1992 to encourage private sector businesses to tender to local and central government authorities for the provision of public infrastructure and services such as schools, hospitals and roads. PFI was expanded in 1997 under Tony Blair’s Labour, and the coalition government in 2012 introduced PF2 as a revised form. In 2018 the government retired both PFI and PF2, and the National Infrastructure Strategy published in November 2020 confirmed that it would not reintroduce the PFI or PF2 models of project finance.

Between 1997 and 2010, an average of 55 PFI contracts were signed per year, which decreased to a total of 84 between May 2010 and its culmination in 2018. By that point there were a total of 704 PFI or PF2 projects, of which four were still in construction.

Under PFI procurement, the private sector would finance, build and operate the infrastructure and provide long-term services and facilities management through long-term contractual arrangements (normally 25 to 30 years). Typically, the PFI contracting arrangements were complex and involved a funding arrangement, an agreement between the public sector procurer (for example a local authority) and the special-purchase vehicle (the project company, let’s call it) as well as separate agreements for the design and construction of the facility and the facilities management. Both latter agreements were also likely to include related subcontracts – the project company would be likely to appoint a contract administrator and there might also have been an independent certifier to represent the funder.

Over the next 10 years more than 200 PFI contracts will end, covering assets worth over £10bn

Under the facilities management contract, a unitary charge payment is made by the procurer to the facilities contractor from the start of the operation until the end of a contract, which covers the cost of the construction of the asset, of borrowing debt and equity investment, taxes, operating services and maintenance. It is estimated that these payments will continue to be in the billions of pounds until the mid-2040s.

Individual PFI agreements contained some bespoke terms, with a great deal of effort put into the pricing for the original project, the allocation of risk and the sum of the unitary charge. There were, however, efforts from the government to introduce standard terms through its guidance Standardisation of PFI Contracts, up to version 4 issued in March 2007 and superseded by Standardisation of PF2 Contracts in December 2012. These documents introduced standard wording to be used within the PFI/PF2 contracts, but the specific requirements of the projects remained bespoke.

Against this background we are seeing issues arising with the hand-back of the PFI asset, and with claims against the contractors and designers of the facility.

Hand-back

Over the next 10 years more than 200 PFI contracts will end, covering assets worth over £10bn. On expiry, in most cases the ownership of the asset will be transferred to the public sector, which will be responsible for ensuring the continued running of the facility.

In these circumstances, the procurer that entered into the original PFI contract is required to closely monitor the performance of the facilities manager to ensure that the required maintenance has been carried out and that the assets are returned in the condition agreed under the original contract. The local authority is then responsible for deciding whether the facilities management services should in future be provided in-house, by a new contractor, or by the current provider.

We are seeing claims brought by project companies against contractors in relation to the assets not being built as specified 

In preparation for the handing back of assets, the government tasked the Infrastructure and Projects Authority (IPA) with developing a programme to manage the expiry of PFI contracts. As part of this programme, the IPA developed a health check tool which evaluates the expiry risk for all PFI contracts ending in the next seven years. This tool planned to originally carry out an initial 55 checks by the end of March 2021 and the results of these checks are eagerly awaited.

The health check is expected to focus on comparing the asset as it should be under the PFI contract and its current state. This may give rise to various claims from the local authority and the project company, which we expect to be passed down the chain as necessary to the facilities manager or the original design-and-build contractors. Which leads onto the next issue…

Claims against contractors and designers

It is likely that issues in the maintenance of the asset will fall to the facilities management contractors. Accordingly, these contractors could be carrying out their own audits ahead of those carried out by the local authorities to assess the quality of the current asset.

However, we are also seeing a number of claims brought by project companies against contractors in relation to the assets not being built as specified in the design and build contract or the agreement between the procurer and project company. Such claims are then being passed to the original designers appointed by the contractors. As an example of these types of claims, we are aware of electrical issues being raised by project companies on PFI hospitals completed in the 2000s with defects being judged by the current electrical design standards rather than those in place at the time of specification and installation. In such circumstances, a joint industry approach could be taken based on the standards at the time of construction.

Claims brought long after practical completion may catch contractors and designers unawares, given the time that has elapsed. This can create difficulties in terms of the project documents and the availability of employees involved in the original works. A shrewd contractor or designer may want to consider staying ahead of the curve by carrying out initial investigations into the location of documents or employees.

Claims brought long after practical completion may catch contractors and designers unawares, given the time that has elapsed

The passing of time, however, may mean that the claims are time-barred. Typically, limitation will expire either six or 12 years from the date of the breach of contract under statute (the longer period if the contract was entered as a deed) or 12 years from practical completion under a provision in the contract. Potential defendants would be well advised to investigate limitation periods when a claim is brought, if not before. This is particularly true if phased completion was used on the project – it may be that some parts of the claim are outside of the limitation period, and some are not.

However, even if a statutory or contractual limitation period has expired, a claim may still be brought in tort if a claimant can show that a defect is “latent” (that is, it could not be found by reasonable inspection) within three years of discovery. It should be noted that this is still subject to a 15-year statutory longstop on limitation (unless there is fraud).

Contractors should also be aware of the expiry of the defects liability period in PFI projects. We have seen examples of effectively unlimited periods for claims to be brought if defects are notified within the 12-year defects’ liability period.

Claimants may ask contractors or designers to enter into standstill agreements which seek to preserve the limitation position for the period specified

Clearly, limitation will be a key issue in most disputes arising from a PFI contract. As limitation is a particularly thorny bush, defendants should seek legal advice at the earliest point in the event of claim being intimated.

Claimants may also not state their case straight away but instead ask contractors or designers to enter into wide-ranging and lengthy standstill agreements which seek to preserve the limitation position for the period specified. What should a defendant’s response be?

A first option is to enter the standstill and allow a claimant to develop its case whilst a defendant prepares its own. This is not always advantageous as in these circumstances a defendant has little control over how the matter progresses or when proceedings are brought.

A second option is to enter a short standstill to allow a period to investigate any issues alleged, and the period could then be extended if the issues exist with a focus on either resolving them by carrying out remedial works or settling claims without the need for formal legal proceedings.

A further option is to refuse the standstill and to force the claimant to issue proceedings. Once issued a claimant will have four months to serve the claim form and issue detailed particulars of the claim. This approach can give a defendant greater control as a claimant would most probably ask the court for a stay (a hold on the litigation). The court is unlikely to grant indefinite stays so it keeps the pressure on them.

In circumstances where a particulars of claim lack the required detail, a defendant could apply to the court to strike out proceedings. Whether an application would succeed is of course fact-sensitive and would require careful thought prior to the application.

If you were involved in PFI projects that are due to expire in the not-too-distant future, you should be prepared for the almost inevitable fallout of the assets being returned. While much of a defence strategy will be dependent upon the actions of a claimant, contractors and designers can begin to investigate areas of potential risk, project documents that support a position and employees who still have first-hand knowledge of the project. When contact is received from potential claimants, contractors or designers should carefully consider their approach, particularly if asked to enter a standstill agreement.

Sheena Sood is senior partner at Beale & Co