When PFIs go wrong

Whether the Private Finance Initiative has resulted in more projects being delivered on time and within budget is open to debate.

In my experience, projects procured on a PFI basis are just as likely to suffer from delay, disruption and cost overruns as traditionally procured projects. Indeed, the size and complexity of many PFI projects makes the normal perils of the construction process all the more likely.

However, PFI projects are less prone to boil over into full scale disputes for two reasons. First, the construction and operating sub-contractors often have an equity stake in the project company giving them a vested interest in the early settlement of disputes. Secondly, as the parties to a PFI contract are often committed to working together for the next 25 years or more there is a reluctance to fall out during the construction phase when the relationship is still in the early stages. This said, disputes can and do arise under PFI contracts and, where the sums at stake are large, they cannot be ignored.

Safety net

PFI contracts typically incorporate dispute escalation procedures to identify and address potential difficulties early and ensure that minor disputes do not become major headaches. Most disputes should be capable of resolution at an early stage during regular liaison meetings between representatives of the public body and the project company. If the dispute cannot be resolved at this level, it is usually referred to senior executives of the parties. While this is a common feature of many PFI contracts, the intervention of senior executives too often fails to resolve a dispute.

In most cases, the senior executives have no direct involvement in the day to day running of the project and must rely on subjective briefings from their management teams. In these cases, the intervention of an independent third party may be required to resolve the dispute.

There are several options. A neutral evaluator may be called in to provide the parties with an independent but non-binding assessment. Alternatively, parties may seek the assistance of a neutral mediator who will assist the parties in finding a negotiated solution to the dispute. If this fails, the standard method of dispute resolution is by referral to adjudication. As with construction contracts, the adjudicator's decision under a PFI contract is usually final and binding on the parties unless and until the decision is challenged by way of court or arbitration proceedings.

Recurring themes

PFI projects are less prone to boil over into full scale disputes

Many PFI contract disputes raise similar issues, often called parallel issues, under the construction and operating subcontracts.

Common examples include a dispute over the valuation of changes instructed by the public body or a claim by the operating subcontractor that performance deductions are unjustified. Public bodies are normally reluctant to agree to disputes at the project agreement level being joined with disputes at subcontract level. This has led to the practice of incorporating equivalent project relief (EPR) clauses in the subcontracts. These seek to limit the entitlement of the construction and operating subcontractors to the equivalent entitlement of the project company under the project agreement.

However, in the recent much publicised case of Midland Expressway vs. Carillion Construction, an EPR clause was held to be contrary to the provisions of the Construction Act and unenforceable. A subcontractor in a PFI project has the same rights to payment and adjudication as the subcontractors in any other project.

This presents a problem for project companies as PFI contracts are excluded from the Construction Act and the public body cannot be forced to accept Construction Act compliant procedures.

The rationale for the exclusion has always been unclear to me and the decision in Midland Expressway just serves to highlight the nonsense of having two different regimes applicable to the project agreement and sub-contracts. Unfortunately, the DTI is unwilling to reconsider the PFI exclusion as part of the current review of the Construction Act. As long as the exclusion remains, there will always be a potential mismatch between the project agreement and the subcontracts, which will create greater potential for disputes.

Paul Thwaite is a partner at Stephenson Harwood