'Standard' PFI building contract terms are unlawful

A groundbreaking decision of the senior Technology and Construction Court judge, Mr Justice Jackson, will have significant implications for all those involved in the world of PFI. The judge has held that certain clauses in a PFI building contract, which are typical for this sort of agreement, are contrary to the Housing Grants Construction and Regeneration Act 1996 (the Act) and therefore unenforceable. The news will assist building and FM contractors, and cause major headaches for project companies/concessionaires.

Background

In a typical PFI arrangement, the public sector authority enters into a project agreement with a special purpose vehicle (the project company); the shares in which are held by the project sponsors. The project company lets the construction work to the construction contractor under a building contract.

The project company receives no income from the authority until the building work is completed and operation commences. It has no assets apart from the projected project income stream. It therefore generally tries to ensure that the contractor cannot claim against it any sums that it is unable simultaneously to recover from the authority. Project companies have used a variety of clauses in the construction contract to try to achieve this objective. Some lawyers have suspected that many of these clauses may be unlawful. Mr Justice Jackson has now confirmed that they indeed are.

The case in question, Midland Expressway Limited v Carillion Construction Limited and others concerned the M6 Toll Road. Midland Expressway Limited (MEL) were the concessionaires for the Toll Road under a project agreement with the Secretary of State for Transport. MEL in turn let the construction contract to a joint venture (CAMBBA) comprising Carillion, Alfred McAlpine, Balfour Beatty and AMEC. CAMBBA commenced an adjudication against MEL for some £10 million. This was the alleged value of work carried out under a Change instruction issued by the Secretary of State in relation to the road layouts at the northern and southern junctions of the Toll Road (the layouts being called "tiger's tails", the name deriving from the road markings used to direct motorists). MEL passed the claim up the line to the Secretary of State. In the meantime, it applied to the court to prevent CAMBBA continuing with its adjudication.

The Decision

Two key points in the decision were as follows:

Firstly, MEL had introduced clauses restricting CAMBBA's right to claim any sums for Changes until agreements or determinations had been made under the concession agreement. These clauses purported to prevent CAMBBA taking any steps to enforce its rights until MEL had concluded proceedings with the Secretary of State on those issues.

Section 108 of the Construction Act gives a right to any party to a construction contract to refer a dispute for adjudication "at any time". Mr Justice Jackson said that these clauses were contrary to that section and therefore unenforceable. The judge noted that in earlier cases, clauses far more innocuous than this (e.g. clauses simply requiring the parties to pause for a period to try to resolve matters before adjudicating) had been struck out as unlawful.

Secondly, MEL relied upon a clause that stated that, whatever rights CAMBBA might have, it could not actually receive any payment until MEL had received corresponding sums from the Secretary of State. This clause, said the judge, was contrary to section 113 of the Act. That section states that any provision making payment under a construction contract conditional upon the payer receiving payment from a third party is ineffective (except in certain limited circumstances). The position for which MEL contended, the judge noted, was precisely the sort of situation that Parliament had legislated against.

MEL tried to argue that one key clause was not strictly "pay when paid" but rather "pay when [MEL was entitled to be] paid [by the Secretary of State]". The judge held that this was mere "circumlocution" and amounted to much the same thing.

The Effect of the Decision

The decision is good news for construction contractors. It is similarly good news for FM contractors carrying out repair and maintenance of buildings, since these contracts are also Act-protected.

For project companies, the case creates problems. Sponsors to project companies have long been concerned that, whereas project agreements are exempt from the provisions of the Act, the building and FM sub-contracts are not so exempt. Some project companies may seek to make greater use of "parallel loan agreements". These agreements provide that if the project company is temporarily out of funds, the building contractor (or its parent company) must loan to it, interest-free, and until the project company is paid by the authority, a sum equivalent to the amount that it is otherwise entitled to receive. Depending upon the terms of the agreement, this may be "pay when paid" by any other name, and therefore also unlawful. However, there is no decision from the courts on such agreements as yet.

In any event, project companies will have a particular incentive to pursue promptly any claims made against them by their building or FM sub-contractors.

Wragge & Co's Construction Team acted for CAMBBA, the successful contractor.