Following on from Back to the future? Prospective issues in PFI / PPP – revisited¹ which considered the macro and high-level issues upcoming in PFI, this article adopts a more granular approach covering the commercial issues in a recap form before turning to the claims themselves.
The starting place on any handback claim is a reminder of cost and time. All handback claims are usually and at least tripartite – public body, the Project Co (“ProjCo") and the FM Contractor(s). Behind two of those stand the government apparatus including the Treasury ("HMT”) and the Funders – whom it is likely are the paymasters. Thus, the mechanics and dynamics of running and resolving a claim can be complex.
The second thought process is what type of project and which generation of PFI project is in play. Very early PFI’s were PPP’s via a concession agreement granted by government (for example Skye Bridge or the M6 Toll). From there PFI spread to schools, hospitals, IT (all too many to list), light rail (for example Croydon, Nottingham) back to large projects: the Olympics and large-scale urban redevelopment. In the case of the more numerous projects (schools, hospitals and the like), there were from about 2001 a series of generations of PFI Agreements pushed out by government and some other local bodies. Each generation – especially the early ones – had its quirks in drafting. Thus, on hospitals, the Service Level Specifications (standards of performance including maintenance and reporting) were to be found in Schedule 14. Schedule 14 was not, however, always linked to the consequences of failing to upkeep or to report – usually in Schedule 18, the Payment Mechanism (“PayMech”). Similarly different early agreements had different positions on whether the time frame for Deductions could be retrospectively bypassed.² It is therefore important to know which generation is at issue as that will enable any “quirks” to be rapidly identified.³
The third process is whether the claim is made under the Deductions regime, Lifecycle regime, the equity repayment scheme on termination or a combination of all three. Which or all it is will govern the basis of recovery, the operation of caps (if any) and whether any claim can be made at all or, if made, can be passed on by ProjCo⁴. The first two are reasonably well trodden – Deductions claims having been around in the author’s experience for 20 years and Lifecyle for about a decade. The last is much more rare to date and advice should be sought – not least as because funders, of which there are nine or so active in the market⁵, and their advisors will be involved.
There is one additional wrinkle to the above which relates to hospitals – the so-called Condition B issue. The commonly adapted definition (not least because any attempt to find an actual, proper definition, is difficult) is:
Condition B is the minimum acceptable condition that must be achieved to avoid backlog costs – sound; operationally safe and exhibits only minor deterioration.
As can be seen the approach is nebulous and there is much room for legitimate debate between all parties involved and their experts. One approach would be joint inspection tours to establish parameters and their application – both agreed and not agreed in good faith and for experts being properly mindful of their CPR35 duties. The things not to do are to adopt extreme, unreasonable and impractical approaches to the parameters, their application and the alleged deviations: it is unlikely to lead to any commercial or forensic advantage⁶ and will adversely impact on the merits of any claim that goes to adjudication, arbitration or court.
The above raises two further issues at this juncture.
First, once one party has its list of defects, there is a temptation to snap adjudicate on that list as it stands without getting to ahandback analysis.⁷ This will, even on a genuinely poorly performing project, generate the same cynicism and criticism as global construction claims.
Second, it would be reasonable to expect there to be two types of experts – put crudely, subject matter experts and then quantification experts. Both are in short supply at present – in part due to the volume of claims and present and historic conflict shadows. In handover claims this shortage can be more acute because there are usually at least three parties; all of whom will need experts on the same project(s). It follows that it is always worthwhile to start hunting for experts at an early stage.
Assuming the above have been covered, each party should now have three lists: pass, fail and debateable. If fail and/or debateable are short, most parties will seek a commercial resolution and exit the process. To a greater or lesser extent, the PFI has in fact worked – a fact that all should bear in mind.
The pass list should be common ground and that fact should be made public as between the parties as soon as possible. It is the fail and debateable that move on to the next stage. At this stage, the parties in consultation with the experts (to the extent permissible) and their legal teams should exclude those fails where their own case is weak.⁸ That should leave two cohorts of claim supported by the arguments and the overall team.
It is these two cohorts that require valuing. Different principles will apply to each of the possible heads of claim – Deductions, Lifecycle and Equity.
Deductions will be calculated by Functional Area or Unit as is standard – bearing in mind that, absent very unusual wording, once a Functional Area or Unit is impacted by the first Event, the Functional Area or Unit cannot be impacted again by another Event whilst the first is unremedied.⁹
Lifecycle claims are a little more complicated: were the items at issue in the Lifecycle items lists and, if they were, were they undervalued? If so, why? What is the true value of remediation? The first two are factual and liability questions. The third is one for an expert. The same point therefore applies to that expert’s approach and conclusions as set out above.
That leaves Equity. The calculation of an equity payment either way – out to Projco or by way of withholding by the public authority – can be significant (in the £10s of millions) and based on multiple factors. Put crudely, any payment will depend on the value of the facility that the public body will receive (usually calculated by reference to market) versus the inputs (CapEx etc) from ProjCo – in fact, the funders – or the amounts that would have been received by ProjCo for the balance of the Project by way of monthly deductions. From the amounts due to ProjCo can be added any wrongful Deductions and the amounts that would be subject to Deductions if the Project had continued.
Two points flow.
First, a lot may depend on the Financial Model – bearing in mind that PFI generally involves front loading of CapEx with later recovery. Thus, again, in crude terms, the later the termination, the greater the amounts payable to ProjCo; the greater amounts payable, the more that they may exceed Deductions or Lifecycle claims by factors of 5, 10 or more.
Second, one can see the immediate temptation, say, to overstate Deductions and understate amounts payable to ProjCo and vice versa. It is a temptation that should be resisted. As indicated, there are about 10 funders active in the PFI market which currently constitutes over 50 Projects worth several billion. There are also a number of public bodies that have ownership of several projects. In either case, an attempt “to bluff” will in all probability fail: the parties should be certain of their figures – including by vigorous application of CPR35.
At this stage, all parties have a number of routes to decide between: agree a process; see if there are points of principle that need to be resolved first and could be determinative or whether any dispute will be all embracing. This will also be the time to trigger a dispute. It is at this point that the multi-tier dispute resolution procedure endemic in PFI will come into play. It is worth remembering that in such multi-tier procedures, “may” used in relation to the commencement of any stage means at least “should” as a matter of policy and can mean “must”. The Dispute Resolution Procedure must therefore be followed if the risk of a stay is to be avoided at a later stage.
An adjudicator and a legal team will also need to be selected if they have not been already. Again, at present, availability can be an issue. Otherwise, most of those involved in contentious work are used to team selection and the “phone a friend” principle. The only caveat is that beauty parades can be less useful in PFI especially with experienced PFI litigators as candidates. This is because the community of such litigators is small and the litigator may well be aware of which projects are going “bad” at that time. That means a) it may be difficult to keep the project details confidential and b) the candidate will want to know what the project is: not necessarily due to a current conflict but due to historic “conflict shadows”: there were at certain points in the past a limited number of parent companies and contractors involved in PFI.
This then brings us to drafting and whether or not to hold an oral hearing.
On drafting, draft the declarations sought first. Unless the parties have need for a very long decision, it is wise to draft a short and, if at all possible, agreed list of the declarations at issue. It is also worth bearing in mind that an experienced Adjudicator or Arbitrator will have seen a considerable volume of the questions in a long list before. Therefore, whilst the Adjudicator will answer and consider every question, the tactic of “packing the indictment” is unlikely to work. Otherwise, the golden rules apply: avoid bad points if you possibly can; avoid unnecessary aggression; avoid adverbs and hyperbole; do not attempt evidential ambushes; try to help and keep it simple.
As to an oral hearing, in the early stages of PFI, they were very common. Indeed, on concessions, they were de rigeur and remain so. For all other types of dispute, they are very much the exception and exceptional grounds would be required for a request to be properly granted.
Once the parties have reached this point – most of the PFI centred wrinkles should have been ironed out or lie in the hands of the Adjudicator. It can, however, be seen that whilst adjudication under the 1998 Act (or the contractual analogue) and PFI adjudication may share the same label, PFI Adjudication is a very different creature and should be approached on that basis.
[1] Wilken Keating Legal Update Winter 2025
[2] See eg Community 1st Oldham (Chadderton) Ltd v Oldham Metropolitan Borough Council [2015] EWHC 1263. This retrospectivity debate is still live today – the answer is usually “no, the time limits cannot be broken”. This is not least because the Supreme Court has become increasingly “black letter” over the terms of a contract.
[3] Much of the litigation at present relates to the 2004 – 2007 generation.
[4] It is an extremely rare, if non existent case - the author has never seen a successful one, where the public body can make direct claims other than against ProjCo or under a collateral financial instrument eg a PCG.
[5] See Managing PFI assets and services as contracts end NAO June 2020 passim Key Facts at p 4
[6] Particularly as against funders who will have seen many such cases
[7] A sort of proto-handback claim.
[8] There are two exceptions to this:
- Where the party recognises that the arguments are weak (but not too weak) and wants to give the adjudicator something to find against it on;
- The items have recognised and valid wider implications.
[9] It is also bearing in mind that Deductions are not penalties – this has been the case since c 2007 when there was the so called ratchet which increased the amount payable the longer the position remained un remediated.
