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PFI contracts: Good faith need not apply

When PFI contracts come into play, recent cases have shown that contractors cannot rely on good faith terms being applied by the developer.

In the early 2000s, PFI (the private finance initiative, now PF2) was seen as almost the only game in town.

Contractors anxiously rebranded themselves as service sector companies in order to get involved.

The scene is much quieter now, but disputes, particularly relating to the operation and maintenance period, continue to reach the courts.

One issue that has featured in two recent cases is the extent to which the courts will allow a contractor to rely on good faith terms.

On this, the public sector employers have had the better of the arguments.

Pointing to problems

In Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC), heard in July, the PFI contractor was obliged to bring the council’s highways network up to standard and then to maintain it over 20 years.

The council could penalise the contractor with “service points” for any breaches.

If these reached a certain level, the council could terminate.

After a few years of operation, the council began to wonder whether it wasn’t perhaps paying too much.

“Disputes, particularly relating to the operation and maintenance period of PFI contracts, continue to reach the courts”

It therefore embarked (and this was not seriously disputed) on a strategy of imposing large amounts of service points so as to force the contractor to re-negotiate.

That strategy involved giving the maximum number of service points possible for a default.

The council also took advantage of the fact that there was no timetable for the issue of service points.

So, in early 2014, it went four and a half months without giving any service points at all, then in April of that year, clobbered the contractor with four and a half months’ worth all in one go.

This might sound all very unreasonable, but had the council actually done anything that it was not entitled to do under the agreement?

Good faith

In court, the contractor pointed to a clause in the agreement requiring the council to act in good faith.

However, the judge said that this did not apply to the regime of allocating service points.

The judge did agree with the contractor on one point, however: that the council could not automatically apply five points for every default.

The main issue of interest was: given that the council could not just allocate the maximum number of points for each default, what exactly was its obligation when doling these points out?

“The fact that the contractor was already on a yellow card, was no reason not to give a second yellow, even if that meant a sending off”

Both parties accepted that there had to be some sort of implied term here, so as to make the contract work.

The contractor argued for a duty of fairness or impartiality.

But the judge held that the implied term was more limited, namely that, when giving out service points, the council had to act honestly and on proper grounds, and not in a manner that was arbitrary or irrational.

The judge also noted, in favour of the council, that when allocating service points, it did not need to be put off by the fact that a particular allocation might tip the contractor over the edge into termination territory.

To use a footballing analogy, the fact that the contractor was already on a yellow card, was no reason not to give a second yellow, even if that meant a sending off.

Implied terms

The contractor in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (Medirest) (2013) EWCA Civ 200 did not fare much better.

The contract here incorporated elements of a standard PFI agreement.

Again, the court refused to impose a ‘good faith’ obligation upon the authority.

There was no need for such a term, it said, because the service point allocations were a matter of straightforward calculation, and were not discretionary.

Both contracts contained express “good faith” clauses at certain points, but in both cases the court said that these did not give the contractor much help.

And in the Portsmouth case, the wording of the implied term was not exactly what the contractor was after.

It was framed in fairly gentle terms, from the authority’s point of view. 

Contractors in long-term maintenance or PFI contracts relying on implied good faith or similar terms should not get their hopes up too much.

Ian Yule is a partner in the construction and engineering team at Weightmans

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