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No relief on PFI con racts

LAW - Until a recent High Court ruling, it was assumed that a PFI contract could restrict the right to adjudication and allow a form of pay-when-paid, but the Construction Act says no, and so do the judges. Jeremy Winter outlines a worrying ruling

THE TERM 'equivalent project relief' might be unfamiliar to many readers.

In the context of a PFI project, it refers to a benefit to which the employer is entitled ? under the terms of the concession agreement ? that is equivalent to a benefit claimed by the contractor in respect of the same circumstances.

EPR was the focus of a recent High Court decision in the case of Midland Expressway v Carillion Construction and Others.

The decision was that a PFI project company's attempt to prevent its subcontractor commencing adjudication with regard to a £10 million EPR was not allowable under the Construction Act.

The decision also suggests that EPR provisions are likely to fail if they require that the subcontractor is not to be paid until the PFI project company is paid.

Midland Expressway v Carillion Construction has serious implications for the future structuring of PFI projects ? both in terms of financing and the way in which subcontracts are drafted.

Despite the fact that the right to adjudication cannot be excluded under the Construction Act, contracts between PFI project companies and contractors often contain restrictions on the contractor's right to resort to adjudication or to be paid.

This is because the nature of a PFI contract is such that the project company will not have much in the way of assets or cash flow at the beginning of a project and so an early claim by a contractor could undermine the project company's financial stability.

Those involved in the construction industry have long realised the difficulties in using clauses that attempt to limit a subcontractor's right to adjudication or right to be paid, but it was thought that some approaches to limitation might be effective.

But this case shows that this assumption is incorrect and PFI project companies will have to make provision for EPR claims when costing their projects.

This particular case involved the construction of the M6 toll road near Birmingham.

The project was awarded to Midland Expressway by the transport secretary and the design and construction of the road was subcontracted to the Cambba Construction Group ? a consortium including Carillion, Alfred McAlpine, Balfour Beatty and Amec.

When a dispute arose over the sum charged by Cambba for a variation requested by the transport secretary, Cambba instigated the adjudication process.

The transport secretary chose not to be involved in the adjudication and wrote to Midland Expressway indicating that he thought his liability in respect of the variation might not necessarily be the same as Midland Expressway's liability to Cambba.

Midland Expressway sought an injunction from the High Court, saying that the subcontract prevented Cambba from resorting to adjudication.

The High Court considered whether the dispute could be characterised as a 'construction dispute' and whether the terms of the contract could prevent Cambba from pursuing its adjudication claim.

The subcontract defined a construction dispute as 'a difference or dispute of whatever nature between the employer and the contractor arising out of or in connection with this contract'.

The High Court found that this dispute fell squarely within the definition given in the contract and noted that section 108 of the 1996 Act provides that either party to a construction contract is entitled to refer a dispute to adjudication at any time. It also noted section 113 of the 1996 Act, which outlaws the practice of pay-when-paid.

But the subcontract did contain a provision limiting Cambba's entitlement to payment for variation until the transport secretary and Midland Expressway had agreed that Midland Expressway was entitled to, and had received, equivalent project relief.

The subcontract also provided that Cambba could take no steps to enforce any right, benefit or relief under the contract until such equivalent project relief had been agreed.

The court decided the first provision was a defence to adjudication rather than an outright bar and that the second was either contrary to the Act or subject to a narrow interpretation.

In either case, Cambba would retain its right to go to adjudication at any time.

The subcontract also stated that Cambba's right to a price adjustment for variation would not exceed the amount, if any, to which Midland Expressway was entitled from the transport secretary.

This was contrary to section 113 of the Construction Act, declared the court.

As I said earlier, the implications of this judgment for the construction industry and PFI contractors are serious.

While lawyers will no doubt be considering ever more creative drafting to get around the problem, PFI project companies should undoubtedly review the relevant provisions of their subcontracts to assess whether they are enforceable or not.

Methods of funding any gap between potential subcontractor claims and payments in by the Government must be considered so that the risk to the project company is minimised.

The High Court commented in this case that it was not surprising that the contractual provisions used were contrary to the Construction Act as they had been based on PFI contract forms.

Project agreements themselves are not subject to the scheme of the Construction Act and so are not drafted so as to comply with its terms.

Only last year the Government rejected a proposal that the Act should be amended to apply to project agreements as well as subcontracts.

This poses the question of whether the Construction Act should also be disapplied from subcontracts ? a move unlikely to be welcomed by the construction industry.

This leaves PFI project companies in something of a quandary ? with their exposure to risk heightened and support from the Government apparently lacking.

It would seem sensible for both project agreements and subcontracts to be subject to the same dispute resolution regime, whether adjudication or otherwise.

But without a review of Government policy this is unlikely to happen.