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Interpretation of PFI contracts: the importance of the big picture

  • United Kingdom
  • Construction and engineering - Foundations

06-06-2018

Issues decided

The court determined the correct interpretation of a private finance initiative (“PFI”) contract. The primary issues were:

  1. whether the PFI service provider was under a duty to update inventory details on a database provided by the local authority; and
  2. whether four completion certificates should be set aside for manifest error.

Facts

Birmingham City Council (“Local Authority”) entered into a PFI contract with Amey Birmingham Highways Ltd (“PFI Service Provider”) for the maintenance and operation of Birmingham’s road network for a period of 25 years (“PFI Contract”).

The PFI Contract provided for milestone completion dates and for the issuance of completion certificates following assessment by an independent certifier. The decision of the independent certifier was to be final and binding on the parties, subject to fraud or manifest error.

Before the parties entered into the PFI Contract, the Local Authority provided the PFI Service Provider with a database containing six tables of data and setting out information in relation to the road network (“Database”). Both parties were aware that a large proportion of the data in the Database was based on hypothetical figures.

Three and a half years into the arrangement, the Local Authority became aware that some parts of the road network were being left unrepaired. This transpired due to the PFI Service Provider’s view that its contractual obligations extended only to the parts of the road network detailed in two of the six tables of data in the Database neither of which it was updating. The PFI Service Provider was updating the other four tables in the Database as it obtained new information.

The Local Authority argued that this was a breach of contract.

The independent certifier believed that it was not his responsibility to resolve contractual disputes between the parties and issued four milestone certificates.

Pursuant to the PFI Contract, the Local Authority referred the dispute to adjudication. The adjudicator found in favour of the Local Authority. The PFI Service Provider referred the dispute to the Technology and Construction Court (“TCC”). The TCC found in favour of the PFI Service Provider and issued a declaration that the adjudicator’s decision was wrong.

The Local Authority appealed to the Court of Appeal.

Decision

The Court of Appeal allowed the Local Authority’s appeal, finding that:

  1. it was clear from reading the PFI Contract as a whole, that the PFI Service Provider was under a duty to keep the Database up to date and that its maintenance obligations extended to the actual road network on the ground and not a notional road network which the parties knew was based on hypothetical data; and
  2. the four completion certificates should be set aside for manifest error, because on the dates the certificates were issued, the parties and the independent certifier were aware of the dispute and knew that if the Local Authority’s case on the interpretation of the PFI Contract succeeded, the certificates would be based on inaccurate data.

It was held that a relational contract such as this one is likely to be lengthy and contain a number of “infelicities and oddities” and that “a reasonable approach in accordance with what is obviously the long-term purpose of the contract” should be adopted by the parties. It was also held that the parties “should not be latching onto the infelicities and oddities, in order to disrupt the project and maximise their own gain”.

Comment

Whilst the decision contains no new law, the court’s decision that parties should take a common sense approach to the interpretation of such long-term and lengthy relational contracts is noteworthy.

The decision should encourage parties to such contracts to adopt a more pragmatic approach to their responsibilities. The decision also highlights the importance of the long-term commercial purpose as well as the express terms of such relational contracts.

Amey Birmingham Highways Ltd v Birmingham City Council [2018] EWCA Civ 264

http://www.bailii.org/ew/cases/EWCA/Civ/2018/264.html

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