UK: Cash Flow on PFI Projects

Last Updated: 2 February 2006
Article by Patrick Twist

Since the introduction of the Housing Grants Construction and Regeneration Act 1996 (the Act) lawyers have been grappling with the question of how PFI projects are affected by the way the Act operates. There were two particular issues.

  1. Could the SPV put itself in the position where it only had to pay the contractor when it had already been put in funds by the procuring authority?
  2. Could the contractor be prevented from bringing adjudication proceedings by provisions in the construction contract that, until the SPV's rights under the Concession Agreement had been determined, the contractor could not enforce any rights for project relevant events?

The recent case of Midland Expressway Limited v Carillion Construction Limited & Ors (Number 2) [2005] EWHC 2963 (TCC) has confronted these two issues. The case came to court because the contractors commenced an adjudication seeking additional payment of £10 million in respect of changes to their works on the Birmingham Northern Relief Road. Under the contract, the SPV was able to ask the Secretary of State for Transport to join into any such adjudication but in this case the Secretary of State declined. The contractors commenced adjudication proceedings by service of a Referral Notice on the SPV. The SPV's response was to apply to the court for an injunction to stop the adjudication going ahead.

The judge had to decide firstly whether the dispute was a ‘construction dispute’ for the purposes of the Act. The SPV argued that the SPV's role was just as a conduit for payment and that the contractor's right to payment was in fact governed by the Concession Agreement. The judge decided that it was a ‘construction dispute’ based on the wide definition in the construction contract and also on the basis that notwithstanding the payment mechanism the claim was in truth against the SPV in its capacity as the Employer under the construction contract.

Secondly, the SPV argued that the contractor could not adjudicate at this stage because the construction contract stopped the contractor from pursuing any claim in respect of the valuation of a change before the value had been determined under the Concession Agreement. The contractor argued that this was contrary to the Act in that it was an attempt to remove the right to adjudicate at any time. The judge agreed with the contractor and referred to other recent cases on s108 of the Act (John Mowlem & Co Plc v Hydra-Tight Limited and RG Carter Limited v Edmund Nuttall Limited). The judge found it unnecessary to decide whether the clause in question was actually contrary to the Act (meaning that the contract provisions for adjudication fell away and the Scheme for Construction Contracts was substituted) or whether the clause could be construed narrowly in a way which was consistent with the Act.

The judge also had to look at whether the contractor could press on with the claim for interim payment against the SPV before the dispute resolution procedure under the Concession Agreement had been fully operated. The SPV argued that the contractor was debarred from pursuing the claim until it had been evaluated under the Concession Agreement. Clauses in the Concession Agreement restricted any price adjustment in the contractor's favour to the amounts which the SPV was entitled to be paid. The contractor argued that the payment mechanisms in clause 39 were contrary to s113 of the Act as being ‘pay when paid’ clauses. The judge agreed.

On the face of it, the effect of clause 39 was that the contractor could not be paid any money in respect of a department change until the SPV had established an entitlement under the Concession Agreement. The Judge found the latter provision to be contrary to s113. He noted that the use of the words ‘the amounts … to which the employer is entitled to be paid’ rather than ‘is paid’ were not enough of themselves to make the payment provisions compliant with the Act given the pay when paid wording also to be found in clause 7 of the contract. This decision does therefore leave open the question of whether ‘pay when certified’ clauses could still be effective. It should however be noted that the recently published DTI paper on improving payment practices in the construction industry raises the question of possible legislative intervention to restrict how pay-when-certified clauses can be used .

The significance of the decision in this case is that it provides the first guidance on the impact of the Act on contractors and SPVs engaged in PFI projects. There has been clear support by the senior judge in the TCC for the principles of the Act being upheld protecting contractors against cash-flow difficulties arising out of pay when paid type arrangements.

There is further confirmation of the right to adjudicate at any time, which gives contractors the right to pursue their claims irrespective of the payment position between the SPV and the authority.

For SPVs, conversely, there is an enhanced risk that they may be obliged to make payments to the contractor at a time when they have not received an equivalent payment from the authority.

Although the ruling does not affect procuring authorities' contractual obligations under the concession or project agreement, they will be interested in its potential effect on SPV cash-flow.

The comments of the judge raise question marks over the enforcement of other mechanisms adopted in PFI projects such as parallel loan agreements to sidestep the impact of s113. These and other project relief mechanisms may well now be reviewed by SPVs in the light of the decision and the judge's comment that:

"Parties cannot escape the operation of s113 by the use of circumlocution"

Case: Midland Expressway v Carillion Construction Ltd & Ors [2005] EWHC 2963 ( TCC ).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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