The TCC recently issued its judgment following a six-week trial heard before Mr Justice Pepperall last year. The judgment has widespread implications as it entitles Essex County Council to terminate a PFI contract worth approximately £800m.
The case also provides useful guidance on the implied duty of good faith and it also stresses the importance for solicitors to check and ensure that their client's expert witnesses are completely independent and do not have any conflict of interest.
On 31 May 2012, Essex County Council ('the Authority') entered into a 25 year £800m Private Financial Initiative contract with UBB Waste (Essex) Limited ('UBB') for the design, construction, commissioning, operation and maintenance of a mechanical biological waste treatment plant to process household waste in the county of Essex.
The waste treatment facility was then constructed and, on 25 November 2014, the facility entered the 'Commissioning Period' under the contract. Within this period, the facility was required to pass 'Acceptance Tests' that would demonstrate that the facility could meet the performance requirements as set out in the contract. However, it soon became evident that the facility was seriously underperforming and it then failed to pass the Acceptance Tests by the Acceptance Longstop Date of 12 January 2017.
The Authority argued that this failure meant that UBB was in default of the contract, and so it was entitled to termination. UBB denied any default and instead alleged that the performance of the facility was critically dependent on the composition of the waste, and the problem was instead the waste composition that the Authority was delivering to the facility. UBB argued that the Authority was itself in breach of contract and sought damages in excess of £77m as well as declaratory and injunctive relief.
The Judge held that the fundamental problem with the project was that UBB made a number of serious design errors, including under-sizing the density assumptions, which resulted in the facility being incapable of processing the required amount of waste. Mr Justice Pepperall concluded that the facility designed simply could not pass the Acceptance Tests.
It was held that UBB was in continuing breach of the contract and its failure constituted a Contractor Default. Accordingly, the Authority was entitled to terminate the contract for default. The Authority was also awarded damages in excess of £9m for the additional costs it had incurred as a result of the facility's failure to process the waste. The Judge refused UBB's principal claims for damages and denied UBB's request for an extension of time to pass the Acceptance Tests.
Implied Duty of Good Faith
By relying on Fraser J's analysis in Bates v Post Office (No.3) , UBB sought to argue that the PFI contract was a relational contract, and so the duty of good faith was an implied term. UBB alleged that the Authority was in breach of this duty for a number of reasons, including a failure to agree to changes to both the contract itself and the Acceptance Tests which would have enabled the facility to pass the commissioning period.
Mr Justice Pepperall agreed with the first argument by concluding that the contract is a paradigm example of a relational contract in which the law implies a duty of good faith. However, UBB's argument that the Authority was in breach of its duty of good faith was dismissed, and the Judge commented that:
"Once UBB's failings became clear in late 2015, it is hopeless to suggest that the Authority was under a contractual obligation to agree fundamental changes to the contract and the Acceptance Tests in order to keep the project on track."
It was further noted by Mr Justice Pepperall that there was some irony in UBB's promotion of the implied term of good faith, since it is arguable that it did not itself act in good faith, due to a series of concealments it had made throughout the project.
Expert Witnesses and the Importance of Checking Conflict
The case also stresses the importance of assessing the independence and impartiality of expert witnesses.
UBB called Dr John Weatherby, the managing director of Fichtner Consulting Engineers Limited, as an expert witness. The Authority argued that there were substantial questions as to Dr Weatherby's independence, impartiality and objectivity. One key reason for this was because Dr Weatherby's company had a number of dealings with UBB throughout the project, including an admission by Dr Weatherby during cross-examination that Fichtner had a "relatively substantial role in assisting UBB in the construction of the facility" between 2012 and 2014. Further, Fichtner had received a pre-action letter from UBB's sister company on 7 July 2015 asking that the company notify its professional indemnity insurers in respect of a likely claim arising out of its consultancy work on the project. Dr Weatherby subsequently obtained an assurance from UBB that there was no current claim against Fichtner.
Mr Justice Pepperall concluded that there were obvious and serious conflicts of interest, due to the following reasons:
- The substantial role played by Fichtner on the project over an extended period of time.
- Dr Weatherby failed properly to differentiate between the provisions of consultancy services to a client and the provision of independent expert evidence. He failed to appreciate the difficulty in both devising UBB's strategy and then offering expert opinion evidence upon such strategy.
- Dr Weatherby failed to identify that UBB's agreement that there was no current claim in respect of Fichtner's consultancy work did not resolve the problem for two reasons:
a) The linkage between UBB's agreement that there was no current claim against Fichtner and Dr Weatherby's willingness to give expert evidence supportive of UBB raised the question of whether Dr Weatherby adopted his position in order to please UBB.
b) The remaining possibility of a claim against Fichtner meant that it was in the company's interests – and therefore in Dr Weatherby's interests as a significant shareholder in the company – to defeat the Authority's claims against UBB.
Mr Justice Pepperall concluded that both Dr Weatherby and UBB should each have recognised that Dr Weatherby was conflicted and that instruction should have been either withdrawn or refused.
This judgment will have widespread implications for the construction industry as the PFI contract was worth £800m and the plot used for the waste plant site may need to be returned to a greenfield site.
As well as its practical implications, the case also raises key legal considerations. Firstly, the case offers useful guidance for determining which contracts will be held to be 'relational contracts'. Mr Justice Pepperall identifies a number of factors to look out for, including an intention between the parties for a long-term relationship and the contract requiring a high degree of communication and co-operation. The judgment then provides guidance for determining whether a party has acted in good faith, with Mr Justice Pepperall concluding that dishonesty is not of itself a necessary ingredient of an allegation of breach. Rather, the question is whether the conduct would be regarded as 'commercially unacceptable' by reasonable and honest people.
The case also acts as a clear reminder that expert witnesses must be independent, impartial and objective. Any potential conflicts of interests should be investigated and identified by solicitors at an early stage. If a conflict is identified, instructions should be withdrawn.
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