The Technology and Construction Court (TCC) has handed down judgment in a long-running PFI hospital dispute relating to the largest oncology centre in the North of England, at St James' University Hospital in Leeds, in the St James Oncology SPC Ltd v Lendlease Construction (Europe) Limited (2) Lendlease Construction Holdings (Europe) Limited case.
Here we discuss the outcome of the case and what it could mean for you.
The Claimant was the Project Company, appointed in 2004 by Leeds Teaching Hospitals NHS Trust (the NHS Trust) under the Government's Private Finance Initiative to design, construct, operate and maintain the Oncology Centre.
The Project Company engaged Lendlease Construction (Europe) Limited to design and build the Oncology Centre. Under the Design and Build Contract (D&B Contract), Lendlease agreed to assume the obligations, risks and liabilities of the Project Company under its Project Agreement with the NHS Trust. The second defendant, Lendlease Construction Holdings (Europe) Limited, provided a parent company guarantee to the Project Company. Practical Completion of the Oncology Centre was certified in December 2007.
The dispute arose after technical investigations conducted between 2014-2017 unearthed fire safety and electrical engineering defects, and certain remedial works (although not concerning the defects addressed in these proceedings) were carried out. In 2019, shortly before the expiry of the limitation period, the Project Company issued proceedings against Lendlease. Amongst other things, the investigations had revealed that the fire safety strategy which had been incorporated into the Project Agreement had been amended before practical completion to reflect the as-built works. Whilst the original revision (Rev 12) of that fire strategy provided for 60 minutes' fire compartmentation around the electricity substation in the basement plant room, this was removed in the revised version (Rev 19). Consequently, the whole of the plant room was now a single fire compartment, and the electricity substation was no longer protected by fire compartmentation from the rest of the plant room.
This meant that a single fire or fault could take out both the primary and secondary power supplies within a basement plant room in the oncology centre. This could be catastrophic: many of the facilities in the Oncology Centre (which includes operating theatres, an intensive care unit, sections for radiotherapy, chemotherapy, imaging and radiology) require an electricity supply.
Of particular relevance in this case was Health Technical Memorandum 81 (HTM 81), which sets out guidance on the design of fire precautions in new hospitals / extensions to existing hospitals.
The parties' submissions
Mrs Justice Joanna Smith DBE observed that the defendants "focused almost exclusively on the content of the Rev 19 Fire Strategy" in contending that the final design of the Oncology Centre was not defective. They argued that any derogations from the requisite technical specifications were agreed and/or approved by the NHS Trust, the Project Company and by the relevant Building Control body. On this basis, they submitted that all parties must have been content that the departures from HTM 81 were justified by the engineering solution adopted, and that the Fire Strategy met the terms of the relevant contracts. This was referred to as the "Fire Strategy Defence".
An important part of the Project Company's case was that wherever there was any deviation from HTM 81 in the design of the Fire Strategy, the Project Agreement required this to be "identified in the Fire Strategy and expressly justified by a fire engineering approach". The Project Company submitted that Lendlease had failed to do so and remained liable for the defective works.
The TCC dismissed Lendlease's Fire Strategy Defence. Mrs Justice Joanna Smith DBE observed that it was common ground between the parties' fire engineering experts that:
- the removal of the planned compartmentation in the plant room did not comply with HTM 81; and
- any deviations from HTM 81 (which could only have been justified if such deviations demonstrated and achieved a standard equal to or better than HTM 81) "should have been treated as requiring a fire engineering approach".
She found among other things that:
- there had been no detailed review and approval process of the Rev 19 Fire Safety Strategy by the NHS Trust or any other relevant authority – there was no evidence that the Trust was involved in any discussions about the proposed amendment to the strategy, nor that the Trust saw "any document explaining the justification" for the changes to compartmentation, or setting out a fire engineering approach;
- there was no contractual significance to the issue of the Building Regulations Completion Certificate (upon which Lendlease also relied): Regulation 17(4) of the Building Regulations 2000 makes clear that a Completion Certificate is not conclusive evidence that the Building Regulations have been complied with and the certificate itself records that it is only certifying compliance with Building Regulations "so far as the authority has been able to ascertain";
- the parties' agreement on a fire strategy was no defence to the existence of design defects, and any such agreement did not relieve Lendlease of its design obligations; and
- while Lendlease had completed the works in accordance with the Rev 19 Fire Strategy, this was of no assistance to it in circumstances where the court had found that the Rev 19 Fire Strategy was not compliant with the terms of the Project Agreement and the D&B Contract.
The TCC concluded that the Project Company's proposed remedial scheme was reasonable and that there was ample evidence the Project Company and the NHS Trust intended to carry out the remedial works (contrary to Lendlease's contention), and awarded the Project Company just over £5 million for the cost of the remedial scheme.
In the context of a PFI contract, the Project Company needs to be mindful of limitation periods in their construction contracts notwithstanding the operation of the asset, in this case for nearly 12 years. There might be continuing liability to the Employer under the Project Agreement which might extend beyond the usual 12 year limitation period "down the line ".
The Project Company may find itself with no recourse if claims are brought against it after 12 years for breach of the ongoing obligations of the Project Agreement in circumstances where an Employer discovers defects possibly as part of a PFI handback process. Such a process may only start a few years before the end of the Project Agreements term and often more than 12 years after the works were completed by the Contractor.
Please get in touch with Sarah Dyer or Lindsay Hammond if you want to discuss the topics raised.