In a recent dispute arising out of a Private Finance Initiative (PFI) project under the Building Schools for the Future programme, the Technology and Construction Court (TCC) held that adjudication was a mandatory step in the dispute resolution process. Nonetheless – and even though adjudication had not yet taken place – the Court allowed the litigation to proceed.
We examine below the reasoning behind this decision, and – while noting that this is a fact-specific decision – questions it might raise for other parties involved in disputes on PFI contracts.
Adjudication in PFI contracts
The statutory adjudication provisions established by the Housing Grants, Construction and Regeneration Act 1996 do not apply to the top tier contracts entered into under PFI initiatives (i.e. usually the project agreements between local authorities and a Project Co). Adjudication is therefore not mandated by statute in such contracts in the same way that it is in respect of "construction contracts" as defined in the 1996 Act.
However, most PFI agreements contain complex, multi-tiered dispute resolution mechanisms which frequently include adjudication provisions that may be similar to the statutory adjudication procedure. These will typically escalate disputes from negotiation to expert determination or adjudication, and then upwards to litigation or arbitration for final determination.
Key background facts to this case:
- The dispute arose out of a 2007 Project Agreement between Lancashire County Council (the "Local Authority") and Project Co for the provision of serviced accommodation at a school in Lancashire, under the Building Schools for the Future programme.
- This was a conventional PFI structure with (i) a downstream Building Contract between Project Co and Lendlease Construction (the "Building Contractor"); and (ii) a Facilities Management Contract between Project Co and Equans (the "FM Contractor").
- A dispute arose in relation to alleged defects at the school. Project Co commenced proceedings against the Building Contractor and its parent company, and later amended its claim form to include claims against the FM Contractor and the Local Authority.
- This decision arises out of the Local Authority's application to set aside service of the claim form against it and / or to strike out the claim.
- The Local Authority argued that the court should decline jurisdiction, since the claim had been brought in breach of a contractual requirement that all disputes must first be determined by adjudication.
The TCC decision
Alexander Nissen KC in the TCC held that adjudication was a mandatory step in the dispute resolution process – but nonetheless allowed the litigation to continue.
In reaching this decision, he made the following points:
- The relevant clause was a condition precedent to litigation;
- However, the Court is not bound to give effect to a mandatory alternative dispute resolution (ADR) provision by ousting / refusing to exercise its jurisdiction – rather it must exercise its discretion having regard to various factors including the overriding objective;
- This was not a narrow contractual dispute which could be satisfactorily resolved by bilateral adjudication between the Project Co and the Local Authority;
- Rather, it was essentially a "multi-party dispute" as there were issues that were contingent on the positions of the other parties who would not have been party to any such bilateral adjudication;
- Furthermore, granting a stay for adjudication would risk delaying the ultimate disposal of the proceedings (as well as connected proceedings relating to another phase of the schools project).
What are the key lessons?
While this decision is fact-specific, many disputes arising out of PFI projects will be similarly complex, multi-party disputes involving the Project Co, building contractor and facilities contractor and local authorities. As noted in the White Fraiser Report published in 2023 by the Infrastructure and Projects Authority, standardised provisions are included across many of these long term contracts. Furthermore, there is increased scope for disputes in the context of PFI contracts due to expire in the next 10-15 years, particularly in cases where there are no clear contractual provisions about the required condition of the asset upon handback.
It may be of surprise to some in the industry that despite confirming the mandatory nature of the adjudication clause in the Project Agreement, the TCC nonetheless struck out the Local Authority's application and allowed the court proceedings to proceed.
This leaves open a potential question mark for parties in similar PFI disputes as to whether they may proceed straight to court proceedings and circumvent other mandatory ADR clauses. On the basis of this decision it appears that the Court will take a holistic view, considering a variety of factors including the number of parties involved and the complexity of the dispute, as well as how long the litigation has been proceeding, when deciding whether a stay is appropriate. If you have any questions about this article, please get in touch with Sarah Dyer or Lindsay Hammond.
References:
Lancashire Schools SPC Phase 2 Ltd v Lendlease Construction (Europe) Ltd & Ors [2024] EWHC 37 (TCC