Dispute resolution clauses in PFI/PPP contracts

The dispute resolution clause is one of the more important clauses in a PFI Contract. There are two main reasons for this:

• the PFI Contract is a contract for 25 to 30 years and there is therefore a distinct possibility of it being called into operation;
• the PFI Contract frequently provides that the parties are to agree on certain issues if certain events or circumstances arise. If they cannot agree, the issues will be referred to dispute resolution.

The clause therefore merits detailed attention from the parties at negotiation stage.

Treasury Task Force Guidance

The Treasury Task Force Guidance on the Standardisation of PFI Contracts provides the parties with a draft clause for inclusion in their contract. It sets out an "escalation" process for the resolution of disputes which is now regarded as standard practice by experienced dispute resolvers.

• First the parties consult with each other for a fixed time period in an attempt to come to a mutually satisfactory agreement;
• if consultation fails, the parties may then (except in the case of certain types of dispute) put their case before an expert to decide; and
• the parties must implement the expert's decision but if either party is dissatisfied with the decision it may refer the dispute to arbitration or to the courts for a final decision.

Some disputes regarding key financial issues may be referred directly to arbitration or the courts without going to an expert first.

The Guidance makes it clear that in looking at future deals the National Audit Office will "take a close interest in the extent to which these standard terms have been followed and the reasons for departure from them". Nevertheless the draft dispute resolution clause is not cast in stone. There are a number of issues arising from it which need to be considered.

Panels

If a party decides to refer the dispute to an expert, the expert is nominated on a strictly rotational basis from a panel. There are two panels: a construction panel and an operational panel. Each panel comprises three experts. If a panel member resigns a replacement has to be appointed as soon as practicable. If the parties cannot agree who should be an expert on any panel, either party may apply to the President of the Chartered Institute of Arbitrators.

The Guidance recommends that the parties should consider setting up a financial panel, in addition to the construction and operational panels, to deal with disputes of a financial (rather than construction or operational) nature. It also recommends that if it is likely that overlapping disputes may arise of both a construction and operational nature, a procedure will be needed for deciding which of the panels should decide the dispute. In most PFI projects it is likely that there will be an overlap between construction and operational disputes in view of the closely interrelated nature of these disciplines. It is even more likely that there will be an overlap between construction or operational disputes on the one hand and financial disputes on the other. Most disputes are about money but they may have underlying construction or operational issues which directly affect the financial issues. It will therefore be essential to include a mechanism for deciding disputes as to the appropriate panel from which the expert is to be chosen.

In large complex projects where disputes can arise more frequently it is sensible to have various panels of experts on tap for rapid resolution of disputes. Unless the panels are kept in place, however, the advantage of a speedy interim decision will be lost. In smaller projects, the need for such complex arrangements may be questioned. It may be preferable in these cases to provide for appointment of an expert on an ad hoc basis as and when disputes arise. Since the advent of adjudication in construction contracts, many professional bodies are able to make such appointments at short notice.

Joinder

In most projects the PFI Contractor will have sublet all the obligations placed upon it in the PFI Contract to sub-contractors. It is likely therefore that if a dispute arises under the PFI Contract, there will be an equivalent dispute under one or more of the sub-contracts. The Guidance, however, advises against providing for joinder of disputes. This, it says, should generally be resisted by the Authority, as it will increase the time and cost of the process for the Authority. Rather, the PFI Contractor should ensure that, as far as possible, decisions under the PFI Contract flow down the contractual chain through a proper structuring of the sub-contracts.

The problem of joinder is exacerbated from the PFI Contractor's point of view by the fact that the construction sub-contract and the operating sub-contract (at least in part) will be subject to the Housing Grants Construction and Regeneration Act 1996 which provides for adjudication of disputes. The PFI Contract, however, is excluded from the operation of the 1996 Act.

Again, the Guidance advises against amending the PFI Contract to give the PFI Contractor the same rights as its sub-contractors in relation to dispute resolution. Instead, the PFI Contractor should ensure that its contractual arrangements are adequate (e.g. that rights and entitlements under the sub-contracts are, without contravening the 1996 Act, sufficiently conditional on the operation of the PFI Contract).

Although expert determination under the clause recommended by the Guidance is similar to adjudication under the 1996 Act, there are differences. The sub-contracts must therefore contain a clause which makes the sub-contractor's rights conditional upon the PFI Contractor's own rights under the PFI Contract without offending against the requirements of the 1996 Act, particularly the prohibition of "pay when paid" clauses and the right to go to adjudication "at any time".

The Guidance offers some assistance by recommending a limited form of joinder in the PFI Contract. This allows the PFI Contractor to include a sub-contractor's submissions as part of its case in a dispute under the PFI Contract where that dispute relates to issues in dispute under the sub-contract. However, the draft clause prohibits the PFI Contractor from allowing the sub-contractor access to any document relevant to the issues in dispute between the Authority and the PFI Contractor unless the document is also relevant to issues in dispute under the sub-contract. This provision needs to be considered carefully. In many cases the PFI Contractor may wish to show documents to the sub-contractor before there is actually a dispute under the sub-contract.

Enforcement

The Guidance suggests that the parties may wish to address expressly the right to apply to the courts at any stage in support of the expert determination. The draft clause states that the expert's decision shall be binding on both parties who must forthwith give effect to the decision. It requires the parties to continue to comply with, observe and perform all their obligations under the PFI Contract regardless of the nature of the dispute and notwithstanding the referral of the dispute to arbitration under the clause. The clause does not say, however, how the decision can be enforced.

The party in whose favour the expert gave his decision may decide to proceed in the Courts and apply for summary judgment. However, the draft clause provides for arbitration if a party "wishes to challenge the Adjudicator's decision". This could have the effect (following Halki Shipping Corporation v Sopex Oils Ltd) that the Court would not have power to enforce the decision if there was a challenge to the decision on the grounds of breach of the rules of natural justice, lack of jurisdiction or the like, regardless of the merits of such a challenge.

In Macob Civil Engineering Ltd v Morrison Construction Ltd the defendant had served a notice of arbitration in respect of a Construction Act adjudicator's decision, alleging among other things that the decision was of no force or effect. The court held that by referring the decision to arbitration the defendant was thereby precluded from arguing that the decision should not be enforced in the meantime. The plaintiff was awarded summary judgment.

On the basis of Macob it appears that if a party to the PFI Contract applied for a stay to arbitration, he would be faced with a similar problem as the defendant in Macob, if he refused to abide by the expert's decision pending arbitration. But what if the defendant did not apply for a stay to arbitration? In Macob it would not have made any difference, because the court held that the decision was still a "decision" within the meaning of the 1996 Act even if its validity was being challenged. However, the 1996 Act does not apply to the dispute resolution clause in the PFI Contract and it would therefore be advisable to follow the recommendation in the Guidance and expressly provide for enforcement of experts' decisions by court action.

The Guidance is currently undergoing a process of review and consultation. A new version is expected in the new year. It remains to be seen whether any changes are going to be made to the dispute resolution clause. It is likely however that the parties will still need to consider and address the issues outlined in this article when negotiating their PFI Contract.

For further information please contact Peter Long at [email protected] or on +44 (0)20 7367 2507.