Adjudication mandatory under standard PFI disputes clause

A TCC decision earlier this year has considered whether the standard SoPC dispute resolution procedure contained in many PFI contracts imposes a mandatory requirement to adjudicate before court proceedings can be commenced. The Court held that adjudication was a mandatory step prior to the commencement of proceedings, but declined to strike out or stay the claim, notwithstanding a failure to adjudicate. The Court’s decision addresses an important question on the standardised wording and will be of significance to the way in which PFI disputes are managed going forward. 

Lancashire Schools SPC Phase 2 Ltd v Lendlease Construction (Europe) Ltd

Lancashire County Council (the “Authority”) is a children's services authority that engaged Lancashire Schools SPC Phase 2 Ltd (“Project Co”) under a PFI Project in relation to the design, construction and financing of serviced accommodation at a school known as Sir John Thursby & Ridgewood (the “Project”). Project Co, in turn, engaged Lendlease as the building contractor and Equans as the facilities management contractor.

A dispute arose in respect of Phase 2 of the Project concerning a series of alleged defects in the works, with Project Co seeking damages and other relief for breach of the Project Agreement. TCC proceedings were subsequently commenced by Project Co against the Authority, Lendlease, Lendlease’s parent company, who had provided a parent company guarantee, and Equans.

The Authority objected to the proceedings on the basis that the Project Agreement Dispute Resolution Procedure (“DRP”) provided that adjudication was a condition precedent to litigation and that no adjudication had been commenced by Project Co. The relevant parts of the DRP, which are materially the same as those contained in the Standardisation of PFI Contracts (“SoPC”) Version 4, were as follows:

“68.1 Disputes

Any dispute arising in relation to any aspect of this Agreement shall be resolved in accordance with this clause save for a dispute relating to the Code which shall be resolved in accordance with Schedule 19.

68.2 Consultation

If a dispute arises in relation to any aspect of this Agreement, the Contractor and the Authority shall consult in good faith in an attempt to come to an agreement in relation to the disputed matter.

68.3 Adjudication

Without prejudice to clause 68.2, either party may give the other notice of its intention to refer the dispute to adjudication ("the Notice of Adjudication"). …

86 GOVERNING LAW AND JURISDICTION

The Agreement shall be governed by and construed in all respects in the accordance with the laws of England and Wales. Subject to clause 68 (Dispute Resolution), the English Courts shall have exclusive jurisdiction to settle any disputes which may arise out of or in connection with this Agreement."

Was adjudication a condition precedent?

Perhaps surprisingly given the wording in clause 68.3 of the DRP that either party “may” give the other notice of its intention to refer the dispute to adjudication, the Court found that adjudication was a condition precedent to litigation. The Court placed particular emphasis on the wording of clause 86 which gave the English courts exclusive jurisdiction to deal with disputes, “subject to” clause 68. In the Court’s view, this showed an intention that the courts were only to have jurisdiction after clause 68 had been complied with and an adjudication had taken place.

Should the proceedings be struck out or stayed?

Again, perhaps unexpectedly, the Court declined to either strike out or to stay the claim, despite acknowledging that the mandatory adjudication provisions in the DRP had not been complied with.

Notwithstanding the finding that clause 86 of the DRP was intended to deprive the courts of jurisdiction until adjudication takes place, it was common ground between the parties that the Court was not bound to give effect to such a clause by ousting, or refusing to exercise, its jurisdiction even if that was the intended contractual effect of the provision. It is not possible to oust the jurisdiction of the courts and non-compliance with such a clause instead gives rise to a discretion to order a stay of proceedings or other relief.

One of the factors considered by the Court was that the multi-party nature of the proceedings meant that any bilateral adjudication between the Authority and Project Co was unlikely to resolve matters. The Court considered that there were issues that were contingent on the positions of parties who would not be involved in such an adjudication, such as Lendlease, which would result in a series of satellite adjudications or disputes.

The Court also considered that a stay would give rise to procedural complications, as the claim against Lendlease, Lendlease’s parent company and Equans, would continue during the period of any stay. This would create case management issues as the proceedings against the Authority would effectively lag behind. The Court also emphasised that the Authority was entitled to commence its own adjudication against Project Co should it wish to do so despite the ongoing court proceedings. 

It is worth noting that limitation was not an issue in the case. If it had been, it may well have changed the Court’s analysis, particularly if non-compliance with the DRP was considered to be unreasonable, as was considered in Kajima Construction Europe (UK) Limited vs Children’s Ark Partnership Limited (please see our Law-Now on that case here).

Conclusions and implications

This decision addresses an important question as to the operation of the standard DRP in use on many PFI projects. Whilst the decision provides clarity that adjudication proceedings will be mandatory under such clauses, the court will not adopt a “one size fits all” approach when considering whether to strike out or stay proceedings commenced in breach of the DRP. The overall result, therefore, leaves continued uncertainty on a practical level as to whether or not a party will be required to adjudicate a PFI dispute before prosecuting court proceedings.

A key factor in the Court deciding not to strike out the claim in this case was the complex, multi-party nature of the proceedings and the consequences that striking out or staying the claim would have on the management of those proceedings and the other parties. Particular emphasis was placed on the importance of the overriding objective of enabling the Court to deal with cases justly and at proportionate cost. Had the application concerned proceedings solely between Project Co and the Authority, the Court may well have reached a different conclusion.   

Parties involved in PFI disputes should, in the first instance, ensure that any procedures required by the applicable DRP are followed closely. If proceedings are commenced in breach of the DRP, parties ought to give careful consideration to the overall impact a stay or strike out is likely to have on the proceedings more generally before making an application. As highlighted in this case, such applications are not guaranteed to succeed, particularly when they are at odds with the overriding objective. Conversely, those parties involved in pursuing PFI claims should be aware of the ability of responding parties to rely on the requirement to adjudicate in advance of court proceedings and, where practical, seek to address upfront any proposal to dispense with adjudication. Where a limitation period is approaching, claiming parties should make sure to allow a significant buffer period for adjudication proceedings to be prosecuted to a conclusion before the commencement of any court proceedings.  

References:

Lancashire Schools SPC Phase 2 Ltd v Lendlease Construction (Europe) Ltd & Ors [2024] EWHC 37 (TCC)

Kajima Construction Europe (UK) Limited & Anor vs Children’s Ark Partnership Limited [2023] EWCA Civ 292