This article appeared in Civil Engineering Surveyor Magazine in September 2006

Disputes are the bane of all construction professionals lives, but unfortunately no matter how hard one tries to avoid them (partnering, mediation and the like) there are always some matters which require formal dispute resolution to resolve them.

PFI is one area where efforts have been made in the last few years to streamline disputes and where appropriate to consolidate disputes. While such aims are to be applauded they can in themselves lead to difficulties.

Let us take a typical PFI structure

Structure diagram showing typical PFI Structure

If a dispute does arise between the SPV and its Sub-Contractor(s) the SPV (being effectively a shell company set up for this specific purpose) will want to ensure that a judgement cannot be enforced against it before it has had an opportunity to seek reimbursement of any sums from the third party, i.e. the public authority. This could be done in a number of ways:

  • provide that no payment will be made under the Sub-Contract until payment has been made under the Project Agreement - this is illegal in terms of the Construction Act 1996;
  • provide that no payment will become due under the Sub-Contract until certification has been made under the Project Agreement - this is arguably also unlawful in terms of the 1996 Act;
  • provide for joining of related disputes under the Project Agreement and the Sub-Contracts; or
  • provide for extended payment periods in the Sub-Contract so as to allow the SPV time to recover any sums due to it from third parties.

Dealing with these in turn:

Pay when Paid

Although the Project Agreement itself is not subject to the Construction Act 1996 the Sub-Contracts are and under Section 113 of that Act any provision making payment conditional on the payer receiving payment from a third party is ineffective unless that third party (or anyone else is due to pay) is insolvent. In the case of payment by a public authority this is (hopefully) very unlikely.

Pay when Certified

This is a rather simplistic way of describing the complex provisions which lawyers have been putting in place for a number of years to the effect that:

  • an SPV can have no greater liability to its Sub?Contractors than its liability to the Authority or
  • the Sub-Contractor is entitled to no greater relief than the SPV is entitled to from the Authority. This is sometimes known as "equivalent project relief". For example if a building sub-contractor applies for an extension of time under the sub-contract the SPV will seek to ensure that it is obliged to grant no greater extension than that which it is entitled to receive from the Authority.

Until quite recently it was thought that these clauses provided the requisite protection to an SPV. However this assumption was thrown into disarray by the decision in Midland Expressway v Carillion Construction and Others in November last year. (This was reported on in the Legal Notebook in CES April 2006 Edition.) In that case the SPV tried to stop its sub?contractor from pursuing claims until the equivalent dispute had been resolved with the Secretary of State for Transport. The court decided that although such causes were not strictly speaking "pay when paid" the effect of them was the same and therefore they fell foul of Section 113 of the Act.

Consolidation of Disputes, third party proceedings and appointing the same adjudicator

Another means of trying to protect the SPV is to provide that if there are disputes covering the same issues in both the Project Agreement and the Sub-Contract the disputes will be "conjoined" and heard together by the same adjudicator. Whilst in theory this should protect the SPV and save costs it does not always take account of:

  • the fact that a "dispute" may not actually have arisen in relation to both contracts;
  • the restricted time limits in statutory adjudication, namely that all disputes must be decided within 28 days of referral unless the referring party agrees to extend. Therefore even if there is a delay of a few days between referral of a dispute and a related dispute this could lead to difficulties in complying with the statutory time limits;
  • the parties who are only in dispute with one party, i.e. the Authority at one end and the Sub-Contractor at the other, may not wish to get dragged into disputes between the SPV and their counterpart. How in practice will an adjudicator be able to balance the conflicting interest of so many parties?

Another way of addressing this problem, which has found its way into several contracts, has been replicating in the adjudication clause a third party procedure akin to that which would apply in the courts. This approach brings with it the same potential problems as consolidation above.

An arguably more palatable approach is to provide simply that the same adjudicator should be appointed for both the main dispute and the related dispute. This would avoid the need for having to rehearse the facts before a second adjudicator, but of course it does not give any guarantee that the second adjudication will have the same outcome. This will depend upon how the respective cases are presented and the evidence which is available in each adjudication.

Extended Payment Periods in Sub-Contracts

This is simply a way of saying that if the SPV is expecting to recover sums from a third party, e.g. the Authority, its period for payment to the Sub-Contractor will be extended beyond the usual payment terms. For example whilst routine payments under the Sub-Contract usually have to be made within 28 days of submission of an invoice, if there are found to be payments due which have been the subject of a dispute this payment period could be extended to say 72 days or longer. However long the period is, once it expires payment must be made, whether or not there has been recovery or establishment of liability up the line. However this could also be subject to the scrutiny of the Construction Act which as readers will be well aware must provide "an adequate mechanism for determining what payments become due under the contract and when".

Summary

Adjudication was introduced as a (relatively) quick and simple method of deciding disputes and in particular to release money to contractors and sub-contractors where it is due. Whilst this principle remains (and is due to remain once proposed amendments to Construction Act are published), there is a danger that attempts to provide greater contractual protection to an SPV could slow down the process and lead to greater rather than less applications to court to resolve ambiguities. The decision in the Midlands Expressway case indicates the strong line which the courts are likely to take and lays down the ground rules which you ignore at your peril.

Chris Arnold is a Partner with Shepherd and Wedderburn Construction & Special Projects Group and is a practising adjudicator.

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