PFI Contract Interpretation: A Trying time for all

Contract interpretation in a PFI context: What practical advice arises?

• Existing principles of contract interpretation were reaffirmed. The case confirms that, when it comes to contract interpretation, a court’s task is to ascertain the intention of the parties by reference to the language used when seen in context. The meaning of language used is to be determined in the context of the overall structure of the contracts and of the nature of the parties’ dealings. Where there is a series of related contracts giving effect to a PFI or other complex project, each one forms part of the context against which the others are to be interpreted. However, in line with leading authority [2], the language used is the starting point and carries the most weight. In this case, an analysis of the relevant obligations and factors arising from the wider context did not override the judge’s conclusions on the meaning of that language.

• Particularly onerous or unusual obligations should be expressed clearly. Where they are not, as was the case here, a court is likely to consider this was deliberate.

• Don’t assume that obligations from one project document will be “read across” to another. It is often the case, in PFI projects and other complex contractual structures, that definitions, obligations and liabilities should be mirrored across, and/or should cascade down from one contract to others. Here, provisions in certain of the contracts did not completely mirror those in others and this was a relevant factor to the conclusion that similar obligations under the contracts were in fact different. The learning point, for contract drafters and for those interpreting completed contracts, is that a careful review of all related and repeated provisions should be taken in respect of all contracts within the PFI or other project to make sure that the right provisions have been flowed through correctly.

• Tender and other pre-contract documents may be disregarded. Remember that pre-contractual communications may be adduced to demonstrate the genesis and aim of a contract (and an understanding of that may help a court to correctly construe a contract), but they are not admissible to aid the interpretation of particular contractual provisions. This is a common misconception. Where any underlying pre-contractual assumptions, intentions or other information might assist with the proper understanding of a contract, these should be included within the contract itself (rather than merely in records of pre-contract communications) – in the ‘recitals’ section. Here, while the preamble to the Project Agreement referred to the tender process, the tender was not a contractual document and it was therefore disregarded.

• Beware circular definitions but don’t despair where drafting is imperfect. The judge in this case commented that it is “almost inevitable in contracts of the length and complexity of those connected with the Project” that the drafting may be awkward and that definitions may, on a strict logical analysis, be circular, but more easily discerned in context. It was said that this is why such contracts must be read as a whole and in context [3].

• A claim for declarations alone will be approached with caution. When a contract interpretation exercise is undertaken against the background of a particular alleged breach, whether in the context of a PFI or more general contractual dispute, the court can form a better view of the consequences flowing from the competing interpretations. On the other hand, considering contract interpretation in the absence of a specific pleaded breach (as was the case here) leaves the court to determine what disputed terms mean in abstract. The latter is much more difficult and so courts will treat claims for declarations alone with caution.

What happened in the particular case?

This PFI dispute was between Solutions 4 North Tyneside Ltd, a special purpose vehicle (Project Co) as claimant, and Galliford Try Building 2014 Ltd, a construction company (the Construction Contractor) as defendant. It related to allegations of failings in the roofs of certain dwellings in a PFI project for housing for elderly residents of North Tyneside (the Project). As with all PFI projects, there were a series of related contracts:

• the Project Agreement between Project Co and North Tyneside Borough Council

• a Construction Sub-Contract between Project Co and the Construction Contractor

• a Facilities Management Sub-Contract between Project Co and a third party (FM Co)

• an Interface Agreement between Project Co, the Construction Contractor and FM Co.

At the outset of the Project, the Construction Contractor was responsible for demolishing and reconstructing some dwellings, and the refurbishment of others. Once those works were complete, its involvement came to an end (subject to liability for defects in its work) and the FM Co became responsible for maintaining the dwellings. The judge noted that this structure was “highly relevant to the consideration of the obligations which each party had“.

Project Co’s case was that there were defects in the roofs of refurbished dwellings which the Construction Contractor was liable to rectify. It said the roofs did not have a design life of 60 years as at the relevant Certificate of Availability or a residual life of 30 years on handover in 2042, which it claimed was a requirement of the Construction Sub-Contract. The Construction Contractor disagreed, saying that those requirements related only to new build works. Its case was that the requirement for refurbished dwellings was to put them into a condition which met the Availability Certification Requirements as at the date of the relevant Certificate of Availability.

There was also a dispute as to whether the Output Specification formed part of the definition of the scope of the works to be performed by the Construction Contractor or related solely to the required standard of the works (the scope for which was defined elsewhere). This arose primarily as a result of the circular nature of the relevant definitions and obligations. As is common in PFI projects, the Construction Contractor was required to undertake the Works in accordance with the Output Specification, which would suggest the Output Specification was the standard required. However, the Works were defined as the works to be undertaken to meet the Output Specification, suggesting that it defined the scope of the Works. Each party sought declarations on the interpretation of the Construction Sub-Contract.

What did the High Court decide?

The court agreed with the Construction Contractor’s interpretation of the design life requirements. The first paragraph relied on by Project Co (2.9) expressly referred to new build works only. The second paragraph relied on (2.10) did not do so but the court found that they should be read together, and therefore that the design life requirements were expressly linked to the new build elements.

The court also considered it relevant that the consequence of Project Co’s interpretation would be that the Construction Contractor would have been required to undertake significant refurbishment works, potentially total replacement, well in advance of the date when they would otherwise be due. That would be unusual and wasteful and should have been set out clearly if intended.

The terms of the Output Specification were found to be relevant to defining the scope of the Works and not only to the standard of the Works.

How we can help when it comes to complex PFI or other commercial disputes and contract interpretation

Walker Morris’ Commercial Dispute Resolution team can advise as to the meaning of contractual obligations and rights under PFI and other complex commercial contracts. We can also advise, from a risk management or a liability assessment perspective, on the consequences flowing from breach of disputed contractual provisions and on the options for mitigating those risks or resolving any dispute, including negotiation, mediation, adjudication or court proceedings. We have substantive experience of advising public and private clients on public project disputes and understand the sensitivities and limits on the scope for settlement by public bodies.

Please contact Lynsey Oakdene or Kathryn Vickers for further information, training or tailored advice on any issue associated with PFI projects, complex contractual arrangements, contract interpretation or commercial disputes in general.

[1] [2022] EWHC 2372 (TCC)

[2] Arnold v Britton [2015] UKSC 36

[3] para 103