In our previous post we outlined the facts in Kent County Council v Robertson Construction Northern Limited and considered the court’s decision on the allocation of availability and performance deductions in PPP/PFI projects. Another interesting aspect of this case is the comments the court made in relation to interface agreements, which are a common feature in projects of this nature.
What is an interface agreement?
The primary purpose of an interface agreement is to regulate the relationship between the construction sub-contractor (Construction Co), the facilities management sub-contractor (FM Co) and any other key sub-contractors (such as an ICT sub-contractor) with regard to certain liabilities and payments and the recovery of certain sums by one from the other. It is intended to protect a thinly-capitalised project company (Project Co) from costly disputes between sub-contractors by requiring the sub-contractors to settle various issues between themselves, largely without the involvement of Project Co. It is likely to include, amongst other things, reciprocal liability and indemnity provisions, caps on liability, and provisions concerning the allocation of deductions by Project Co.
Key areas of contention
Each interface agreement is different, depending on the nature of the particular project. However, there are some common areas of contention, one of which is the extent of Project Co’s involvement in allocating deductions between its key sub-contractors. This is because of:
- The cash flow risk it imposes on the sub-contractor to whom the deduction is allocated in the first instance.
- The insolvency risk (in respect of the other sub-contractor) if the sub-contractor who is initially allocated the deduction seeks to recover the amount of that deduction from that other sub-contractor.
In our experience, many interface agreements provide that if either Construction Co or FM Co is in breach of their respective sub-contracts, and this results in Project Co incurring deductions under the project agreement, Project Co can pass on such deductions to the defaulting sub-contractor. This sub-contractor can then seek to recover these deductions from the other sub-contractor if it considers they have been wrongly allocated in the first instance.
It is common for the initial allocation of deductions to be at the discretion of Project Co acting in good faith, although the extent of this discretion varies from project to project. Sometimes Project Co has to allocate a deduction to a specific sub-contractor in specified circumstances. For example, to the construction contractor where a deduction has been levied against Project Co under the project agreement for unavailability and this has been caused by defects in the construction work.
Sometimes Project Co is able to allocate such deductions against the sub-contractor it feels is most able to bear the loss. The interface agreement in this case seemingly did exactly that; it allowed Project Co to allocate deductions to Construction Co or FM Co “as appropriate” and this is what Construction Co sought to argue. Impossible, said the court, it makes no commercial sense. Where a breach by A caused Project Co loss, you cannot pass that liability to B.
Did the judge get it wrong?
An interface agreement contains a straightforward allocation of risks and liabilities between Project Co and its key sub-contractors on a project. It is a commercial agreement and the parties to that agreement are free to agree the way in which Project Co can allocate deductions to its sub-contractors. In fact, it makes good commercial sense from Project Co’s perspective to allocate the deduction to the sub-contractor best able to bear that loss. However, this is rarely acceptable to FM Co because this will almost always be FM Co: it is much easier administratively for Project Co to reduce FM Co’s monthly payment by an amount equivalent to the deduction than to recover such amount from Construction Co.
On the facts of this case, the judge was probably right that this interface agreement only entitled Project Co to allocate a deduction to a sub-contractor where that sub-contractor was in breach of its sub-contract and this had caused Project Co to suffer a deduction under the project agreement for poor performance and/or unavailability. However, this will not necessarily always be the case.
Some interface dos and don’ts
- Although interface agreements are commonplace on PPP/PFI projects, there is no “standard” form. Do not take a “one size fits all” approach.
- Do not push issues into an interface agreement that should properly be dealt with at sub-contract level.
- Whether you are Project Co, Construction Co or FM Co, make sure you understand exactly what issues your interface agreement deals with and how this fits with your respective sub-contract(s).
- Consider what practical interfaces may usefully be addressed in the interface agreement, such as design development, mutual rights of access, and so on.
- Consider what project-specific issues may need to be addressed, for example, FM Co’s control of site prior to completion of construction on secure accommodation projects.