REUTERS | Fabrizio Bensch

PPP and PFI: defending unavailability deduction claims

The first part of this post explored the increased number of unavailability deductions being levied on PFI and PPP projects. I explained the contractual provisions that must ordinarily be satisfied before an employer can establish any entitlement to levy unavailability deductions.

Here, I set out various means by which a party could attempt to defend such a claim.

Complying with accessibility or availability conditions

Even if an employer has shown a service failure, by reference to the contractual service level specification, the functional part may still satisfy the express provisions in the payment mechanism relating to the accessibility or availability. For example, Project Co or the contractor may be able to demonstrate that:

  • All authorised staff and visitors are able to gain unobstructed physical access to the facility;
  • All persons entitled to use the facility are able to do so without increased risk to health and safety; and
  • The facility is capable of being used for its intended purpose.

Employer’s breach of duty to co-operate and act in good faith

The contract may impose a duty to co-operate and act in good faith and, if it does, the parties should not ignore that provision. In Compass (t/a Medirest) v Mid Essex Hospital NHS Trust, the court found the Trust had overzealously made deductions. For example, deductions of £46,320 were levied for one box of out-of-date ketchup and £84,450 for a mousse that was out-of-date by one day. Medirest purported to terminate the contract for breach of the co-operation/good faith provision. The court had to decide what this provision required and found that the Trust had breached the co-operation/good faith provision by failing to co-operate when Medirest queried the deductions and attempted to resolve the dispute and by levying deductions in an “arbitrary, capricious and irrational manner”.

A party could rely upon the Medirest principle to argue that the levying of deductions is arbitrary and in breach of any express provision of co-operation/good faith if:

  • There is a technical breach of the contract which has resulted in no real loss being sustained, relying also on Ruxley v Forsyth (see further below); and/or
  • The employer has rejected a remedial solution that expert evidence deems entirely appropriate.

Unreasonable conduct by the employer

Even if the contract contains no express duty to co-operate or act in good faith, the parties must still act reasonably. An employer who insists on pursuing a technical breach or levying deductions arbitrarily may be entitled to nominal damages only, applying the principle in Ruxley Electronics v Forsyth.

Ruxley involved a swimming pool that was built about one foot too shallow and the pool owner sued the builders for the cost of rebuilding the pool to the contractual depth. The court found that the pool owner had no intention of using the damages to reconstruct the pool and the property had suffered no diminution in value by reason of the shallower depth, which amounted to a technical breach only and did not impact negatively on the use of the pool. It awarded nominal damages only for loss of amenity.

Misapplication or miscalculation of the deductions formula

If the employer has levied deductions, then Project Co or the contractor should consider carefully whether the contractual payment mechanism has been operated properly. For example, check the following:

  • Trigger date for deductions. This is usually the employer’s notification to the helpdesk and there is often no entitlement to roll back the deductions retrospectively (that is, before the date of notification to the helpdesk) or roll forward the deductions into the next contract month.
  • Maximum sum. Does the contract specify a maximum sum that can be deducted from a contractual service payment (for example, the maximum may be the volume adjusted service payment)? If so, the employer cannot bypass it by applying deductions that exceed the contractual cap.
  • Level of deductions. Has the level of deductions been adjusted appropriately? It should reflect:
    • the specific failure event notified to the helpdesk;
    • the seriousness of the failure event pursuant to the express performance/unavailability categories;
    • the number of affected functional parts; and
    • the correct application of any unit weighting prescribed to each functional part.

It’s a long road

Many PFI/PPP projects still have over 20 years to run. Therefore, a balance must be struck between the parties working together to achieve the objective of the contract and the correct application of the contractual provisions to ensure performance is maximized.

A reasonable commercial approach based on fact and common sense should prevail over any arbitrary application of the contractual payment mechanism. Employers who choose to ignore this do so at their peril.

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