The more cynical amongst us may think that the growing frequency of unavailability deductions on PFI/PPP projects is a sure sign that employers are going the extra mile to claw back the cost of PPP or PFI projects.
However, in their eagerness to recoup some costs, employers, sponsors or authorities can (and often do) ignore the contractual provisions that must be satisfied before establishing any entitlement to levy unavailability deductions.
Employers do so at their own peril and we are seeing an increasing number of contractors (both Project Co and Construction Co) that are prepared to take employers to task on the arbitrary application of unavailability deductions. What should the employer be doing to show entitlement?
Has a failure event been established?
Ordinarily, PFI/PPP contracts contain a service level specification, a performance monitoring schedule and a payment mechanism schedule. These have to be reviewed together to ascertain whether an employer may levy unavailability deductions. To put it simply, for an employer to levy deductions, there often has to be a contractually defined service failure, which leads to a failure event, which in turn impacts upon the availability of any contractually defined functional part.
What some employers fail to appreciate (or choose to ignore) is that the provision of the “Services” is a distinct and separate operation from the obligation to design and construct the “Works”. A project agreement generally deals with these separately.
The Works phase is often expressed to cover design, construction, testing, commissioning and completion by a specified date (with an obligation to remedy snags or defects within a defects liability period). On the other hand, the Services relate to facilities management after the Works are complete (during the operational term), which can last between 20 and 30 years.
A defect in the Works could manifest as a service failure event, but, in that case, it would be for the employer to demonstrate that this had occurred by reference to the service level specification and the performance monitoring schedule. Only then may the employer be entitled to levy deductions under the payment mechanism.
Kent v Robertson Construction
In Kent County Council v Robertson Construction, the Scottish Court of Sessions found that a failure to install tables on a school PPP project amounted to a service failure under the project agreement. However, there was no express obligation under the construction contract to perform the services, so Project Co could not pass the deductions down the line.
Each case will turn on its facts, however, a contractor’s starting point when responding to a threat of deductions may be to ask the employer to specify in writing the exact contractual provisions relied upon to justify a deduction. For Project Co, this would include asking which provisions in the project agreement service level specification and the performance monitoring schedule have allegedly been breached. For Construction Co, it should ask Project Co to identify the specific provisions under the construction contract or FM contract that allegedly entitle Project Co to recoup those deductions from Construction Co or FM Co.
Even if an employer has demonstrated that a service failure has occurred, the contractor may still be able to defend a claim for unavailability. I will review possible defences in part two of this post.