PFI Contract

July 23rd, 2015

In Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC) interpreted a PFI Contract between a local authority and a service provider and considered whether it is to be implied that the authority as a best value authority must act in good faith when dealing with breaches by the service provider. In the action the Council sought declarations in relation to the performance of certain of its obligations under a long term PFI Contract made with Ensign. The dispute was about the manner of awarding Service Points by PCC for breaches by Ensign of its obligations under the Contract, which concerns the long term rehabilitation, maintenance and operation of the Council’s highway network.

The Contract incorporated a regime for awarding Service Points for breaches by Ensign of its obligations under the Contract. Schedule 17 to the Agreement contained a table which set out a large number of Default Events for which Service Points could be awarded and, against each Default Event, a “Maximum Event Value”. The Maximum Event Value for each Default Event originally consisted of a single figure between 1 and 10. It was common ground that, until about December 2013, the Council treated the figures for the Maximum Event Value as the upper limit of a range. Accordingly, where the Maximum Event Value was greater than 1, the number of Service Points awarded would depend on the Council’s view of the gravity of the breach.

The Council assessed and awarded Service Points on a monthly basis and, initially, the system was operated in a manner that seemed to be regarded as satisfactory by both parties. However, after a few years cuts in central government funding to local authorities began to take their toll. In 2012 The Council began to form the view that if the Contract continued to be operated in the same manner for the remainder of its term it would become unaffordable. The Council embarked on a strategy of awarding Ensign large amounts of Service Points in order to force it to accede to the Council’s commercial demands in a renegotiation of the Contract. This involved, amongst other things, awarding the maximum amount of Service Points for every default, refusing to communicate with Ensign in relation to breaches, finding breaches in areas which Ensign might find hard to remedy and storing up Service Points over several months so that Ensign could be “ambushed” with a large award of Service Points at one fell swoop.

Ensign notified the Council that it intended to refer the dispute about the award of Service Points to Expert Determination in accordance with the terms of the Contract. The Expert issued a detailed and careful Determination in which she concluded, in fairly trenchant terms, that the Council had acted in bad faith, without mutual co-operation and unfairly. However, she did not conclude that Ensign’s performance was always as it should have been: her conclusion was that in general it was delivering the required service but that the Contract did not really provide any means of achieving long-term improvements. In addition, it seems that there was a view within the Council that the performance standards required under the Contract were unnecessarily high, and that it was therefore an unnecessary luxury.

The Council of course was under the “best value” duty imposed upon it by Section 3 in Part I of the Local Government Act 1999. Clause 44 of the Contract is concerned with best value and best value reviews. The Council relied strongly on the decision of the Court of Appeal in Mid Essex Hospital Services NHS Trust v Compass Group [2013] BLR 265.

Edwards-Stuart J in the Portsmouth case observed that failure of highway maintenance can take many forms. He concluded on the Service Points issue as follows:-

“70. … It does not in my view make commercial sense to have a system which requires the authority to impose the same number of points irrespective of the gravity or duration of the breach. In the absence of any specific indications to the contrary, one would expect the parties to have agreed a system that provided or permitted some flexibility in relation to the number of points to be awarded for any particular breach. …

71. I agree that the word “maximum” is a word with a clear meaning – namely, the upper limit of a range. It is therefore an inappropriate word to include in the heading of a column containing numbers if those numbers were intended to be single values, rather than the upper limit of a range. On PCC’s approach, the word simply has to be ignored.

72. In my view, the use of the word “Maximum” in the heading to the column showing the number of points was not the result of a drafting error but was there for a purpose. That purpose was to permit the PCC Representative, within the range provided for in the schedule, to award an appropriate number of points having regard to the gravity of the breach.”

“76. I therefore conclude that the Service Point values set out in Schedule 17 are maximum values that can be awarded for a particular breach and are not fixed “tariffs” that are to be applied irrespective of the gravity of the breach in question.”

As to the extent of the duty of good faith, the Judge began by observing as follows:-

“81. … It is clear to me that, in the context of this Agreement, PCC could not discharge its Best Value Duty unless it was in a position to negotiate improvements to the Service that might operate to Ensign’s financial detriment in circumstances where Ensign was obliged to discuss such changes in good faith – in other words, by giving proper and careful consideration to PCC’s needs and statutory obligations and balancing those against its own commercial interests. That, it seems to me, is the reason why, at least for the purposes of clause 44, Ensign is required by clause 44.4.1 to deal fairly, in good faith and in mutual co-operation with PCC. Since a duty of good faith is not usually implied into commercial contracts under English law, save in certain particular types of contract, it is necessary to provide for an express duty in appropriate terms. That is what clause 44.4.1 does.”

The Judge, however, rejected Ensign’s submission that the clause 44.4.1 duty applied to the Contract as a whole.  Nonetheless, he concluded, at paragraph 112, that when awarding Service Points (under clause 24) the Council was subject to an implied term, as follows:-

“When assessing the number of Service Points to be awarded under clause 24.2.1(c) of the Agreement, PCC’s Representative is to act honestly and on proper grounds and not in a manner that is arbitrary, irrational or capricious.”

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