Adjudication As A Mandatory Step In PFI Disputes: Lessons From Recent Case Law – Project Finance/PPP & PFI

In a recent dispute arising out of a Private Finance Initiative
(PFI) project under the Building Schools for the
Future programme, the Technology and Construction Court
(TCC) held that adjudication was a mandatory step
in the dispute resolution process. Nonetheless – and even
though adjudication had not yet taken place – the Court
allowed the litigation to proceed.

We examine below the reasoning behind this decision, and –
while noting that this is a fact-specific decision –
questions it might raise for other parties involved in disputes on
PFI contracts.

Adjudication in PFI contracts

The statutory adjudication provisions established by the Housing
Grants, Construction and Regeneration Act 1996 do not apply to the
top tier contracts entered into under
PFI initiatives (i.e. usually the
project agreements between local authorities and a Project Co).
Adjudication is therefore not mandated by statute in such contracts
in the same way that it is in respect of “construction
contracts” as defined in the 1996 Act.

However, most PFI agreements
contain complex, multi-tiered dispute resolution mechanisms which
frequently include adjudication provisions that may be similar to
the statutory adjudication procedure. These will typically escalate
disputes from negotiation to expert determination or adjudication,
and then upwards to litigation or arbitration for final
determination.

Key background facts to this case:

• The dispute arose out of a 2007 Project Agreement between
  Lancashire County Council (the “Local Authority”) and
  Project Co for the provision of serviced accommodation at a school
  in Lancashire, under the Building Schools for the Future
  programme.




• This was a conventional PFI
  structure with (i) a downstream Building Contract between Project
  Co and Lendlease Construction (the “Building
  Contractor”); and (ii) a Facilities Management Contract
  between Project Co and Equans (the “FM Contractor”).




• A dispute arose in relation to alleged defects at the school.
  Project Co commenced proceedings against the Building Contractor
  and its parent company, and later amended its claim form to include
  claims against the FM Contractor and the Local Authority.




• This decision arises out of the Local Authority’s
  application to set aside service of the claim form against it and /
  or to strike out the claim.




• The Local Authority argued that the court should decline
  jurisdiction, since the claim had been brought in breach of a
  contractual requirement that all disputes must first be determined
  by adjudication.

The TCC decision

Alexander Nissen KC in the TCC
held that adjudication was a mandatory step in the dispute
resolution process – but nonetheless allowed the litigation
to continue.

In reaching this decision, he made the following points:

• The relevant clause was a condition precedent to
  litigation;




• However, the Court is not bound to give effect to a mandatory
  alternative dispute resolution (ADR) provision by ousting /
  refusing to exercise its jurisdiction – rather it must
  exercise its discretion having regard to various factors including
  the overriding objective;




• This was not a narrow contractual dispute which could be
  satisfactorily resolved by bilateral adjudication between the
  Project Co and the Local Authority;




• Rather, it was essentially a “multi-party dispute” as
  there were issues that were contingent on the positions of the
  other parties who would not have been party to any such bilateral
  adjudication;




• Furthermore, granting a stay for adjudication would risk
  delaying the ultimate disposal of the proceedings (as well as
  connected proceedings relating to another phase of the schools
  project).

What are the key lessons?

While this decision is fact-specific, many disputes arising out
of PFI projects will be similarly
complex, multi-party disputes involving the Project Co, building
contractor and facilities contractor and local authorities. As
noted in the White Fraiser Report published in 2023 by
the Infrastructure and Projects Authority, standardised provisions
are included across many of these long term contracts. Furthermore,
there is increased scope for disputes in the context of
PFI contracts due to expire in the
next 10-15 years, particularly in cases where there are no clear
contractual provisions about the required condition of the asset
upon handback.

It may be of surprise to some in the industry that despite
confirming the mandatory nature of the adjudication clause in the
Project Agreement, the TCC
nonetheless struck out the Local Authority’s application and
allowed the court proceedings to proceed.

This leaves open a potential question mark for parties in
similar PFI disputes as to whether
they may proceed straight to court proceedings and circumvent other
mandatory ADR clauses. On the basis of this decision
it appears that the Court will take a holistic view, considering a
variety of factors including the number of parties involved and the
complexity of the dispute, as well as how long the litigation has
been proceeding, when deciding whether a stay is appropriate.

References:

Lancashire Schools SPC Phase 2 Ltd v Lendlease
Construction (Europe) Ltd & Ors [2024] EWHC 37
(TCC

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