Context is king: the High Court considers "minimum life" requirements under a PFI contract
The Technology and Construction Court’s recent decision in Solutions 4 North Tyneside Ltd v Galliford Try Building 2014 Ltd  EWHC 2372 (TCC) is an important reminder that it is never too early for parties to start thinking about the condition that the PFI asset is required to be in at handback.
The dispute in Solutions relates to a typical PFI project: the local council had engaged Solutions 4 North Tyneside Ltd (Project Co) to: (a) construct new residential properties; (b) refurbish existing residential properties; and (c) maintain and manage this portfolio of properties once the works were complete – with a total project duration of some 28 years (the Project Agreement). Project Co, in turn, engaged Galliford Try Building 2014 Ltd (Galliford Try) to undertake construction and refurbishment works (the Subcontract).
The key issues before the Court were:
- whether or not the contractual obligations that applied to the refurbished properties were the same as the contractual obligations that applied to the new properties; and
- whether or not it was appropriate to seek declaratory relief only in order to deal with the dispute.
A year after Galliford Try completed the refurbishment works, Project Co alleged that the roofs of the refurbished properties were defective.
Key to Project Co’s claim was how the relevant “Output Specification” should be interpreted/applied in relation to the refurbishment works.
The two relevant provisions of the Output Specification were:
- section 2.9 – which set out the minimum design life for the works undertaken by Galliford Try (the Design Life Requirement); and
- section 2.10 – which set out the minimum “residual life” of certain elements of the works following the conclusion of the 28-year project (the Residual Life Requirements).
Importantly, sections 2.9 and 2.10 of the Output Specification did not appear to differentiate between refurbished properties and new properties.
The claim before the Court was for a declaration as to the correct interpretation of the Subcontract, rather than a claim for breach of contract or seeking to recover damages. The central dispute concerned whether, as a matter of contractual interpretation, sections 2.9 and 2.10 of the Output Specification applied to the refurbished properties.
That, in turn, would determine whether or not Galliford Try could be liable for the allegedly defective roofs of the refurbished properties.
Project Co argued that Galliford Try was contractually obliged to provide the refurbished properties in accordance with the Design Life Requirements and Residual Life Requirements.
This would mean, essentially, that the roofs of the refurbished properties should have: (a) a design life of 60 years; and (b) a “residual life” of 30 years, following the expiry of the 28-year project.
Galliford Try defended the claim on the basis that the Design Life Requirements and the Residual Life Requirements applied to the new properties only, and not to the refurbished properties.
Instead, Galliford Try argued that the refurbished properties were subject to far more limited requirements, which focused on the physical condition of the refurbished properties when the works were completed – reflecting the fact that works of refurbishment were of a fundamentally different nature to works to construct a new property.
What did the Court say?
The Court largely agreed with Galliford Try’s interpretation of the Subcontract: sections 2.9 and 2.10 of the Output Specification applied to (a) the new properties and (b) the refurbished properties to the extent that they included new-build elements, but not to pure refurbishment works.
The starting point for the Court when interpreting the Subcontract was “to seek to ascertain the intention of the parties by reference to the language used when seen in context”.
An uncontroversial starting point – but in this case, did it lead to a controversial result?
Ultimately, the Court decided that:
- in the context of how the PFI project was structured, imposing the Design Life Requirements and the Residual Life Requirements on the refurbished properties would have been neither a practical nor a commercially attractive agreement;
- it would have been “an unusual arrangement” for Project Co to require Galliford Try to ensure each refurbished property had a certain residual life, because this would have required Galliford Try to carry out more extensive refurbishment works than were genuinely required, just to achieve the Residual Life Requirements – requirement which must be met decades after those refurbishment works were completed; and
- there was no such requirement in the Subcontract – which would require clear and unequivocal words to that effect, had that been the parties’ intention.
PFI project documentation is often extensive and very detailed. It is interesting, therefore, that the Court relied on certain differences between various project documents – the Subcontract, the Project Agreement and the facilities management subcontract (the FM Subcontract) – to support its conclusion that the Design Life Requirements and the Residual Life Requirements did not apply to the refurbished properties. Of particular note:
- the Project Agreement and FM Subcontract included a defined contractual term, “Handback Standard”, meaning “the standard to which the Dwellings are to be handed back to the Authority on the Expiry Date as set out in the Output Specification”;
- tellingly, however, the Subcontract did not make any reference to a “Handback Standard” - which the Court said provided strong support for the view that Galliford Try’s obligations did not extend to the condition of the refurbished properties at the distant end of the Project.
It is an interesting conclusion for the Court to reach, given that: (a) the express words of sections 2.9 and 2.10 of the Output Specification did not differentiate between refurbished properties and new properties; and (b) there were no express words in the Subcontract dealing with whether or not sections 2.9 and 2.10 of the Output Specification applied to refurbished properties. What is clear, however, is that the wider context of the project (including reading all of the project documents together), as well as a healthy dose of commercial common sense, appears to have led the Court to its conclusion.
Claims solely for declaratory relief
Finally, it is worth noting what the Court said about Project Co’s approach in this case – namely, seeking a declaration about the interpretation of the Subcontract, rather than pursuing a more conventional claim for breach of the Subcontract.
In short, the Court was not supportive of Project Co’s approach. While the Court readily accepted that seeking a declaration on a matter of contractual interpretation is sometimes appropriate, it warned that such a strategy should be approached with “a degree of caution” because:
- by interpreting a contract in the context of a particular alleged breach, “the court can form a better view of the consequences flowing from the competing interpretations”;
- as part of the exercise of contractual interpretation, the Court should consider the commercial consequences of competing interpretations to determine the parties’ intentions when the contract was agreed; and
- this approach should ensure, as far as possible, that the Court enforces the contract as agreed between the parties.
This case underlines the difficulties that questions of contractual interpretation can raise, particularly in the context of PFI contracts – contractual requirements cannot be read and understood in isolation from the rest of the project documentation. It is also a helpful reminder that the Courts will look at the wider context of the project – including its lengthy duration – to discern the parties’ intentions when entering into these contracts.
That includes considering the practical consequences that flow from the parties’ competing interpretations of the contract. So whilst a claim for a declaration as to the meaning of the contract may be appropriate in some cases, in many instances the Court may prefer to test competing interpretations in the context of an alleged breach of that contract.
This is also a useful reminder that parties involved in PFI projects are increasingly focussed on the expected condition of their assets at project expiry – in this case, the condition of the refurbished properties – and what the project documentation says about the parties’ obligations in this respect.
This article was co-authored by trainee Hatty Jenner.