Commercial sensibilities in PFI disputes

David Owens and Freyja McLoughlin on the lessons to be learned from a recent PFI dispute case, including the steps that need to be taken in regard to remedial schemes.

The recent case of St James’s Oncology SPC Ltd v Lendlease Construction (Europe) Ltd and another [2022] EWHC 2504 (TCC) concerned alleged fire safety and electrical engineering defects in the basement power plant of the Oncology Centre at St James’ University Hospital. The judgment found that the constructor contractor, Lendlease, appointed via a private finance initiative (PFI) was to pay the project company, Project Co, substantial damages for these defects.

This case is important reading for anyone who is facing, or potentially facing, a PFI dispute. Knowing what steps need to be taken in regard to remedial schemes, as well viewing the dispute as a whole through a commercial lens is increasingly relevant, especially in the current economic climate.

What happened in St James’s?

As outlined above, the case of St James’s involves a PFI dispute. St James’s Oncology SPC Limited (‘Project Co’) entered into a Project Agreement with Leeds Teaching Hospital NHS Trust, for the design, construction, operation and maintenance of the Oncology Centre at the hospital. Project Co then appointed Lendlease to design and build the Oncology Centre.

In 2017, Lendlease were contacted by Albany, a 3rd party who had been employed to carry out annual Fire Safety Compliance works. Albany informed Lendlease that serious concerns had arisen about various fire safety provisions within the Hospital. The concerns centred mainly on Plant Room 2 and focused on a lack of fire stopping and separation. This lack of separation meant a single fire or fault could take out both the primary and secondary power supplies to all medical equipment and facilities in the Oncology Centre, which was in breach of numerous provisions of Health Technical Memoranda. A third party, Hoare Lea (who had produced the concerning report) were tasked with devising and refining a suitable remedial scheme.

Project Co commenced proceedings against Lendlease in December 2019, arguing that the construction of the Oncology Centre was defective in that it was built in breach of fire safety standards and contractual requirements. They stated the cost of rectifying defects totalled over £6.2m.

A remedial strategy was produced and shared before trial, but it was only in March 2022 that Lendlease alleged that Project Co did not intend to implement any remedial works and a more limited remedial scheme was appropriate.

The Judge rejected these arguments and found a total quantum of over £5m was owed to Project Co. Although this outcome was to be expected, with no new law created, it is an important reminder of the principles that run through PFI disputes. We have highlighted some of the most important takeaways below:

Were the remedial works necessary, practical and proportionate to rectify the alleged defects?

It should be noted from the start that the Judge remarked the law on this issue was ‘so uncontroversial as to be barely mentioned’ by the Contractor. It is accepted law that when determining whether a remedial scheme is reasonable, the court will consider whether and to what extent expert evidence was relied upon when deciding to carry out the work. What is also important is that it is not enough for a defendant to prove the works can be rectified through an alternative scheme at a lower cost, it must also show that the proposed works are unreasonable. In this case the Judge fully supported Project Co and found all their proposed remedial stages were necessary, practical, and proportionate.

Does Project Co intend to carry out any remedial works and, if not, what is the relevance of any absence of intention?

Lendlease argued that Project Co did not intend to carry out the proposed remedial work and would instead wait until after the trial before deciding what work to carry out. The general rule in the case of damages for defective work is that the measure of damages to be awarded will be the cost of making the defect good, unless that cost is disproportionate. Lendlease argued that as the rectification works might not be carried out, the amount sought was disproportionate. The case of London Fire v Halcrow was cited, but the Judge distinguished from it on interesting grounds. In London Fire, there was available evidence that the proposed remedial scheme would not be carried out/that it would not be reasonable to carry it out. This included evidence that the Authority themselves felt the remedial works were ‘fatally flawed’. The Judge here had no such evidence and was in ‘a very different position’ which therefore led her to find that Project Co did intend to carry out the works.

Indemnity claim

In addition to its claim for damages, Project Co pursued a claim for an indemnity by way of a declaration.

However, the Judge found a declaration was not in the interests of justice for the following reasons. Firstly, substantial damages were awarded to Project Co for the defects they had identified, and by virtue of its indemnity claim Project Co was in effect seeking a blank cheque in relation to future claims which may be issued against it by the Trust. There was no evidence that future claims were being brought and equally there was no evidence of deductions in service payments. The Judge therefore found such a declaration was not necessary and would leave Lendlease with an unquantified and uncertain liability to Project Co. The Judge found it appeared more sensible to assess any future claims which related to the scope and effect of the D&B indemnity clause as and when they arose.

This demonstrates that even in cases such as this, where one side has succeeded on every point, the Courts are very hesitant to allow what would be in effect a blank cheque for an indefinite amount of time.

The practical tips for potential Claimants are laid out below:

1. It is reasonable to consider the commercial factors which may have led to remedial work being delayed. For example, if the company is having a cash flow issue, the decision to postpone the works could be viewed as reasonable. Similarly, in cases where Claimants have delayed carrying out works until they have established that they would be able to recover the costs, the Courts have found this reasonable and commercially sensible. There is therefore not as much urgency to rush into schemes as individuals may first assume.
2. Rival remedial schemes are normally decided upon based on whether Claimants have relied upon expert advice when deciding how and whether to carry out the works. It is therefore important that experts are enlisted when putting together remedial schemes and that the cost of the works is assessed often.
3. A Judge needs to be convinced to a high standard in order to find that a remedial scheme will not be implemented by a Claimant. Examples of where such grounds have been found include when the Claimants themselves have put in writing that they believe the scheme is ‘fatally flawed’. Concerns and delays because of costs reservations, or other similar commercially motivated hesitations, are highly unlikely to show proof of a lack of intention to implement. Decisions should therefore not be rushed into without considering the financial burden if costs aren’t recovered.

David Owens is a Partner and Freyja McLoughlin is a Paralegal at Sharpe Pritchard LLP.

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