12/11/2021
A common issue on which we advise clients who are a party to a PFI/PPP contract concerns a failure by one party to provide key information, whether that be relating to defects, performance issues or financial information.
A recently published judgment shows that the Court can and will grant specific performance where the party can show that it has a contractual right to the information. The judgment further confirms that, when interpreting contractual provisions in a PFI/PPP contract, the Court will take into account not only the strict wording of the Project Agreement, but also the commercial rationale and business common sense underpinning the Project Agreement.
In the case of Buckinghamshire Council v FCC Buckinghamshire Ltd [2021] EWHC 2867 (TCC), the PFI/PPP project in question related to the design, construction and operation of a waste to energy thermal treatment plant and waste transfer station. The Project Agreement provided for the treatment of both waste from the Council (“Contract Waste”) and Waste from Third Parties, including other local authorities (“Third Party Waste”).
The Council was seeking declarations as to certain contractual provisions relating to “Third Party Income” (being “income from third parties . . . associated with the Project”), and an order for specific performance relating to documents which would assist the Council in establishing (on its interpretation) the true value of such Third Party Income.
Under the terms of the Project Agreement, FCC guaranteed Third Party Income from a number of sources, including income from third party waste and electricity output. Income received in excess of specified thresholds was to be shared between the parties.
The dispute related to two potential income sources which FCC argued should not be contained in the calculation. The first related to a by-product of the thermal treatment, IBA (“Incinerator Bottom Ash”) residue, which contains various contaminated metals, and can be sold on for further treatment.
The second related to income received by an ancillary of FCC for waste haulage. In summary, the contractual arrangement was that FCC sub-contracted the operation and maintenance of the plant to FCC Recycling, who also agreed to source Third Party Waste. Separately, FCC Recycling entered into a contract with FCC Waste for the supply of Third Party Waste. The price paid by third parties for the disposal of waste to FCC Waste was lower than the price FCC Waste paid to FCC Recycling. The Council’s position was that the additional sub-contracting layer should not detract from the fact that FCC Waste, as an Affilliate of FCC, had received income in respect of the disposal of waste, and that the higher rates paid to FCC Waste should be taken into account in calculating Third Party Income.
In essence, the Council’s concern was that it was not receiving the income to which it was entitled (i.e. their share of income once the contractual threshold had been exceeded), nor the requisite financial information, notwithstanding the contractual requirement for open book accounting.
FCC argued that the contractual definitions (which we do not set out here) meant that the sums had been received by its Affiliates, not by the Contractor (FCC) itself, so the Third Party Income sharing provisions did not bite. It was also argued that the reference in the calculation as to how Third Party Income was to be shared to “gate fee revenue” should be limited to payments received for treating the waste.
The Court noted that the test for interpreting contractual provisions is that set out by the Supreme Court in Arnold v Britton [2015] UKSC 36. When interpreting a written contract, the Court will consider the meaning of the relevant words in their documentary, factual and commercial context.
In this case, the Court concluded that the definition of Third Party Income as “income from third parties . . . associated with the project” was clearly broad and that the natural and ordinary meaning of those words was that income would flow from a wide range of activities related to the availability of the Facilities. It was noted that the phrase “gate fee revenue” was not defined and that to conclude that this limited the revenue to the payments to FCC Recycling for receiving the waste would be contrary to the clear and express definitions elsewhere in the Project Agreement.
In respect of IBA, the Court noted that a Method Statement submitted by FCC as part of the procurement process for the project specifically referred to the metals being recovered and sold. The obvious conclusion is that FCC included such statements to give comfort to the Council as to potential sources of income.
The Court was therefore willing to grant declarations confirming that the Council’s contractual interpretation was correct.
In relation to specific performance, the Court noted that this is a discretionary remedy and that the factors which the Court will take into account include whether the Council is entitled to the information under the Project Agreement and whether the relief sought is proportionate to the Council's interest in such information (Cavendish Square Holding BV v Makdessi [2016] AC 1172 ).
The Court noted that the Project Agreement included provisions requiring FCC to keep a full record of all costs, and a provision requiring them to retain documents relating to the project. The Court was prepared to order a specific performance for FCC to provide to the Council those documents it considered necessary for the Council to assess any share of Third Party Income owing.
Conclusion
In the case of Amey Birmingham Highways Ltd v Birmingham City Council [2018], the Court had noted that PFI/PPP contracts are “of massive length, containing many infelicities and oddities” and advised against parties latching onto such oddities for their own commercial gain. The Court has again shown the risk for a party in advancing an argument on that basis.
The specific performance award also shows that, where cost effective to do so and where a clear contractual remedy can be demonstrated, steps can be taken to ensure that a recalcitrant party can be forced to disclose information which is required by the other party to assess its position.
It is noted that the “sole remedy” provision contained within PFI/PPP contracts, which states that the remedy for a breach is the operation of the Payment Mechanism, normally includes a carve-out for specific performance applications.
