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PITFALLS IN PFI DISPUTES

ADAM ROBB

November 2012

The material in these notes is based upon the law of England and Wales. It is only intended to provoke

and stimulate. It does not constitute advice.

Detailed professional advice should be obtained before taking or refraining from taking action in relation

to any such material

.

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1. SCOPE OF PAPER

1.1. This paper considers three issues which frequently arise in relation to PFI disputes:

1.1.1. The operation of the mechanism in PFI contracts by which the failures to achieve

service standards attract points which can lead to deductions from payments and

termination:

(1) The recent case of Compass v Mid Essex NHS Trust;

(2) The relevance of the doctrine of penalties;

1.1.2. Recent cases on entire agreement clauses which are a common feature of PFI

contracts;

1.1.3. Multi-tier dispute resolution clauses, another common feature of PFI contracts.

2. PFI – THE BACKGROUND

2.1. The current scope of PFI can be gleaned from HM Treasury Figures from March 2012:

2.1.1. Total capital cost of current PFI projects is £54.7 billion;

2.1.2. 717 current projects of which 648 are operational;

2.1.3. PFI unitary charge payments are expected to total £9.3 billion in 2012-2013.

2.2. One curious feature of the PFI sector, particularly in light of these figures, is how few disputes

have reached the courts or arbitration. PFI schemes are usually fairly complicated and high

value, with a significant number of parties involved. Although a few high profile disputes have

reached the courts, such as the Midland Expressway, Emcor Drake & Scull v Sir Robert McAlpine

and the Croydon Tramlink litigation, there have been relatively few.

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2.3. That is not to say that disputes do not occur on PFI projects – they do. However, certainly in

the past, these disputes have usually been resolved through commercial negotiation or

alternative dispute resolution.

2.4. Obviously, the fact that the parties expect that they will have to work together over a lengthy

period of time (say, thirty years) is an important factor.

2.5. Until relatively recently, there had been a fairly steady flow of work so that providers had every

incentive to make projects work and avoid disputes so as to avoid reputational damage.

2.6. It is also very likely that the number of disputes reaching the courts or arbitration (or even

adjudication) has been significantly reduced by the tiered dispute resolution procedures found

in many PFI projects. Tiered dispute resolution procedures can be very effective where both

parties are keen to work together and co-operate over the long term.

2.7. Public authorities may not have felt under particular financial pressure and so may have been

prepared not to take full advantage of their contractual rights in order to maintain a good

relationship with the provider.

2.8. If these factors help explain why there have been relatively few major PFI disputes reaching the

courts or arbitration so far, they may also indicate that we are likely to see an escalation of

disputes in the near future.

2.9. Public infrastructure spending has been and is being reduced. This means that there are fewer

projects and providers may need to focus on maintaining or increasing profitability on existing

projects.

2.10. Public authorities are under much more severe financial pressure than ever before. The need

to reduce expenditure in the short term may mean that they are more likely to try to take full

advantage of their contractual rights and less concerned about long-term relationships.

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2.11. As projects mature, both the public authority and the provider may be concerned that the deal

is not what they thought they bargained for and so may seek to use contractual mechanisms to

get what they regard as a “fair deal”.

3. THE OPERATION OF THE POINTS MECHANISM

3.1. PFI contracts usually require the provider to adhere to a fairly large number of service

standards and that breaches of those standards give rise to service failure points. Those service

failure points then translate into sums which the public body can deduct from the unitary

charge. Eventually, if enough service failure points are accumulated, then the public body may

be entitled to terminate the contract.

3.2. If public bodies decide to exercise their contractual rights more fully than they have in the past

it is likely that they will be focusing on service failures and whether these mean that deductions

can be made from the unitary charge.

Compass Group UK v Mid Essex NHS Trust

3.3. The (relatively) recent case of Compass Group UK and Ireland Ltd v Mid Essex NHS Trust

Introduction

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3.4. As set out in more detail below, the contract at the centre of this case contained an express

term that the parties would co-operate in good faith. Many PFI and PFI type contracts will not

contain such a term. However, the courts have, on a number of occasions, used the implication

of a term of good faith to restrict the exercise of broad contractual powers. Further, in the

course of his judgment Cranston J relied upon the role of the Trust in carrying out public duties

on behalf of the wider community in explaining the nature of the duty of good faith. This may

provides a salutary warning both to public bodies and PFI providers.

1 [2012] EWHC 781 (QB).

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prove to be the foundations upon which others may seek to imply more intrusive implied terms

of good faith and co-operation.

3.5. This case concerned a long-term facilities contract between the claimant, Medirest, and the

NHS trust. The contract was for the provision of catering services to the Trust.

Summary of the facts

3.6. The contract was not itself a PFI contract, but included a mechanism for the deduction of points

and deductions from the payments to be made to Medirest.

3.7. It contained detailed provisions describing the services to be provided and the service levels to

be achieved. A failure to achieve these service levels permitted the Trust to deduct service

credits, which could be deducted from the monthly payment to be made to Medirest. Such a

failure could also lead to the awarding of “service points”. Various remedies, including the right

to terminate the contract, were triggered by the accumulation of a sufficient number of service

points.

3.8. However, the contract also contained an express obligation on the parties to “co-operate with

each other in good faith”. The dispute between the parties focused on how this general

obligation related to the detailed provisions in relation to service levels, deductions and service

points.

3.9. The contract commenced in April 2008 and there were initial significant problems. In

particular, Medirest wrongly considered that it was not required to report on its service levels

during the first three months.

3.10. As a result of Medirest’s failure to self report, the Trust carried out its own monitoring of

Medirest’s performance. The Trust identified a number of relatively minor service failures.

These service failures would later become very significant.

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3.11. By late 2008, Medirest’s performance, including reporting, had improved considerably. Despite

this, in December 2008, the Trust issued a contractual warning notice which required Medirest

to prepare an action plan.

3.12. By the time Medirest and the Trust agreed the action plan, the Trust had provided its

calculation of service points and service credits. The Trust had calculated that there were

deductions of just under £600,000 and service points of 52,000 for the period of July 2008 to

December 2008. This amounted to more than half the total payments for that period.

3.13. The Trust had interpreted the contract in a way that massively increased the deductions to be

levied with respect to relatively minor service failures. For example, the Trust claimed to be

entitled to £46,320 for out-of-date tomato ketchup sachets and £84,450 for the out-of-date

mousse.

3.14. Medirest considered that the service credits were only £37,665 and that it had accumulated

only 18,000 service points. The main difference between the parties was as to when service

credits stopped accumulating. The Trust insisted that service credits continued to accumulate

until it had been formally notified that the service failure had been remedied. Medirest stated

that the service credits ceased once the Trust was aware that the remedial steps had been

taken.

3.15. Thereafter, despite attempts to settle the dispute, the Trust began withholding significant sums

from the monthly payments due to Medirest.

3.16. Medirest then served a notice on the Trust alleging that it was in material breach and

demanding repayment of the withheld sums and that the Trust issue a corrected service credit

schedule.

3.17. The Trust repaid the withheld sums but refused to issue a revised service credit schedule.

Medirest then served a termination notice. The Trust served its own termination notice based

upon the accumulated service points.

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3.18. The parties then agreed that the contract would terminate on 23 October 2009 without

prejudice to whose termination was effective.

3.19. It was common ground that Medirest had accumulated more than the 1,400 service points

which would entitle the Trust to terminate the contract.

3.20. The key issue was whether Medirest had also been entitled to terminate the contract by reason

of the Trust’s breach of its obligation to co-operate in good faith.

3.21. Clause 3.5 of the Contract provided:

The judgment of Cranston J

The obligation to “co-operate in good faith”

“The Trust and the Contractor will co-operate with each other in good faith and will take

all reasonable action as is necessary for the efficient transmission of information and

instructions and to enable the Trust or, as the case may be, any Beneficiary to derive the

full benefit of the Contract.”

3.22. Medirest contended that there were two distinct obligations:

3.22.1. Firstly, a general obligation to co-operate in good faith; and

3.22.2. Secondly, a more limited obligation to take all reasonable action necessary for the two

purposes set out in the clause.

3.23. The Trust contended for a narrower construction, whereby both obligations (to co-operate in

good faith and to take all reasonable action necessary) were limited to the two purposes

expressly referred to.

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3.24. Cranston J preferred Medirest’s interpretation but found that the different approaches made

no difference on the facts of the case.

3.25. Cranston J’s decision in relation to the duty to co-operate in good faith covers both the usual

commercial interpretation of such a clause and a number of comments which were specific to

the Trust as a public body.

3.26. As to the usual commercial approach to such a clause:

3.26.1. The precise scope of the duty to cooperate will take its content from the

circumstances and the nature of the contract concerned;

3.26.2. The duty to cooperate necessarily encompassed the duty to work together to resolve

the problems which would almost certainly occur from time to time in a long term

contract of this nature: Anglo Group plc v Winther Brown & Co Ltd2

3.26.3. As this was a long term contract for the delivery of services, the performance of which

required detailed and continuous cooperation between the parties at a number of

levels if it was to work smoothly, it was highly likely that the parties intended that

there should be a general obligation that they should cooperate in good faith with

each other. The only limitation to that general obligation would be that it was limited

to the performance of the contract: Rainy Sky v Kookmin Bank

. It also necessarily

required the parties not to take unreasonable actions which might damage their

working relationship;

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3.27. However, on a number of occasions, Cranston J had specific regard to the fact that the Trust

was a public authority performing a public function:

.

2 (1997) TCC 413, [128] per HHJ Toulmin CMG QC.

3 [2011] UKSC; [2011] 1 WLR 2900.

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3.27.1. Despite cases such as Manifest Shipping Co v Uni-Polaris Shipping4

“33. In the contract in the present case the term good faith in clause 3.5 referred to

how the parties were to conduct themselves in the course of its performance.

Conduct which could be said to be committed in bad faith was clearly caught.

Additionally, in its context, the term had an objective character. It qualified how

the duty to cooperate was to occur, that duty having the features already

described. Moreover, it concerned the performance of a long term, complex

contract, involving the provision of an important service to members of the

public, the patients and visitors to the hospital. In deriving the full benefit of

the contract under clause 3.5 for itself and the beneficiaries identified in the

contract, the Trust was in a real sense pursuing a common purpose with

Medirest of benefit to the public. To my mind the objective standard of conduct

demanded in this case of both parties primarily encompassed faithfulness to

this common purpose. Fair dealing and acting consistently with justified

expectations were, in a sense, corollaries of that.

where it was

suggested that a duty of good faith could only be breached by actions taken in bad

faith, Cranston J held that the duty was significantly wider. At paragraphs 33 and 34,

Cranston J held:

34. In addition to the duty to cooperate in good faith, clause 3.5 also contained the

duty to take all reasonable action necessary for the two purposes, the efficient

transmission of information and to enable the Trust and the beneficiaries to

derive the full benefit of the contract. Those two purposes were themselves

broad. As I said earlier, in conducting itself the Trust was not entitled to have

regard merely to its own interest in securing the benefit of the contract; it was

obliged as well to have regard to wider interests. In my view this part of clause

3.5 imposed a broad obligation on the Trust to act reasonably in conducting the

contract, in particular not taking unreasonable actions which might damage the

relationship with Medirest and thus undermine the purpose of the contract.”

4 [2001] UKHL, [2003] 1 AC 469.

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3.27.2. The extent to which Cranston J considered that the Trust’s status as a public body was

relevant to the interpretation of Clause 3.5 was emphasized by his explanation that

the Trust’s interpretation of that clause would have made no difference:

“26. It would not transform the clause into a one way street, or a narrow lane, where

the Trust’s duty to cooperate in good faith was non-existent or limited. That is

to misunderstand the Trust’s character, which as a public body must be devoted

to high standards of behavior and to the public good. It is also to misunderstand

the contract. Clause 3.5 itself expressly stated at the outset the obligation of

both parties to cooperate with each other. In particular, on the Trust’s own

reading, it had to cooperate in good faith with Medirest not only to secure the

benefit of the contract for itself but also to secure the benefit of the contract for

the Beneficiaries. It was therefore not open to the Trust to interpret the clause

in a self-interested manner. However, interpreted, this was not a contract

solely for the Trust’s own benefit, but for the benefit of other persons and

institutions. Any disruption through a failure to cooperate in good faith would

adversely affect the delivery of those benefits, benefits which ultimately

accrued to patients.”

3.28. Having identified the scope of Clause 3.5, the next issue was how this applied to the facts of the

case. Here there were a number of issues:

3.28.1. Was the deduction mechanism discretionary?

3.28.2. Had the Trust operated the deduction mechanism in accordance with Clause 3.5?

The deductions mechanism: discretionary, not mechanistic

3.29. The Trust submitted that:

3.29.1. The service failure points were awarded by the contract and not levied by the Trust;

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3.29.2. The Trust had no power to levy deductions that were not mandated by the contract;

3.29.3. As such, there was no basis for the implication of a term that the Trust should not act

capriciously, arbitrarily or unreasonably in calculating service failure points or even

levying deductions;

3.29.4. If Compass disagreed with the Trust’s calculations or levying deductions it was entitled

to operate the dispute resolution procedure.

3.30. Cranston J disagreed with these submissions:

3.30.1. The contract conferred a discretion on the Trust to decide whether or not to award

service points or to levy deductions;

3.30.2. This was an important discretion because this was a long-term and complex contract

and “the mechanical application of its provisions could potentially lead to absurd

results”;

3.30.3. The purpose of the Trust’s powers to award service points or to levy deductions was to

curb performance failure not to generate discounts on service payments. The Trust

could only exercise its powers consistently with that purpose.

Had the Trust operated the deduction mechanism in accordance with Clause 3.5?

3.31. During the early part of the contract, Medirest’s performance was poor, particularly with

respect to monitoring.

3.32. Medirest’s service failures and deductions calculated by the Trust included:

3.32.1. Box of out-of-date ketchup sachets found in store cupboard: £46,320;

3.32.2. Failure to sign off a cleaning schedule: £71,055;

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3.32.3. No temperature on refrigeration display: £94,830;

3.32.4. Butter sachets with no use by date: £94,830;

3.32.5. Bagels out-of-date: £96,060;

3.32.6. Out-of-date mousse: £84,450.

3.33. The calculated deductions were so high because:

3.33.1. Service points and deductions accumulated until the Medirest had demonstrated to

the reasonable satisfaction of the Trust that the performance failure had been

remedied;

3.33.2. The Trust had calculated the deductions on the basis that it could only be reasonably

satisfied if it received an email or similar from Medirest that the performance failure

had been remedied.

3.34. Cranston J disagreed. He considered that there was an obligation on the Trust to act

reasonably in deciding whether it was reasonably satisfied that a fault had been remedied. In

several cases, although a fault had been remedied in the presence of senior Trust staff, the

Trust stated that it could not be reasonably satisfied and continued to calculate service failure

points because no email was received.

Was the Trust in breach of contract?

3.35. Cranston J found that the Trust was in breach of the contract such that Medirest was entitled to

terminate:

3.35.1. The Trust accepted that its calculations of service failure points and deductions were

flawed but submitted that given that it had not sought to terminate the contract on

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the basis of such flawed calculations and had re-paid the deductions these could not

amount to a breach of contract;

3.35.2. Cranston J rejected this analysis (paragraphs 42, 83 and 97 to 103):

(1) The absurdity of the calculations by the Trust of the service failure points and

deductions was itself a breach of the obligation of good faith and breach of its

power because the calculations were arbitrary, capricious and irrational;

(2) The threat by the Trust to make wrong deductions from the monthly payment

and then to terminate the contract had poisoned the relationship and was a

breach of Clause 3.5;

(3) The fact that deductions had not in fact been fully implemented and that the

contract had not in fact been terminated on the basis of the wrong

calculations did not remedy or nullify the breaches of Clause 3.5;

(4) Even the fact that the Trust had repaid the sums which had been unilaterally

deducted was not sufficient to remedy the breach.

Lessons from Compass

3.36. The key point from Compass is that it contained an express term requiring both parties to co-

operate in good faith. For this reason, Cranston J held that there was no need to consider

whether there was an implied term to this effect.

3.37. If there is no such express term, will a term be implied? There is no case on point at present

and the courts may be reluctant to find an implied term of the scope of the express term in

Compass, arguments are available to those who would seek to rely on such a term.

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3.38. Although the Courts have traditionally formally stated that a term must be “necessary” before

it can be implied5, they have in fact discovered implied terms in many cases where the test, if

rigorously applied, would not have been met. In AG of Belize v Belize Telecom Limited6

“… in every case in which it is said that some provision ought to be implied in an

instrument, the question for the court is whether such provision would spell out in

express words what the instrument, read with the relevant background, would

reasonably be understood to mean.”

, Lord

Hoffmann appeared to adopt a broader approach to the implication of terms. He stated:

3.39. However, this must be read in light of Lord Clarke MR’s comments in Mediterranean Salvage &

Towage v Seamar Trading & Commerce Inc7

“... as I read Lord Hoffmann's analysis, although he is emphasising that the process of

implication is part of the process of construction of the contract, he is not in any way

resiling from the often stated proposition that it must be necessary to imply the

proposed term. It is never sufficient that it should be reasonable.”

:

3.40. The relevant factors will include:

3.40.1. PFI contracts will have the characteristics that Cranston J considered were particularly

important when considering the scope of Clause 3.5:

(1) Long term;

(2) Entered into by a public body;

(3) For the benefit of the public;

5 Liverpool City Council v Irwin [1977] AC 239.

6 [2009] UKPC 10, [2009] 1 WLR 1988.

7 [2009] EWCA Civ 531.

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(4) Require co-operation to work successfully;

(5) Involve detailed interaction between the provider and the public body;

3.40.2. Any express terms with which such an implied term would be inconsistent;

3.40.3. The extent to which the PFI contract confers a discretion on the public body in relation

to service points and deductions.

3.41. In light of Compass:

3.41.1. All parties to a PFI project will need to consider whether there is a term requiring them

to co-operate in good faith, express or implied;

3.41.2. Where there is such a term, public bodies will need to consider:

(1) whether they have acted in compliance with such a term in calculating service

points and potential deductions, even where it does not go on to levy these

points or deductions;

(2) whether taking a tactical stance with respect to service points and potential

deductions could be a breach of the obligation to co-operate in good faith;

(3) is their behavior in relation to this private provider consistent with their wider

obligations to secure a service for the public benefit.

4. Penalties

4.1. If a public body is, under the terms of the PFI contract, entitled to levy deductions, can the

provider argue that these amount to penalties?

Introduction

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4.2. The traditional view is that a clause providing for liquidated damages is enforceable if it is a

genuine attempt to estimate in advance the loss which the claimant would be likely to suffer

from a breach of the obligation in question8

4.3. The essence of a penalty is a payment of money stipulated as in terrorem of the offending

party.

.

4.4. A first blush, clauses in PFI contracts which provide for deductions for service failures may fall

foul of the rule against penalties:

4.4.1. In the absence of any such provision, the public body may not be able to show that it

has suffered any loss at all. Indeed, this is one of the reasons for the introduction of

service points and deductions;

4.4.2. As Cranston J held in Compass, the purpose of the clauses permitting deductions for

service failures is to provide a means by which the public body can ensure proper

performance by the provider.

4.5. However, the courts have repeatedly held that the power to strike down a clause as a penalty is

a blatant interference with freedom of contract and is designed for the sole purpose of

providing relief against oppression from a party having to pay the sum stipulated. It has no

place where there is no oppression9.

4.6. In Murray v Leisureplay plc

Developments in case law

10, the majority11

8 Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Co Ltd [1915] AC 79.

9 See, for example, the Privy Council in Phillips Hong Kong Ltd v AG of Hong Kong (1993) 61 BLR 49 at 58 citing with approval Dickson J in Elsey v JG Collins Insurance Agencies Ltd (1978) 83 DLR (3d) 1 at 15.

10 [2005] EWCA Civ 963.

of the Court of Appeal held that a clause should not

be struck down unless it is extravagant and unconscionable in amount in comparison with the

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greatest loss that could conceivably be proved to have followed from the breach. Arden LJ

held:

“The real question is whether the sums for which the parties have provided to be paid

on breach differ substantially from the sums that would be recoverable at common law

and whether there is shown to be no justification for that.”

4.7. She set out a series of questions that a court should consider:

4.7.1. To what breaches of contract does the contractual damages provision apply?

4.7.2. What amount is payable on breach under that clause in the parties’ agreement?

4.7.3. What amount would be payable if a claim for damages for breach of contract was

brought under common law?

4.7.4. What were the parties’ reasons for agreeing to the relevant clause?

4.7.5. Has the party who seeks to establish that the clause is a penalty shown that the

amount payable under the clause was imposed in terrorem?

4.8. In General Trading Company (Holdings) Ltd v Richmond Corp Ltd 12

11 Clarke and Buxton LJJ.

12 [2008] EWHC 1479 (Comm) [2008] 2 Lloyd’s Rep 475.

, Beatson J, relying on the

majority of the Court of Appeal in Murray v Leisureplay plc, took into account whether the

clause was commercially justifiable, whether it amounted to oppression, and whether it was

negotiated and freely entered into between parties who were of comparable bargaining power,

though he thought that it was more significant that the clause was not intended to deter

breach.

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4.9. In the recent case of Azimut-Benetti SpA v Darrell Marcus Healey13

“On the other hand, (as the claimant points out) this does not imply that if the

comparison between the amount payable on breach and the loss that might be

sustained on breach discloses a discrepancy, it follows that the clause is a penalty. A

particular clause might be commercially justifiable provided that its dominant purpose

was not to deter the other party from breach (see Cine Bes Filmcilik VE Yapimcilik v

United International Pictures [2004] 1 C.L.C. 401 at [15], Mance LJ, Murray v Leisureplay,

ibid, at [50], Arden LJ, and [106], Clarke LJ). As Lord Woolf said in Philips Hong Kong Ltd v

AG of Hong Kong (1993) 61 BLR 41 at 59, the court has to be careful not to set too

stringent a standard and bear in mind that what the parties have agreed should

normally be upheld. At least in connection with commercial contracts, great caution

should be exercised before striking down a clause as penal (Murray v Leisureplay, ibid,

at [114], Buxton LJ), though the circumspection that the courts show before striking

down a clause when the parties are of equal bargaining power does not displace the

rule that the clause must be a genuine pre-estimate of damage (Lansat Shipping Co Ltd v

Glencore Grain BV [2009] 2 C.L.C. 465 at [33], Lord Clarke MR).”

, the Court upheld a

liquidated damages clause despite the fact that the level of damages it provided for was clearly

not a genuine pre-estimate of the claimant's losses. At paragraph 21, Blair J held:

4.10. And at paragraph 29:

“Both parties had the benefit of expert representation in the conclusion of the contract.

The terms, including the liquidated damages clause, were freely entered into. As the

authorities referred to above show, in a commercial contract of this kind, what the

parties have agreed should normally be upheld.”

13 [2010] EWHC 2234 (Comm).

Penalties and PFI contracts

18

4.11. Despite the developments in the doctrine, there is still the view that if the liquidated damages

are significantly in excess of what the common law would award then they are unenforceable

as penalties.

4.12. One of the reasons for the inclusion of deductions in PFI contracts is that the public body would

be unlikely to be able to recover any or any substantial damages at common law. Even fairly

serious breaches of service standards may not give rise to any recoverable loss in the hands of

the public body. In light of the reluctance of the common law to award damages based on the

contract breaker’s profit, it is very unlikely that the public body would be able to recover

damages based on the profit made by the provider in failing to meet the service standards.

4.13. The purpose of the deductions mechanism is, as stated by Cranston J in Compass, to force the

provider to comply. The PFI provider is not entitled to decide not to perform certain services

because it makes economic sense not to do so. PFI contracts are different from the usual

commercial contract in this regard.

4.14. Can it be argued that it does not apply to deductions clauses because they are not liquidated

damages clauses but simply adjustments to the price?

Doctrine of penalties not applicable because deductions are adjustments to the price

4.15. For example, HM Treasury’s Standardisation of PFI Contracts version 4 provides as follows:

“7.21 The key features of the payment mechanism are:

• no payment should be made until the Service is available;

• there should be a single Unitary Charge for the Service which is not made up of

separate independent elements relating to availability of performance;

• the level of payment should be linked to the level of Service. For a payment

mechanism based on availability with an overlay of performance deductions,

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this will mean linking payment to both the availability and the quality of the

Service;

• …

• the payment mechanism should adjust for sub-standard performance, and

deductions should reflect the severity of failure. Thus no Service should lead to

no payment, but proportionality is important and therefore a minor failure

should cause a minor deduction (except in the case of persistent failure where

ratchet mechanisms may increase the level of deduction);

• the mechanism should not only incentivize the Contractor to remedy service

failures but should also take into account the importance of that failing Service

to the Authority;

• …”

5. ENTIRE AGREEMENT CLAUSES

5.1. It is now fairly common for parties to include “entire agreement” clauses in commercial

contracts of any significant complexity. The clauses vary but usually state that the signed

written document contains all the terms of the contract and no warranties or promises are

given other than those expressed in that document.

5.2. In Springwell Navigation Corp v JP Morgan Chase Bank14

5.3. In Axa Sun Life Services Plc v Campbell Martin Ltd

, the Court of Appeal used the doctrine

of contractual estoppel in order to give effect to non-reliance clauses, so that they were not

merely evidence of non-reliance but conclusive of non-reliance.

15

14 [2010] EWCA Civ 1221, [201] CLC 705.

, the Court of Appeal extended the use of

the doctrine to entire agreement clauses and held that:

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“… an entire agreement clause … in a signed written agreement is effective in

accordance with its terms.”

5.4. So what are the limits of entire agreement clauses in light of the doctrine of contractual

estoppels?

5.4.1. Rectification;

5.4.2. Implied terms;

5.4.3. Estoppel by convention.

5.5. In The Procter & Gamble Co v Svenska Cellulosa Aktiebolaget SCA

Rectification

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5.6. It is not clear why rectification should be available in the first instance but not the second. In

both cases, the party seeking rectification can show that, as a matter of fact, the written

document does not properly record the bargain that the parties in fact struck, even if there is

an entire agreement clause. Rectification is an equitable remedy intended to prevent the

unconscientious departure from a common intention. The distinction drawn in Proctor &

Gamble case will preclude rectification in the central example of rectification, namely where

the parties simply omitted, in error, to include a term that they had agreed.

, the claimant sought

rectification of a contract containing an entire agreement clause. Hildyard J held that the entire

agreement clause would preclude a claim based on a collateral warranty but it would not

preclude a claim for rectification. However, a distinction was drawn between two types of

rectification. Firstly, there was rectification “to correct an errant provision”, which is

permissible. Secondly, there is rectification to “put in an extra term which presently is not

there at all”, which is not permissible.

15 [2011] EWCA Civ 133, [2011] 1 CLC 312 at [34].

16 [2012] EWHC 498 (Ch).

21

5.7. In Compass Group UK v Mid Essex Hospital Services NHS Trust

Implied terms

17

“all other terms, conditions and warranties other than [those] implied by law in favour

of [the Trust] are excluded from the agreement.”

, Cranston J was required to

consider the issue of the implication of terms in relation to clause 1 which defined the

“Contract” and stated:

5.8. The Trust relied on this clause to resist the implication of any terms which would limit the

levying of service failure points and/or service failure deductions.

5.9. Cranston J rejected the proposed reliance on Clause 1:

5.9.1. the test for the implication18 of a term of a contract is whether, without it, the

“consequences would contradict what a reasonable party would understand the

contract to mean”, the touchstone being the “reasonable expectations of the parties”:

AG of Belize v Belize Telecom Ltd19

5.9.2. Clause 1, in defining “Contract” to exclude implied terms in Medirest’s favour, could

not have the effect the Trust submitted. This was because in the AG of Belize case the

Privy Council held that the implication of terms is not an addition to the document but

simply spelling out what the document means. As a result it is conceptually impossible

to agree to preclude the implication of terms which are necessary to give business

efficacy to the contract and which give effect to what the parties must be taken to

have meant or which are intrinsic to the agreement.

;

17 [2012] EWHC 781 (QB).

18 Terms can also be implied by custom. An entire agreement clause may preclude the implication of a term by custom but not on AG of Belize grounds.

19 [2009] UKPC, [2009] 1 WLR 1988, [22] – [23].

22

5.10. In Dubai Islamic Bank PJSC v PSI Energy Holding Co BSC

Estoppel by convention

20

5.10.1. The claimant had advanced large sums to the fifth defendant company and its parent

to enable them to enter into trade financing contracts with third parties;

:

5.10.2. A substantial proportion of the moneys advanced were not used to fund trade finance

transactions, despite documentation to that effect being presented, and had been

diverted to companies controlled by C. R was a party to the fraud and brought it to

the attention of the claimant bank;

5.10.3. The discovery of the deception and misuse of funds led to the restructuring agreement

between the claimant and, among others, the second to fifth defendants;

5.10.4. The restructuring agreement was governed by English law and subject to an English

jurisdiction clause;

5.10.5. Under the agreement, the fifth defendant agreed to repay the claimant bank, and C, R

and N guaranteed that repayment obligation;

5.10.6. The agreement also gave the claimant bank certain security, in particular by way of

conditional assignment of a leasehold interest in a development in Dubai known as

Plantation. The lease belonged to a company controlled by an individual (F) who was a

long-standing business associate of C;

5.10.7. The claimant bank had served notice of breach of the restructuring agreement and

sought payment from C, R and N under their guarantees. The claimant bank also

enforced its security rights over the Plantation lease by perfecting its assignment. It

had not sold the lease and since then the property market in Dubai had fallen.

20 [2011] EWHC 2718 (Comm).

23

5.10.8. The defendants argued that:

(1) The bank, by initiating criminal proceedings which led to the arrest of C, R and

F, had taken steps to cause a default under the restructuring agreement and

to prevent payment of the sums due which would have released the security

and the guarantees; the reason for it doing so was a desire by the bank to

confiscate Plantation and take the full benefit of the development for itself;

(2) There was a shared understanding or common intention that if the

assignment of Plantation was enforced but it was not sold within a

reasonable time then the defendants and F should have the benefit of the

value of Plantation at the date of its assignment; there was no reason in

principle why estoppel by convention could not arise in respect of pre-

contractual matters, alternatively, if necessary, the agreement should be

rectified.

5.10.9. Hamblen J held:

(1) The case law provided support for the defendants' argument that a surety

might be discharged where a creditor caused a default or acted in bad faith

towards the surety, or positively acted so as to prejudice the surety in an

unfair way;

(2) The defendants' case involved an allegation that it was the claimant bank’s

own deliberate acts which caused the default and, if so, that would give rise

to an arguable defence as a matter of causation;

(3) In particular, it was arguable that as a matter of construction there was no

agreement to indemnify if and to the extent that a failure or inability to

recover the rescheduled amount was caused by the claimant bank’s own

deliberate actions;

24

(4) Further, on the defendants' case, the claimant bank’s actions in engineering

the default were not only deliberate but involved illegal conduct and a

deliberate breach by it of its equitable duty not to impair the security;

(5) The entire agreement clause arguably did not preclude the defence of

estoppel by convention (para 83):

(a) Such clauses do not preclude claims for rectification, a principle

which, like estoppel by convention, is based on considerations of

unconscionability;

(b) Further estoppel by convention in this context, unlike a collateral

warranty claim, does not involve the assertion of an additional

contractual promise, but rather precludes a party from enforcing an

existing contractual promise in a way contrary to the parties’ shared

understanding.

6. TIERED DISPUTE RESOLUTION CLAUSES

6.1. Many PFI and PFI type contracts contain structured dispute resolution clauses.

6.2. For example, SOPC4 (Standardisation of PFI Contracts Version 4), the current Treasury standard

form suggests the following process:

6.2.1. a consultation/negotiation period between the parties, possibly at different levels;

6.2.2. if this fails, then:

(1) the appointment of an expert depending on the nature of the dispute; or

(2) the appointment of an adjudicator, based on upon the Housing Grants,

Construction and Regeneration Act 1996;

25

6.2.3. if a party remains dissatisfied then the dispute can be referred either to arbitration or

the courts.

6.3. As regards adjudication, PFI head agreements are exempt from the provisions of the Housing

Grants, Construction and Regeneration Act 1996 but the SPV's subcontracts are not. However

contractual adjudication provisions in the head agreement can be agreed by the parties.

6.4. This tiered process, particularly the requirement for consultations and negotiation at different

levels of management, can be very effective at resolving disputes relating to the day-to-day

operation of the project. More formal means of dispute resolution would not be suited to such

disputes.

6.5. However, where disputes concern issues of legal or technical principle, the tiered dispute

resolution process can be problematic:

6.5.1. If the contract requires the parties to operate each step of the procedure, then the

parties can waste a significant amount of time and money before they get to the stage

that will provide a conclusive result;

6.5.2. Adjudication, in particular, can be expensive but may not permit the recovery of costs

by the winning party;

6.5.3. Some legal and technical issues require resolution by tribunals other than

adjudicators. The quality of decision making required may not be available through

the adjudication process.

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