Managing long running PFI contracts: Portsmouth City Council v Ensign Highways Ltd

How should public bodies administer long-running PFI contracts which will operate for many years to come where the changed financial climate impacts…

How should public bodies administer long-running PFI contracts which will operate for many years to come where the changed financial climate impacts on the funding available to pay for the provision of ongoing services ?

The facts

Portsmouth employed Ensign under a 25 year PFI contract for Ensign to maintain, renew and operate Portsmouth’s highways. Portsmouth could award ‘service points’ if it considered Ensign to be in breach of the agreement. Those service points could ultimately lead to Portsmouth being able to terminate the contract with immediate effect.

Ensign alleged that Portsmouth awarded service points for every default possible, awarded the maximum points possible and ‘stored up’ the points issuing them ‘in one go’ which was described as a form of ambush. It was suggested that this ‘strategy’ was adopted in light of the changed economic climate. The court was asked to make declarations on the principles of administering the contract.

Whilst the contract contained a provision (relating to best value obligations under the Local Government Act 1999) that “[Portsmouth] and [Ensign] shall deal fairly, in good faith and mutual co-operation with one another…” the court was not prepared to extend this obligation more generally. This follows an earlier decision in the case of Mid Essex Hospital NHS Trust v Compass Group UK and Ireland Limited [2013] EWHC (CIV 200). The court reached this conclusion finding that the parties had identified, in discrete parts of the contract, where they should act in good faith. If they had intended this obligation to extend more widely they would have provided for that.

However, as Portsmouth was exercising its discretion in awarding points, the court found there had to be some limit on that. It found there was an implied term of the contract that Portsmouth should exercise its discretion by “act[ing] honestly and on proper grounds and not in a manner that was arbitrary, irrational or capricious”.

What does this mean for me?

The court has reiterated that it will not (1) imply a duty of good faith into PFI contracts or (2) extend any good faith obligation in a discrete part of the contract more widely. However, it has also found that an employer must not act in a way which is arbitrary, irrational or capricious. Practically speaking this test does not appear to differ materially from an obligation to act in good faith. In circumstances where budgetary constraints make ongoing provision of service unaffordable, the court will still analyse any exercise of discretion under the contract to see that it is being exercised in a way which is ultimately fair.

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