Up until now, PFI contracts have contained clauses intended to separate contractors from their statutory rights. This is not lawful

A recent decision of Mr Justice Jackson, the senior Technology and Construction Court judge, will cause shock waves in the world of PFI, in particular, for special purpose companies and their advisers. The judge has confirmed what many had suspected for some time: that the building contractor's right to adjudicate and to be paid are statutory rights that cannot be made conditional upon similar rights that the project company has under the project agreement.

In PFI, the main contract, known as the project agreement, is made between the public authority and a special purpose company, known as the project company. The shares in the project company are owned by financial institutions and, usually in smaller proportions, by the building contractor and the facilities management contractor that will be carrying out the works. The project company engages the contractor under a design-and-construct contract.

When contracts are signed, a project company has plenty of debt and no assets. Its strategy is to transfer risk to the contractor. As part of this strategy, at least two types of clause are often used. The first restricts the right of the contractor to adjudicate until a corresponding adjudication under the project agreement is in progress. The second restricts payment to whatever the project company has received from the authority. Thus the project company tries to stay aloof from disputes, merely acting as a go-between and avoiding any direct liability.

The case in question, Midland Expressway Limited vs CAMBBA, related to the M6 toll road. The road was built under a concession agreement made between the Department for Transport and Midland Expressway Limited, a special purpose company. MEL engaged CAMBBA, a joint venture comprising heavyweights Carillion, Alfred McAlpine, Balfour Beatty and Amec, to design and construct the road.

CAMBBA claimed nearly £10m for a change to the road layouts, quaintly called "tigers' tails" after the appearance of the relevant road markings, at the northern and southern junctions with the M6. MEL clearly saw itself as simply a conduit for the claim. It wrote to the DoT stating that, with regret, it had no option but to start a similar adjudication against it. Meanwhile, it sought to have CAMBBA's adjudication restrained by injunction. It was this application that came before Mr Justice Jackson.

The project company’s strategy is to transfer risk to the builder. It tries to stay aloof from disputes, acting as a go-between and avoiding direct liability

MEL relied heavily on two similar clauses. Both of these said CAMBBA could not take any steps to enforce any right under the contract where that right related to similar circumstances under the project agreement. Such clauses are typical in PFI deals. But, argued CAMBBA, they purported to deprive CAMBBA of its right under section 108(2) of the 1996 Construction Act to adjudicate "at any time", and were thus unenforceable.

The judge agreed. He noted that in previous cases, far less onerous clauses - for example, ones requiring a claimant to postpone adjudication for a short period in order to allow discussions to take place - had been struck out.

MEL threw further clauses into the battle. One of these said that it had no liability to pay in the absence of an agreement, or determination under the project agreement, of the proper sum due. Another said the amount due to CAMBBA could not exceed the amount due to MEL under the project agreement; and also that no payment or recovery would be made by MEL until it had received funds from the DoT.

The judge said this state of affairs was precisely what parliament was legislating against when it passed section 113 of the 1996 act. That section prevents "pay when paid" provisions, except in limited circumstances. MEL had tried to get round this provision by making the clause a "pay when [we are] entitled to be paid". This, said the judge, was mere circumlocution.

The ramifications of this decision for project companies are significant. They and their advisers generally argue that pay when paid clauses, and clauses postponing adjudication, are commercially necessary. The court has now ruled that such clauses infringe fundamental rights given to all construction contractors under the act and are therefore unlawful.

It will be interesting to see whether the courts ever take the same view on that other notorious device designed to avoid section 113: the parallel loan agreement …