No more party games

Eighteen Months AGO in THIS Magazine, (8 August 2003, page 42), I discussed the mechanisms that some PFI project companies use to avoid becoming embroiled in disputes. One was the use of an interface, or co-operation agreement, between the project company (the special purpose vehicle, or SPV) and its building, FM and perhaps ICT contractors. Without such an agreement in place, any three-way disputes would normally come up the line from the building or FM contractor to the SPV, and then be passed back to the other contractor.

This game of “pass the parcel” is often expensive for the SPV’s shareholders. They end up shelling out for legal and expert fees, and they are not comforted by the news that these charges are theoretically recoverable from the losing contractor. The interface agreement, by contrast, requires contractors to settle their dispute between themselves, without the involvement of the SPV.

Interface agreements are now commonplace on PFI projects. However, they are becoming ever more complicated. What should the building contractor watch out for?

Firstly, consider the position where the building contractor is delayed because, for example, the FM contractor has dithered over what controls system it wants. The building contractor claims against the FM contractor for its losses. The FM contractor then goes insolvent. In this scenario, the builder ought not to lose out. The function of the interface agreement is simply to smooth the SPV’s position administratively – it should not deprive either contractor of any rights it would have had if the “pass the parcel” route had been used. Under that procedure, the builder would claim from the SPV and would not be concerned over whether that company recovered from the FM contractor.

If this point is made in negotiations with the SPV’s sponsors and lenders, heads might be shaken or doubts about the project’s bankability heard. However, there is no reason why the interface agreement should be used to shift the risk of insolvency from one contractor to another. Neither contractor has had any say in the other’s appointment, does not control the other’s contract with the SPV and has no power to terminate it.

Secondly, insofar as the building contractor is held liable to pay anything to the FM contractor, this ought to use up any cap on liability under the building contract with the SPV. Again, the principle is that the claim has been channelled through the SPV for administrative convenience. If that had happened, the FM contractor’s claim would have formed part of the SPV’s losses, and the building contractor would at least have had the benefit of having its cap eaten up.

Interface agreements tend to be used as a repository for matters that ought to be in the building or FM contract

Finally, interface agreements nowadays often go on to make detailed provisions about matters where the building and FM contractors come into direct contact: for example, design development and what happens during the defects liability period. This is all very well, but both contractors ought to resist the urge to overelaborate. One issue is that these points often end up duplicating, or conflicting with, obligations that the builder and FM contractor have with the SPV.

The building contractor in particular ought to be careful that it does not end up with a convoluted procedure that bogs down design development in a morass of authorisations and consents. With regard to the defects liability period, it ought to ensure that any rights anyone else has to deal with its defective work are exercisable only after proper notice, or in emergency cases affecting health or safety.

Interface agreements have ballooned in size. Some of this is inevitable, but it is also partly because they tend to be used as a convenient repository for matters that ought to be in the building or FM contract. In some cases, there also seems to be a degree of panic on all sides if every conceivable scenario is not covered. Perhaps it’s time to get back to the real essentials.

Ian Yule is a partner in solicitor Wragge & Co