Another fine mesh

Suppose that as a main contractor I face a claim from a subcontractor. The claim is that I have delayed the project by failing to specify precisely what type of IT equipment I want installed. I duly defend my position, but the adjudicator says that the specification I gave was not to the level of detail required by the subcontract. I pay up, contenting myself with the thought that at least I can raise the subcontractor's (apparently successful) arguments in my forthcoming adjudication against the employer. But then I get a nasty surprise. In the main contract adjudication, the employer, using elaborate arguments that I had not previously considered, persuades this adjudicator (perhaps a different one) that in fact the specification was adequate. I thereby lose out both ways.

The above scenario is a particular problem for the project company in the PFI. One way to avoid it would be to provide that all disputes between the project company and its building subcontractor that also affect the project company's position with the authority can be joined into one set of proceedings. However, the latest Office of Government Commerce/ Partnerships UK Guidance on Standardisation of PFI Contracts recommends that the public authority employer should resist such requests by the project company. Why is this?

The answer given in the guidance is that merging disputes increases the time and cost of the process for the public sector. The authority, it says, should not become embroiled in the disputes that the project company has with its building or operating subcontractors. The most that the guidance concedes is that the authority might agree to allow these subcontractors to make written representations to the adjudicator (or arbitrator). There is no three-way hearing as such. The subcontractor has no right of its own to participate in the main contract adjudication. There are at least three consequences of this.

First, the time and cost problems about which the public sector is apparently so concerned are simply transferred to the project company and the subcontractor. The subcontractor, which will inevitably be bound to some degree to accept findings of the main contract adjudicator, will want some control over the way that its claims are presented by the project company. The project company therefore has to busy itself acting as a co-ordinator of the two disputes. However, since it must factor the costs of this co-ordination into its financial model, these time and cost problems return indirectly to haunt the authority.

Second, the project company, which is often neutral in these cases, is forced to act as a reluctant mouthpiece for one or other of the parties (claims can of course go down the chain as well as up). This means that the adjudicator is hearing the case presented at one remove. Having a hearing where representatives of the building contractor are constantly leaning over the shoulders of the advocate for the project company is not an efficient way to proceed.

Third, however diligent the project company's lawyers are in ensuring consistency between the relevant contracts, it is not unknown for the project company to fall foul of some procedural or other hurdle that affects what ought, in theory, to be a smooth meshing of the two adjudications. For a special purpose vehicle, the consequences can be disastrous.

It is true that in JCT-type arrangements, the employer quite reasonably does not want to become involved in disputes with domestic subcontractors. But the PFI is different. There are only two key subcontractors – the builder and the operator. It almost seems odd to call them subcontractors at all when they are running large contracts worth tens of millions of pounds. The authority will have some right of review of the relevant subcontracts (in case of a step-in) and will be aware of the special purpose nature of the project company and its need to offload risk down the chain.

This is an area where change should be considered when the next review takes place. Disputes in the PFI are not as prolific as under old-style traditional contracting, but when they occur, they usually involve three parties. It is unfortunate that the guidance is unwilling to allow the cases of those three parties to be dealt with together and before just one tribunal.