Reasons to be cheerful

Raising the issue of bid costs with a typical PFI sponsor is likely to cause them to grumble. Suggesting that they should factor into their financial model a sizeable sum to cover legal and expert fees for resolving disputes is liable to turn them red with rage. PFI construction work has not been subject to the level of disputes about time and money that has blighted traditional contracting, at least before the Construction Act. However, PFI disputes can and do exist. What can be done to minimise the cost of resolving them?

The use of a "stepped" system, involving meetings and mediation before the dispute escalates to a formal stage, can certainly help. However, even mediation and adjudication can be time-consuming. What the sponsors of the project vehicle often want is to be able to pass the responsibility for resolving disputes down the line to the contractors, in the same way that most of the risk is generally passed down. This thinking has led to the use of two drafting mechanisms, the purpose of which is to take the special purpose vehicle largely out of the dispute arena altogether, so as to avoid its projected returns being eaten into by fees.

The first is to provide that where the construction contractor has a claim against the authority (or vice versa), it borrows the name of the SPV and runs the claim on that company's behalf. "Name-borrowing" has of course been familiar to the construction industry for many years, and it is interesting to see it being revived for a new purpose. The SPV will be entitled to be indemnified against any costs order made against it in the dispute proceedings. It may also be entitled to take over the running of the case if it believes the contractor is acting in a way that is prejudicial to the project – for example, if it is seriously damaging the SPV's relationship with the authority. In return, the project company will agree to co-operate with the contractor to run its claim. This term will be implied if it is not made explicit.

Name-borrowing in traditional procurement has had a chequered history. One leading legal commentator has described it as an "ill-considered procedure". However, that comment derives primarily from cases that occurred in the late 1980s involving multiparty arbitrations that became bogged down in procedural wrangling. There may be difficulties, for example, if the procedure is embarked upon without the contractor and SPV having provided for the situation where they have a dispute among themselves (as distinct from the dispute that they both have with the authority). But proper drafting should cope with this situation.

The second mechanism is the interface agreement. This is aimed at streamlining disputes between the contractors, in particular the construction contractor and the facilities manager. The authority, for example, may make payment deductions against the SPV during the operations phase for lack of availability or performance. The FM contractor may blame this on poor construction. Of course, the FM contractor and construction contractor are not directly linked in contract. The interface agreement plugs this gap. The two subcontractors will agree in the interface agreement such issues as indemnities, whether indirect or consequential loss is excluded, and whether liability is to be capped.

The SPV may need to be a party to this agreement too, in case there are allegations that it is the SPV itself that is to blame – for example, through failure to serve appropriate notices (in such circumstances, there may be no way to avoid a three-way dispute). The SPV will also wish to have the right to set off against the subcontractor that it reasonably thinks is at fault, any payment shortfall from the authority.

The above mechanisms tend to reduce the controlling influence of the SPV. But they both have the merit of enabling the parties that have the real dispute to resolve it among themselves, so saving costs. And it is not just the banks or financial institutions in the SPV that stand to benefit. The construction company and the FM company also gain. And since the construction company and the FM company, wearing different hats of course, are usually also part of the SPV, they have reasons to be cheerful twice over.