In PFI contracts, the independent tester signs off a project. If it doesn’t, the contractor may have to pay damages. So it’s no wonder contractors want warranties from the tester
The independent tester plays a crucial role in PFI deals. It certifies when completion occurs, triggering payment by the authority to the project company. Payment takes the form of a “unitary” charge each month.
If the independent tester fails to certify completion, the design-and-build contractor will carry the risk and pay the project company liquidated damages.
But does the contractor have a right of recourse against the independent tester? Usually the independent tester is engaged by the company or by the company and the authority. The contractor is not usually a party to the appointment. If it is, it is solely for the purpose of fulfilling certain obligations.
So contractors have been requiring collateral warranties from independent testers. But there is still resistance in some quarters to this. One of the reasons given is that a direct warranty would prejudice the tester’s independence. It is feared it will not act impartially if there is a risk of being sued by the contractor.
However, the duty of an independent tester is to act impartially and to exercise reasonable skill and care. It is already open to being sued by the authority or the company and nobody would argue that this prevents it from acting impartially.
Opponents claim warranties are not available from independent testers. But the experience of the market is that there has been no difficulty procuring warranties where requested.
As an alternative to providing a direct warranty, some suggest the issue can be dealt with in the building contract between the company and the contractor by assigning the company’s rights to sue the independent tester. But this runs up against a “no loss” argument. If the independent tester fails to certify completion when it should have done, the company will arguably suffer no loss since it is paid liquidated damages by the contractor.
It is feared the independent tester will not act impartially if at risk of being sued by the contractor
Also, the rights of the company under the project documents will be held for the benefit of the financiers. The financiers, and the company itself, will not wish to assign the benefit of the company’s rights against the independent tester in a situation where the company might also wish to sue the tester. Conflict could arise, especially where other subcontractors may wish to pursue rights against the tester.
Some suggest that the equivalent project relief provisions in the building contract could be used against the independent tester. This also runs into the “no loss” argument and would require an express provision in the independent tester’s appointment recognising that the company could sue on behalf of, and for the losses suffered by, its subcontractors.
Such provisions are run contrary to what the company and financiers want in PFI deals, which is to be left out of disputes involving subcontractors. To this end they need agreements between subcontractors.
An additional problem with the company disputing the tester’s decision is that its certification of completion is final and binding in terms of triggering the unitary charge. There is no right to claim that the authority should have switched on the unitary charge earlier, because certification should have been earlier.
In these circumstances, the company cannot recover the lost unitary payment from the authority. Disputing the decision has to be made under the independent tester appointment and the loss suffered has to be claimed against the independent tester, not the authority.
It is totally different from the usual construction scenario, where the contractor can dispute the decision of, for example, the architect through the dispute resolution procedure under the contract, to prove that practical completion should have been given at an earlier date so that the employer refunds liquidated damages.
Once PFI participants accept that the independent tester should be responsible for losses caused to the contractor, the best way of covering that is through a direct warranty from the tester to the contractor.
Trevor Nicholls is a partner and Peter Dzakula is an associate in the projects group at K&L Gates