PFI Law Update 2019 Newcastle | Leeds | Manchester 2 Agenda 1:00pm - - PowerPoint PPT Presentation

Newcastle | Leeds | Manchester

PFI Law Update 2019

Newcastle | Leeds | Manchester

1:00pm Registration and refreshments 1:30pm Presentations 3:00pm Refreshment break 3:30pm Presentations resume 5:00pm Networking and close

Agenda

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Housekeeping

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Melanie Pears Partner, Head of Public Sector

Annual Update

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• Carillion / Interserve
• Financial challenges
• First NHS PFI default termination
• Cancellation of PFI and PF2
• PFI Task Force

Annual Update for 2018/2019 – a busy year!

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• Compulsory liquidation
• Trading liquidation
• Serco and others
• Terms and renegotiation
• TUPE / Redundancy
• Asset transfer
• Cost of liquidation

Carillion

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• 18 March 2018
• Pre-pack administration
• £485m debt connected to shares for lenders
• £100m new debt facility

Interserve

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• Service sector margins tight
• Evidence of renegotiations / efficiencies
• Providing input on contractual position
• Construction sector margins tight with a number of profit warnings
• Framework agility

General

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• September 2018
• Roseberry Park Hospital, Middlesbrough
• Testing a number of contractual and procedural processes
• More information later

First NHS PFI Contract Default Termination

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• Chancellor stated:
• “heavily criticised for failing to deliver value”
• “inflexible and overly complex”
• “source of significant fiscal risk to government”
• 700 active PFI / PF2 schemes
• Shareholders – no payment
• Taxpayers - £199bn by 2040s
• Oversight criticised
• “Poor quality services, high profits, crippling payments” (Guardian)

PFI and PF2 cancelled

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• Appears to be specific to DH&SC
• Will not operate like PFU which was staffed with accountants and lawyers who undertook

reviews and were reasonably hands on.

• Will be staffed by civil servants who will collect lessons learnt and disseminate best

practice.

• Initially 12 Trusts will be supported financially to purchase professional advisors with a

force on the application of the PFI payment mechanism

• Pilot assessments are expected to last 6 months

PFI Centre of Excellence

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• Those selected are making appointments
• It is clear that schemes which have or are being invested in are also being interviewed and

asked for lessons learnt

• Focus on managing schemes “properly”
• Monitoring
• Enough staff with sufficient skill
• Enforcing contracts
• NB. Sensitivities and confidentiality required in some contracts

…continued

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Lucy Probert and David Taylor Solicitors, Public Sector

Monitoring Performance – A Practical Guide

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• Self monitoring / self reporting
• BUT if don’t dispute, could lose the right to remedy (save in exceptional circumstances)
• Payment of correct amounts due
• Incentivise performance
• Achieve Value for Money
• Non-delegable duties

Why should I monitor?

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• What to look for on the face of the document?
• What does the Contract require?
• Are all the Services accounted for?
• Is the information provided complete? Are there errors or omissions?
• Does it match the Helpdesk report and/or the Payment Mechanism?
• Was the report received on time?
• Does the report match the invoice?

Scrutinising a Monthly Performance Report

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• Helpdesk Event Reporting – within report or annexed to it?
• Have faults / Events been recorded and correctly classified and reported in accordance

with the Functional Units?

• Have target Response and Rectification Times been correctly calculated?
• Has an extension of time been applied? If so, was it agreed?
• Have target Response and Rectification Times been met?
• If not, has the Failure Event / Service Failure been reported?
• Have Deductions / SFPs been correctly applied?

Performance Reporting

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• Unavailability
• If an area has been reported Unavailable, has this been correctly reported?
• Has it been correctly classified as Used or Not Used?
• (Unrectified) Unavailability may still trigger the Performance Mechanism even if it

arises from a cause other than a failure by the Services Provider e.g. a construction defect

• Failures for breaches other than reactive maintenance / provision of Services
• Failure to carry out PPM e.g. to carry out statutory testing
• Failure to keep records up to date

Other Performance Failures

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• Health and safety and statutory reporting elements
• Shared statutory responsibility
• Investigation and the ability to call for records
• Failures that haven’t been disclosed?
• Are all of the Services being performed and monitored?
• Is there an opportunity to generate efficiency?
• Monitoring of energy performance
• Variations
• Double Charging

Good Project Management

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• Project Co incentivised to report
• Further Deductions / SFPs if fail to report
• Deliberate failure to report is serious issue
• Fraud / misrepresentation
• Gross incompetence
• Misconduct

Failure to Report

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• Scrutinise / investigate
• Call for records
• Dispute report, Payment Report and Invoice within prescribed time limits
• Written record is preferable
• Calculate the Deductions if possible
• Remember to claim remedies for failure to report
• Withhold disputed amounts?
• Liaison / Dispute Resolution

Disputing the Report

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• Common issues
• The importance of getting it right
• Benefits of increasing your monitoring
• Recommendations on monitoring resource

Conclusions

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Sara Acheson and Kerry Adcock Associates, Public Sector

Variations and Related Issues

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• Practicalities
• The steps required /timescales
• Approvals
• What your varied Project Agreement should look like
• Costs
• Impact
• Intended and unintended consequences
• Importance of due diligence

What we will cover …..

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• What is the process?
• What are the likely timescales?
• Due diligence
• Approvals
• When is funder approval required?

Practicalities – frequently asked questions

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• Can a party object to a variation?
• Who picks up the costs of a variation?
• What documentation is involved?
• Request for Additional Works
• Deed of Variation/Supplemental Agreement
• Restated Project Agreement
• Other documents

Practicalities – frequently asked questions

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• There can be a ripple effect of changes within the agreement
• Changes should be fully considered in light of the Project Agreement as a whole
• Examples:
• Service Variation
• Capital Variation
• Detailed prior consideration mitigates risk of unexpected consequences
• Consider savings / benefits generated v risks assumed

The impact of a variation

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• Changing an area from office space to clinical space:
• Change to specification
• Update to payment mechanism?
• Update your plans
• Consider reporting requirements
• Consideration consequential operational issues

A more detailed example

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• Some variations are riskier than others
• Weigh up benefit and/or savings against risk assumed
• Some examples
• Insurance
• Varying out services
• Variation may be one of a number of options – look at all options

The impact of a variation

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• Consider relevance of procurement law
• Is your variation a material change?
• Project Agreements often have a number of different variation procedures
• Material Changes can give rise to a challenge
• Costly
• time-consuming
• disruptive

The impact of a variation

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• Practical tips when varying an agreement?
• Have a clear understanding of variation requirements
• Carry out full due diligence
• Check that you are working from the most recent documentation
• Always consider the ripple effects before entering into a variation

Practical tips

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Jane Garvin Partner, Corporate Recovery and Insolvency

Insolvency – A Practical Overview

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• A reminder of the basics
• types of insolvency procedures
• terms commonly used
• Protecting your position
• from the outset
• if a company is in difficulties

Insolvency – practical overview

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• For companies and partnerships
• liquidation
• administration
• administrative receivership
• other receivers (eg LPA receivers)
• scheme of arrangement
• company voluntary arrangement (“CVA” / “PVA”)
• informal arrangement

The basics – types of procedure

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• For individuals
• bankruptcy
• individual voluntary arrangement (“IVA”)
• debt relief orders
• informal arrangement

…continued

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• Key points
• a close-down scenario - no trading….usually
• insolvency practitioner (“IP”) / Official Receiver in charge
• normally a lead-in time of 2 weeks to 4 months +
• Liquidation and winding up – the same thing
• Bankruptcy is the equivalent for individuals
• Creditor or director lead
• Three different types
• compulsory (court) – involves the Official Receiver
• creditors voluntary liquidation (insolvent) – IP Liquidator
• members voluntary liquidation (solvent) – IP Liquidator

Liquidation – key points

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• Key points
• primary purpose - rescuing the company as a going concern… but not always
• if not, achieving a better outcome than just shutting the doors
• IP in charge
• even when the business is saved, the buyer is usually a different legal entity. Do you want to trade with

them?

• automatic protection from creditors and restriction of creditor rights
• Usually bank or director lead
• Little or no prior notice
• Often the business will trade on…. but not always
• “Pre-pack” sales

Administration – key points

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• Key points
• a global settlement with unsecured creditors
• continued trading with directors still in charge
• creditor approval needed
• a lead in time of 2-4 weeks
• often struggle to get credit and contracts might terminate
• a high percentage fail (65%+) so be prepared!
• A proposal put forward by directors
• Must be approved by 75% in value of creditors
• Popular in the retail sector

Company Voluntary Arrangement (CVA) – key points

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• Know who you are dealing with….
• …and their financial position and background
• Identifying key information
• accounts can be misleading and out of date
• professional advice on key contracts / information if needed
• Robust analysis and challenge
• Contingency planning
• What would you need to continue the project?
• How can you secure it at the outset?
• Build into the process and/or contract

Protecting your position – from the start

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• Build protections into the contract
• termination on insolvency
• retention of title / ownership
• security
• payments in arrears
• know how and information
• review and assistance provisions
• … but consider the practicalities of enforceability
• unlikely to be able to force compliance of many things
• focus on the practical
• if something sounds too good to be true………

Protecting your position – from the start

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• Lots of stakeholder interests
• Acceleration
• Event of default
• Termination
• Step in rights
• …. so it can be very complex

Dealing with a company in financial difficulties

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• Contingency planning
• identify objectives – keep project running, getting money back, securing the
• rganisation’s position, protecting welfare
• information gathering and review
• business reviews
• possible outcomes
• plan “b”

Dealing with a company in financial difficulty

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• In the meantime
• diverting payments or contracts can be risky
• clawback claims
• monitor and track
• reserve your rights

…continued

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• Understand where you stand and your options
• Quantify your own claims before paying anything – set off usually applies
• Review Companies House and other reports
• Actively participate in the proceedings by deadlines given
• Do you want to deal with business (or its buyer)? – reserve your rights whilst you decide

Protecting your position – post insolvency

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Melanie Pears Partner, Head of Public Sector

Termination

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• Although provided for, not expected
• Not all provisions completely thought through in standard form or bespoke contracts
• Focus on outcomes, operational issues, monitoring and workability

Introduction

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• First PFI voluntary termination
• Followed by one or two variants
• First NHS PFI scheme to terminate for default

Some firsts

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• Rights to terminate
• Voluntary
• Force majeure
• Default
• Insolvency
• Long stop
• Service failure points
• Health and safety
• Change in control / assignment
• Non-payment

The basics

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• Rights arise
• Act promptly
• Standstill?
• Funders Direct Agreement
• Notice
• Follow up notice with details of liabilities and claims etc.
• Funder step in?
• If not, or time expiries, can terminate

The process

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• Liquid market / no liquid market?
• If no liquid market or public sector decision, then calculate amount owing (if anything!)
• Designed to protect investors and funders particularly

Compensation on termination

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• How much would have been paid (without deduction) (NPV)
• LESS
• Rectification costs (Project Operations)
• Cost of delivering Services
• to the Contract standards
• Lifecycle
• Insurance
• PPM
• Public sector costs of termination
• CLAIMS??

Calculation

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• Insolvency regime and contract terms do not correlate
• Challenge on detail and process
• Swap breakage costs
• Timescales for calculations for Funder notices
• Evidence

Some observations

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• Ability to put things right
• Health and safety
• Savings and bonuses
• Master of own destiny
• Accounting treatment

Authority Perspective

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Melanie Pears Partner, Head of Public Sector

Case law update

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• Lease of two aircraft
• Pilgrims West Africa to Saudi Arabia for 2016 Hajj
• Leases entered into
• Approval to fly into Saudi Arabia not granted
• Attempted to terminate lase and collect first instalment

Triple Seven MSN 27251 Ltd v Azman Air Services Ltd

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• Held:
• Void for common mistake
• Assumption of state of affairs
• Assumption must be fundamental
• Assumption wrong when contract concluded
• Performance radically different or impossible to preform
• Wouldn’t have entered into contract
• Contract cannot provide for mistaken assumption

…continued

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• Manufacturers of diamond blades for power tools
• 2012 discussed JV
• 2013 (March) “Exclusive Supply and Trading Agreement” signed by both parties
• Exclusive purchase of diamond-cutting and diamond-drilling products
• Split marketing retailers / individual customers
• 5 year arrangement
• Contract to follow

Edge Tools Equipment Ltd v Great Star Europe Limited 2018

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• Held:
• An agreement can be made even if another future agreement is referenced
• Terms neither vague nor uncertain
• “Strongly indicative” language and conduct of an intention for binding legal

arrangements

• Valid contract

…continued

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• Design work for two large construction contracts
• Lots of terms and conditions exchanged – each had different limitation clauses
• Car park completed, alleged to be defective, possible demolition
• Liability denied and attempted to rely on cap on liability

Arcadis Consulting (UK) Ltd v AMEC Ltd 2018

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• Held:
• Clear language in correspondence
• Aligned commercial common sense
• Assumption that terms will be agreed shortly therefore binding.

…continued

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• Complex shipping case
• Costs of detaining a ship beyond time allowed for loading, unloading and sailing

Lukoil Asia Pacific PTE v Ocean Tankers (PTE) Limited 2018

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• Held:
• Objective meaning of language used
• Reasonable person with all background knowledge
• Review contract as a whole
• More or less weight to elements depending on wider contract
• Can avoid “unduly limited” interpretation and adopt a more contextual and commercial

approach

…continued

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• Licence agreement to occupy premises
• “No oral modification”
• Fell into arrears
• Telephone conversation to reduce / spread payments
• First payment on revised terms
• Locked out and issues proceedings for remaining unpaid rent

Rock Advertising Limited v MWB Business Exchange Centres Limited 2018

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• Held:
• Oral variation was not effective
• By agreeing varied terms orally, no implied agreement to dispense with no oral

modification clause

…continued

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• 25 year PFI contract for Birmingham road network
• Payments were to increase when certain milestones achieved
• Dispute
• Adjudication
• £55m to be returned to Council
• Court granted summary judgement and repayment
• Certification had been set aside
• Held: No lawful right to retain monies

Birmingham City Council v Amey Birmingham Highways Limited 2018

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• PFI Agreement for mental health hospital
• Supplementary Agreement with Funders
• Trust had rights to terminate
• Trust issued notice to Funders indicating its rights to terminate and its intention to do so
• Trust had to serve a further notice 20 working days later detailing any amounts owed and
• ther liabilities and obligations
• Funders claimed notice was invalid as not all matters were quantified and there was no

evidence of the Trust having made proper enquiry

Tees Esk and Wear Valleys NHS FT v Three Valleys Healthcare Limited 2018

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• Held:
• Trust’s notice sufficiently detailed and sufficiently clear and unambiguous
• Trust had quantified amounts owed
• Trust did not have to quantify other liabilities and obligations
• Trust did not have to provide evidence of proper enquiry

…continued

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