by Hardwick Legal | Oct 31, 2017 | Purpose Built (LexisNexis)
In the first of a special series on environmental localism, Sarah-Jane Denton, consultant in the environment and climate change team at Simmons & Simmons LLP, examines the rise in environmental localism and discusses some of the recent trends.
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What is environmental localism?
‘Localism’ is a move away from centralised government in favour of greater powers and decision making for local authorities, with the perceived benefit that communities and local people will be more involved and invested in issues which directly affect them, including policy and decision-making. The Localism Act 2011 (LA 2011) was passed with the stated aim of removing bureaucracy and the influence of central government. Environmental localism, by extension, represents a move towards environmental policies designed at a local level, to address local manifestations of national or international environmental challenges. The term can be used to describe a wide spectrum of environmental initiatives, from the achievement of national emission targets via the promotion of community energy programmes, to controls aimed at improving areas prone to flooding. Localism also encompasses small scale town or city-specific measures such as cycling incentive schemes which represent, individually, small changes but, in sum and over time, make a positive contribution to the achievement of environmental objectives.
What is the current status of the environmental localism movement in the UK? What are some of the main trends?
In the face of a central government with limited capacity in all areas at present, local governments are not waiting for central government to take the lead and instruct them to adopt greener practices and projects. In 2016, a large number of local leaders of boroughs, towns, cities and counties (71 at the time of writing) formed a network named ‘UK100’ to devise and implement plans for the transition to clean energy—in many cases in conjunction with private sector businesses, with the goal of achieving 100% clean energy by 2050.
The contribution of UK100 to the UK’s climate goals has been recognised and welcomed by the then Climate Minister Nick Hurd. Some of the UK100 projects already extend beyond energy and into wider sustainability and green economy plans—the success of the first round of projects could well drive local councils to go it alone in other green areas. It will be for central government, however, to provide a supportive framework in which this local leadership can grow. While councils are willing to take the initiative, the government is being urged to act to prevent continual ‘reinvention of the wheel’—to issue guidance and advice, to share best practices and facilitate councils doing the same. This is particularly true where councils have stepped up but there may not be full clarity over who bears responsibility in a particular area, with air quality being a prime example. The government even raised the possibility of passing on EU fines to local authorities, though it has since said that it would not do so unless, perhaps, local authorities fail to meet their own responsibilities which contributed to the overall achievement of air quality objectives.
The Mayor of London recently released a draft environmental strategy. Do you imagine other appointed metro mayors will promote environmentalism in their regions? Is this form of localism likely to gain more traction in the future?
An amendment to the Greater London Authority Act 1999, made by LA 2011, requires the London Mayor to publish an environmental strategy. Other regions are not under the same statutory obligation and not all share the system of government which equips London to handle its devolved powers so adeptly. However, signs are that other cities and regions do share the Mayor’s ambition—as noted above, the UK100 boasts participants from all corners of the UK, many undertaking innovative projects neither directed nor funded by central government. According to research cited by the UK100, up to a third of local residents want to be involved in environmental projects and decision making.
London has forged plans to tackle air pollution at the local level. What does the Air Quality Plan (AQP) mean for local government in this area? Can you envisage other regions following suit and, if so, how?
The plan published in July 2017 recognises a role for councils in improving local air quality, leveraging their particular understanding of the factors contributing to air quality problems in their local area. The AQP will need to be followed up with adequate funding for local councils to implement schemes in order to be effective. Several local councils of large cities with significant pollution problems voiced their disappointment, following publication, with the government’s failure to allocate new clean air zones where driving would be charged, instead asking councils to looks at equally effective other options before imposing charges.
The councils called for ‘national backing of local action’. Councils already have an ongoing obligation to monitor air quality and improve it where statutory nitrogen oxides (NOx) levels are found to be exceeding national limits, though in reality they may not have effective control of local sources of pollution. They have access to various grants for making improvements, but in relatively low amounts—only £11m has been awarded under the Air Quality Grant scheme since 2011. The plan will require local authorities to assess, choose and implement measures to achieve statutory NOx levels in the shortest possible time. This is only a subtle shift compared with local councils’ existing responsibilities, though raises the profile of the issue and increases pressure on the government to provide adequate support for local councils. Local council plans will need to adhere to criteria set centrally and the plan approved by government before it can qualify for funding, which will extend to £255m according to the plan.
The Committee on Climate Change recently released its UK Climate Change Risk Assessment for 2017 (CCRA2). What does this report say about devolved nations? Are there differences in the risks identified?
The CCRA2 presents individual chapters for each of the devolved nations, reflecting the slightly different risk levels faced by each in relation to the six identified priority areas. Temperature change, for example, is a particular risk for England (with London the most susceptible). Water shortage could become a serious issue for England before the end of the century, with demand predicted to exceed supply in some areas by 200%, whereas in Scotland demand is generally less than 25%, and most parts of Wales face no threat of water shortage. Action, however, mostly remains within the remit of central government.
Are certain devolved nations embracing environmental localism whereas others are less enthusiastic? If so, why is this the case?
Certain devolved nations have been more forward from a legislative perspective, for example, Scotland enacted its own Climate Change (Scotland) Act in 2009 which set it on a national path parallel to that followed by England and Wales—the overarching 80% reduction by 2050 target has historically been the same. However in June 2017, no doubt encouraged by the rapid growth of renewable energy in the country, Scotland announced its intention to raise its target to 90%, a move which, if the Bill becomes law, will cement its position as the UK’s leader on climate change. Wales enacted the Well-being of Future Generations (Wales) Act 2015 to oblige a wide range of public bodies from the Welsh government to the National Library to act sustainably, protecting resources and biodiversity. Rather than any particular local driver or risk factor, each nation’s policy on environmental matters and its ability to enforce the policy, as we see with localism generally, is to a large degree driven by the political priorities and distractions of the moment. While Scotland positions itself as a climate leader and an attractive destination for green business, Northern Ireland is challenged by the collapse of its government and the Westminster government has limited resources to focus on non-Brexit environmental issues.
Could devolution lead to a fragmented UK environmental policy (as seen in the Scottish government’s and the central government’s conflicting approaches to fracking)? Could Brexit soften or exacerbate the potential fragmentation?
Some 80% of environmental legislation is currently derived from the EU. This means that the whole of the UK has had to follow the EU’s lead and stay in reasonable alignment, except where legislation has yet to catch up with technology or where the EU permits legislative ambition over and above the requirements of a Directive. The Scottish and Welsh governments accused the Westminster government of a ‘naked power grab’ when the Withdrawal (European Union) Bill was first published in July 2017. The Bill prevents the devolved legislatures from legislating contrary to retained EU law after Brexit, which in simple terms means that central government is defining policy in devolved areas for the immediate future by preventing a departure from EU rules.
In Scotland, the SNP pledged in its 2017 election manifesto to ensure that powers, including in the environment sphere, repatriated from Brussels to the UK would be devolved to Scotland. There is a lot of speculation about the approach that central government will take to environmental policy after Brexit, not helped by the ongoing delays to the publication of Defra’s 25-year plan. Whether Scotland and perhaps Wales will look to diverge their environmental policies depends to a large degree on the level at which the bar is set by central government.
Source: LexisNexis Purpose Built
What is environmental localism?
by Hardwick Legal | Oct 24, 2017 | Purpose Built (LexisNexis)
While UAE law generally recognises the parties’ freedom to contract as they see fit, there are mandatory provisions of the UAE Civil Code that will override any agreed risk allocation for adverse ground conditions. Bill Smith, Partner, and Alistair Price, Associate, at Pinsent Masons give a brief introduction to the key legal issues to be aware of under UAE law when disputes concerning adverse ground conditions arise.
Who is liable if adverse conditions are discovered prior to completion of the project?
If the contract between the parties does not contain provisions apportioning this risk, the starting position is that the contractor will be liable for the costs of overcoming any adverse ground conditions encountered. Whilst UAE law does not contain any direct provisions dealing with the apportionment of risk in this situation, it is likely that a Court or Tribunal would have regard to Article 53 of the UAE Civil Code. This requires the contractor to provide that which is ‘ancillary’ to the contract, even if not specified within it. Overcoming adverse ground conditions may well be considered ancillary to, and therefore part of, the contractor’s obligations to complete the project in accordance with the contract in some circumstances.
If the contract does contain provisions dealing with the risk of adverse ground conditions encountered prior to completion of the project, those agreed contractual terms will govern which party is liable. The majority of projects in the region are let upon standard forms, often containing complex provisions dealing with the apportionment of the risk of encountering adverse ground conditions.
Risk allocation under FIDIC Red and Silver Books
By way of example, the most commonly encountered form of contract in the region, the FIDIC Red Book 4th Edition apportions the risk (and therefore the cost) of encountering adverse ground conditions on the basis of what would be foreseeable to an experienced contractor. A full analysis and explanation of these provisions is beyond the scope of this article. However it is important to be aware that the test is not what is foreseeable to the contractor itself, but instead what would have been foreseeable to an objectively experienced contractor who was in possession of the geotechnical information (if any) which had been provided by the employer and which had carried out any other ground investigations required of it under the contract (whether it in fact carried them out or not). If the conditions are found to be foreseeable following this analysis, the contractor will be liable. If, following its own analysis, the contractor still considers that the conditions are unforeseeable, it must (under the FIDIC Red Book 4th Edition and a number of other standard forms) notify the Engineer of this as soon as possible in order to preserve its entitlement to extensions of time and additional cost.
Of course, provisions in standard forms are often heavily negotiated and amended. We have seen and dealt with relatively minor amendments but have also seen, by way of contrast, the wholesale incorporation of the FIDIC Silver Book ground conditions provisions into the FIDIC Red Book. The effect of these provisions is to hold the contractor liable even where the conditions are unforeseeable by an experienced contractor and where they are totally outside the contractor’s control. In summary, the parties’ bespoke amendments can radically alter the apportionment of risk between them in relation to this issue.
Potential defences available to contractors
Both where contracts contain provisions apportioning the risk of encountering adverse ground conditions and where they are silent, defences are potentially available to contractors that would otherwise be at risk for dealing with the consequences of those conditions. By way of illustration, Article 106 of the UAE Civil Code provides that the exercise of a right, for example by an employer requiring a contractor to overcome adverse ground conditions at its own cost, may be unlawful if its interests in requiring the remediation are disproportionate to the harm that would be suffered by the contractor. In addition, Article 246(1) of the UAE Civil Code, which obliges parties to a contract to observe the requirements of good faith, may assist a contractor otherwise facing the burden of overcoming adverse ground conditions.
Finally, in accordance with Articles 185 and 186 of the UAE Civil Code, an employer who provides limited or misleading geotechnical information as part of the tender documentation may be liable for misrepresentation if the contractor is able to prove that the employer either was aware of the true nature of the ground, or had deliberately withheld information which would have allowed the contractor to become aware of its true nature and the contractor relied upon the information provided in entering into the contract. This defence would not of course assist the contractor in every situation; by way of example, the FIDIC Red Book 4th Edition standard form explicitly requires the contractor to carry out its own investigations of the land (albeit to the extent practicable) prior to entering into the contract, putting in doubt any reliance it could place on the geotechnical information provided to it by the employer.
In reality, if a dispute arises during the build period of a project, the parties must in every case analyse the precise terms of the contract which they have entered into to ascertain how they apportion the risk of encountering adverse conditions and whether, as against them, any defences are available which could reduce or eliminate their liability.
Decennial liability for adverse ground conditions
Whilst the majority of ground condition disputes arise during the course of a project, it is possible for these issues to arise at a later date. For example subsidence which affects the structural integrity of the completed structure, or water leakage from a swimming pool which threatens the safety and stability of adjoining structures.
If adverse ground conditions cause serious problems with a building or other structure after the works have been handed over, the contractor and the designer will be primarily liable pursuant to the mandatory decennial liability provisions of the UAE Civil Code.
Article 880 of the UAE Civil Code is a mandatory provision which overrides any provisions in the building contract, or the professional appointment. Article 880(2) requires the employer to be compensated for any defect in the land which results in the total or partial collapse of a building, or even any defect threatening the stability or safety of the structure. The liability exists for a period of 10 years from the date on which the works were handed over. However, in practice, the contractor’s and designer’s exposure to liability may be longer or shorter than the 10 year period as the employer must commence proceedings within three years from the collapse or discovery of the defect.
Whilst Article 880 imposes strict liability, there are limits placed on this. If a designer has only prepared the design, Article 881 of the UAE Civil Code expressly limits its liability to defects caused by its design. That said, if the designer acted in a supervisory capacity during the build period, its liability will not be limited in this way.
Likewise, in accordance with Article 878 of the UAE Civil Code, contractors are only responsible for defects arising from their execution of the works unless (i) they prepare the design, (ii) the designer is a subcontractor to the contractor, or (iii) an experienced professional in the same position as the contractor would have been aware of such design defects.
Going forward
Before contracting, parties should take care to analyse the precise terms of the contract to ascertain how the risk of encountering adverse conditions is allocated. The common sense principle that risk should be allocated to the party best placed to manage it, is not always observed when it comes to ground conditions. This false economy during the procurement phase often provides fertile ground for future disputes.
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Source: LexisNexis Purpose Built
Adverse ground conditions in the UAE—what you need to know
by Hardwick Legal | Oct 11, 2017 | Purpose Built (LexisNexis)
The Technology and Construction Division (TCD) of the Dubai International Financial Centre (DIFC) Courts came into operation on 1 October 2017. Mark Raymont, Partner, and Eveline Strecker, Senior Practice Development Lawyer, at Pinsent Masons Dubai look at the recently-published TCD Rules and consider what the TCD means for technology and construction disputes in the UAE.
The DIFC Courts have established the new TCD with a view to expediting and improving the management and resolution of technology and construction related disputes. This follows a one-month public consultation in April this year on the possible introduction of a specialist division.
The Rules governing the TCD have recently been published, and the TCD came into operation on 1 October 2017.
Expanding functions of the DIFC Courts
The DIFC Courts are located within the DIFC, an offshore financial centre or ‘free zone’ in the UAE, which provides a platform for business and financial institutions to enter the markets in the region. The courts administer an English language common law system for the resolution of local and international commercial and civil disputes.
Established in 2004, the DIFC Courts have had a Small Claims Tribunal (‘SCT’) function since 2007, which the DIFC Courts recently announced to be a faster and more effective way to resolve disputes with 88% of SCT cases resolved in less than four weeks after successful service of the claim. In March this year, the DIFC Courts’ jurisdiction was expanded to deal with labour claims arising out of existing and proposed labour contracts between DIFC companies and their employees, or contracts which are to be performed within the DIFC. This is expected to better facilitate litigation procedures for employees based in the DIFC.
The new TCD is a further step in the DIFC Courts’ development of specialist functions with its judges focusing on technology and construction disputes. It is expected that the determination of such claims will benefit from speedy and focused case management in an environment geared up to potentially complex and document-intensive cases.
What kind of claims will the new TCD deal with?
New Rules governing the TCD (Part 56) have been added to the DIFC Courts’ Rules. They are modelled on, and similar to, those of the long established and successful English Technology and Construction Court (TCC), although there are some important differences.
They describe a ‘TCD Claim’ which can be brought in the new division as one which involves ‘technically complex’ issues or questions. The Rules go on to give the following examples of such claims, although the list is by no means exhaustive and other types of claims may be appropriate for determination in the TCD:
- building, other construction and engineering disputes
- claims by/against engineers, architects, surveyors, accountants and other specialised advisers relating to the services they provide
- claims by/against the DIFC or bodies established by the DIFC (including, for example, the DIFC Authority) relating to their statutory duties concerning land development or construction
- claims relating to the design, supply and/or installation of computers, software and related network and IT systems and services
- claims between landlord and tenant for breach of a repairing covenant
- claims between neighbours, owners and occupiers of land in trespass, nuisance etc
- claims arising out of fires
- claims involving taking of accounts where these are complicated
- challenges to decisions of arbitrators in construction and engineering disputes
Clearly, this wide ranging list of claims, quite aside from the primary criteria that a matter involve ‘technically complex’ issues, is likely to see a significant number of disputes fall under the management of the TCD. Construction is a substantial industry in the region, often involving complex and high value multi-party disputes which would benefit from efficient and specialist management and determination by judges with the appropriate experience and expertise.
But what about smaller claims? Presumably even a monetary claim of relatively small value could meet the TCD’s threshold test, subject to the complexity of the technical issues. It is important that smaller claims are not excluded from the TCD’s jurisdiction as they are likely to benefit considerably from the more specialised and streamlined processes that the TCD is likely to offer, as compared to for example arbitral proceedings or local court proceedings.
Having said this, it remains to be seen how the requirement for technical complexity alone will operate in practice and whether the number or nature of the technical issues, the monetary value of the claim, the number of parties or some other factors will be deemed to be relevant in case allocation.
Although the TCD Rules largely mirror the English TCC Rules in terms of the types of claims which are likely to be appropriate to bring before the TCD, some notable exceptions are:
- claims relating to the quality of goods sold or hired, and work done, materials supplied or services rendered
- claims relating to the environment, such as pollution cases
It is not clear why claims relating to goods and services have not been included within the TCD jurisdiction, particularly given the fact that disputes regarding performance issues and defective materials/equipment are likely to be very much within the ‘sweet spot’ of a TCD judge. Hopefully the exclusion of this relatively broad category of claims from the TCD does not unduly limit the TCD’s jurisdiction.
The exclusion of environmental claims is also a little surprising given that they very often form part of the issues in construction disputes. It may be that there are other courts or governmental bodies which can more appropriately deal with such claims. However, with the relatively undeveloped nature of this area of law in the UAE, it would be advantageous from an environmental protection perspective alone to also permit the TCD to deal with such claims, where possible, in a civil claim context. This may well be an area for future development of the TCD’s jurisdiction (recognising that other bodies will have the relevant jurisdiction to deal with environmental claims from a regulatory or penal perspective).
An application must be made to commence proceedings in the TCD and to transfer existing DIFC Court proceedings into the TCD. The TCD Rules permit any DIFC Court judge to direct that a claim does or does not fall within the TCD’s jurisdiction. This is in contrast to the English TCC Rules which require a specialist TCC judge to make such a direction. This is relevant to the question of the experience and familiarity of the TCD judge with TCD matters. It is therefore to be hoped in the interests of consistency, predictability and confidence in the TCD’s jurisdiction that any decision or determination as to the TCD’s jurisdiction will be made in consultation with the head of the TCD.
Experience and expertise
The TCD Rules provide for a judge to be in charge of the TCD. It has recently been announced that the head of the TCD will be Justice Sir Richard Field QC, who brings 20 years of experience handling complex disputes in the London courts.
The DIFC Courts Chief Justice Michael Hwang has said: ‘The TCD has been designed around the particular characteristics of highly complex technology and construction disputes, which can be resolved much more speedily and efficiently with the oversight of specialist judicial experience…’. As matters currently stand, we understand that TCD cases will be heard by the existing DIFC judges, including three UAE judges who have experience in technology and construction cases.
Given the volume of construction and technology disputes in the UAE and the wider region, it may be that future consideration will be given to the appointment of a small panel of specialist TCD Judges. This is likely to aid the effective development and functioning of the TCD as a ‘go to’ construction/technology dispute resolution forum. It will also offer a viable alternative to arbitration where the parties are likely to select arbitrators who specialise in construction/technology disputes and who are familiar with the management and resolution of technology and construction disputes, the nature of the particular issues involved and other related issues, such as the importance of managing and controlling the assistance provided by technical experts in the process.
By way of comparison, the largely successful and efficient operation of the TCC in England has, based on our experience in that jurisdiction, been due in large part to the TCC judges’ experience in and knowledge of the technology and construction industries, the nature of claims and issues that arise and the particular case management techniques that have been developed to deal with document and issue intensive disputes. An important distinguishing feature of the English TCC is the fact that, where possible, the judge assigned to the matter oversees it from beginning to end and we would hope that this practice be adopted in the TCD.
Case management in the TCD
As a court division, proceedings in the TCD would lack the confidentiality that comes with arbitral proceedings. However, this potential disadvantage may be off set by the attraction of a potentially more cost effective and streamlined process, especially in the case of large-scale disputes and smaller technical disputes which would benefit from effective case management and the array of procedural and enforcement tools available in the DIFC Courts.
Similar to the English TCC Rules, the TCD Rules require the court to fix a case management conference within 14 days of the issue or transfer of the claim to the TCD. Generally, the TCD’s proposed case management conference procedures are comprehensive. The TCD Rules expressly provide for the court to make orders in respect of a court-appointed expert, conducting inspections, obtaining samples, conducting experiments and producing calculations, as well as the production of a Scott Schedule (itemising the claims and the other party’s response and counterclaims). If well managed, the express provision for orders in respect of Scott Schedules is a positive addition to the TCD Rules.
Use of experts
Orders in respect of court-appointed experts and inspections are prevalent in UAE local court proceedings and can be useful, cost-saving devices. We are also aware that the use of a single court-appointed expert has proved to be effective in the TCC in England in suitable cases. However, the use of single, court-appointed experts in the local UAE Courts can be a somewhat mixed experience with doubts being raised as to the suitability and expertise of some of the experts appointed. Accordingly, there is a risk, that, unless properly managed (in particular ensuring that the ‘pool’ of experts from which expert appointments are to be made will inspire confidence in the system) such orders may result in ‘shadow’ experts who simply duplicate the role of the parties’ experts.
There are a relatively limited number of suitably qualified and experienced experts available in the region, particularly in the case of very specialist technical issues, and if a party lacks confidence in the court-appointed expert, the party is likely to engage its own expert (as will the other party/ies in turn), resulting in considerable additional costs and time delay. The TCD may find itself weighing up considerably more expert, and potentially conflicting, evidence than would have been the case had the court not appointed an expert. It will be interesting to see how the procedures for use of court-appointed experts develop in practice in the TCD.
Opportunities for settlement
We also note that, at present, the TCD’s Case Management Directions Form (Schedule A to the Rules) does not provide an option for a stay, for example of one month, in order for the parties to pursue settlement discussions or alternative dispute resolution options (eg mediation). This option is provided for and has been successfully used in the equivalent English TCC. Although the opportunity for such a stay can be used as a means of delaying a proceeding, the matter is in the court’s discretion and both parties must still have included all the necessary case management information in the form, and expended the accompanying time and cost of having assessed the primary claims, issues, witnesses, expert evidence and costs at this stage.
The frank and early exchange of information (including costs) in respect of English TCC construction claims, with a view to entering settlement discussions, is supported by the Pre-Action Protocol for Construction and Engineering Disputes (2nd edition, November 2016) which applies to most construction and engineering disputes, including professional negligence claims, in England and Wales. Its objectives are ‘to exchange sufficient information about the proposed proceedings broadly to allow the parties to understand each other’s position and make informed decisions about settlement and how to proceed’ and to make attempts to resolve the claims, including through the use of ADR. The Protocol expressly states that it must not be used as a tactical device to secure advantage for one party or to generate unnecessary costs, and that the cost of producing the claims and responses should be modest.
Again, based on the UK experience, this may be something that the TCD may wish to consider for the future. This could be introduced through the TCD’s Case Management Directions Form which could be adapted so as to require the provision of such information in order to facilitate settlement between the parties. Some modification would be required to the TCD Rules and the Form, and it may also be appropriate to include a few key questions in the form in respect of costs to help focus the parties on the extent of costs incurred to date and anticipated expenditure.
Trial and pre-trial review
Another effective feature of the English TCC is the early fixing of a trial date (often at the case management conference) and vacating that date in only exceptional circumstances. This is a useful tool in bringing together, as early as possible, what is often a considerable number of witnesses and experts, as well as the parties and their advisors.
The TCD’s proposed pre-trial review procedure suggests that it is not compulsory, although it proceeds in a similar way and requires the parties to complete a Pre-Trial Review Questionnaire in a very similar form to that of the English TCC. There may therefore be some scope of this issue to be clarified, as even a brief pre-trial review is beneficial to the management of proceedings and assists both the court and the parties’ final preparation for the hearing.
Outlook
Although proceedings in the DIFC Courts’ TCD will lack the confidentiality that generally comes with arbitral proceedings, its establishment is a clear indication of the further development of the DIFC Courts and may well, in time, come to be seen as a viable alternative to the local Dubai courts and arbitration in the UAE. In any event, the TCD now offers potential litigants engaged in the technology and construction sectors a greater choice of dispute resolution forums in the UAE.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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Source: LexisNexis Purpose Built
The DIFC Courts’ new Technology and Construction Division
by Hardwick Legal | Oct 5, 2017 | Purpose Built (LexisNexis)
The shadow chancellor recently pledged that Labour would bring existing private finance initiative (PFI) contracts ‘back in-house’ if they are elected. Philip Vernon, partner at Ashurst, explains the proposals and their potential implications.
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What are Labour’s proposals in relation to PFI contracts?
The shadow chancellor, John McDonnell, announced in a speech at the Labour Party conference in Brighton on 25 September 2017 that ‘the scandal of the PFI, launched by John Major, has resulted in huge long-term costs for taxpayers while handing out enormous profits to some companies’. He promised that Labour would ‘rip up’ PFI and, in addition to Jeremy Corbyn’s previous pledge not to sign any new PFI deals, Labour would ‘bring existing PFI contracts back in-house’. Mr McDonnell also said that if Labour came to power ‘the government would intervene immediately to ensure that companies in tax havens can’t invest in PFI projects and their profits can’t be hidden from HMRC’.
This initial soundbite was tempered somewhat by the Labour Party press release which followed Mr McDonnell’s speech and which appeared to be somewhat less radical, stating ‘Labour will review all PFI contracts and, if necessary, take over outstanding contracts and bring them back in-house, while ensuring NHS trusts, local councils and others do not lose out and there is no detriment to services or staff’.
A Labour spokesman said that shareholders in PFI companies would be compensated by swapping their shares for government bonds and ‘Parliament will assess the appropriate level of compensation at the point at which contracts are brought back in-house’.
In reality, it might be that only a relatively small proportion of PFI contracts would be brought back into public ownership under a Labour government. In an interview with the BBC on the day after Mr McDonnell’s speech, the shadow health secretary, Jon Ashworth, addressed PFI contracts in the healthcare sector, saying ‘NHS experts generally accept that it’s only a handful which are causing hospital trusts across the country a significant problem, but let’s look at every single one in detail’.
Are they achievable?
Whether Labour’s proposals are achievable would depend on where across the spectrum of possible outcomes outlined above Labour ultimately land.
If Labour’s proposals turned out to involve a review of all existing PFI contracts based on their then current terms, in order to assess whether termination of any of them presented better value of money than continuation, then that would look relatively simple to achieve.
Indeed, the current government has been reviewing the value for money of PFI, looking at ways in which savings could be made and, if appropriate, considering terminating PFI projects where it makes sense to do so. HM Treasury issued a policy note in June 2015 which set out the budgeting, accounting and fiscal implications of a voluntary termination of a PFI contract by the procuring authority. It expected ‘the incidence of voluntary terminations of PFI arrangements to be low, due to affordability challenges and the requirement to be able to demonstrate value for money for the public sector as a whole’.
On the other hand, if Labour’s proposals turned out to involve the introduction of new legislation to change the terms of PFI contracts by statute, providing for termination with reduced compensation, then this would be more complicated. For example, the suggestion by a Labour Party spokesperson that ‘Parliament will assess the appropriate level of compensation’ raises the possibility that something other than full contractual compensation may be contemplated.
This would require primary legislation to be passed and it is likely that any new legislation which sought to adjust the compensation payable under current PFI contracts would face a number of challenges. In the first instance, the standard terms of PFI contracts provide both for a clear level of compensation to be payable for public sector ‘voluntary termination’ and for compensation to be paid by the public authority if legislation is introduced which discriminates against PFI. While new legislation might seek to sidestep or override these provisions, this in itself is likely to give rise to wider potential areas of challenge.
For example, legislation that has the effect of cancelling contractual and other legal rights under PFI structures would likely give rise to claims being advanced before UK courts based not only on breach of contract/legitimate expectation grounds, but also potentially under the Human Rights Act 1998 (in relation to the right to protection of property contained within the European Convention on Human Rights).
Where investors in PFI structures are non-UK entities or individuals, claims could be brought against the UK under the 100-plus investment treaties which the UK has entered into with foreign states. Foreign investors with the benefit of investment treaty coverage could sue on the basis of expropriation under public international law, with such claims being heard before arbitral tribunals and with any resulting awards being directly enforceable against the UK under international law, with no appeal process available to the UK. We note that Jeremy Corbyn described this process as ‘supranational and unaccountable’ in the context of EU transatlantic trade agreement discussions in 2015.
Consideration would also need to be given to the impact of Brexit. The current status of Brexit negotiations means that we can only guess at the potential impact.
What would they mean in practice for those in the construction industry?
There are many large UK (and international) construction companies with interests in PFI projects, both through having signed construction contracts with the project companies which are established to enter into PFI contracts with public authorities and through direct investment in those project companies. We focus here on their interest as construction contractor, rather than as investor (see question below for the impact on investors).
The immediate impact of wholesale termination of PFI contracts on construction contractors would be more limited than for investors. There would be a relatively small proportion of PFI contracts on which construction works had not yet completed and, in any case, construction contractors are generally paid for works on a monthly basis (using the private finance provided by senior debt providers and investors).
Upon voluntary termination by the public sector during the construction phase, a construction contractor would generally have a claim for breakage costs (including some compensation for lost profits), but the public sector might well take the view that it would make sense to use its collateral agreement with the construction contractor to continue to use the construction contractor to complete the works outside the PFI structure (unless there were problems with the current construction process).
Looking further forward, the wider impact on the construction industry of curtailing PFI arrangements depends upon the ability of the government to finance the continuing and substantial need for infrastructure investment in the UK, which itself depends upon the state of the public finances.
What it would mean for investment in national infrastructure more generally?
There are wider commercial, financial and political implications if Labour’s proposals were to result in the wholesale termination of PFI contracts (with reduced compensation), including:
- the impact on the government’s public accounts of financing the settlement of compensation claims by senior debt providers and investors in PFI contracts
- the transfer of PFI workforces from the private sector to the public sector, including employment and pensions implications
- the takeover by the public sector of operational and financial responsibility for continued maintenance and lifecycle across the existing PFI estate
- the costs and resourcing of multiple claims from participants in the PFI structures
- the impact on pension funds and corporate investors (including construction companies) with investments in the PFI estate
- the impact of the consequent state of public finances on the ability of government to finance further spending on UK infrastructure.
The Labour Party proposal on PFI contracts forms part of a wider set of proposed nationalisations by Labour, which have raised questions over the impact they could have on the confidence of international investors in the UK. John McDonnell himself has stated that he plans to carry out scenario planning for crises which could follow an election victory. One of the scenarios to consider is a flight of capital from the UK with a run on sterling. As Mark Carney, Governor of the Bank of England, said in his recent (June 2017) Mansion House speech, ‘the UK relies on the kindness of strangers’ to fund its current account deficit.
How have the proposals been received?
They were well received by many of those attending the Labour Party conference but less well received by many of Britain’s business groups, as well as those active in the PFI market.
The Confederation of British Industry’s director general, Carolyn Fairbairn, said the policy could send investors ‘running for the hills’ and that ‘the shadow chancellor’s vision of massive state intervention is the wrong plan at the wrong time. It raises a warning flag over the British economy at a critical time for our country’s future.’
The director general of the British Chamber of Commerce, Adam Marshall, echoed these views, adding ‘with the UK’s departure from the EU on the horizon, businesses will be concerned by the shadow chancellor’s proposals for widespread and deep intervention across the economy. Proposals to nationalise key industries would put business investment in the deep freeze at precisely the time that it is needed most’.
However, given the clarifications that followed John McDonnell’s initial comments, it may well be that Labour’s policy to ‘review all PFI contracts and, if necessary, take over outstanding contracts and bring them back in-house’ will not actually result in a step change from current government policy. Only time will tell.
Interviewed by Alex Heshmaty. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
For more information on PFI contracts, see LexisPSL Construction subtopic: PFI/PF2.
Source: LexisNexis Purpose Built
Bringing PFI contracts ‘back in-house’
