Out-Law / Your Daily Need-To-Know

Coronavirus: contingency planning for operational PFI

Out-Law Guide | 20 Mar 2020 | 5:04 pm | 6 min. read

The coronavirus pandemic is already having a wide range of impacts on operational PFI projects, from availability of key staff and supplies to lack of insurance cover for pandemics.

Unlike many UK facilities, PFI-funded critical infrastructure such as hospitals and prisons cannot simply close completely. Project companies responsible should put contingency plans in place now.

Availability of contractual relief to mitigate the impacts of Covid-19 will depend on a number of variables including:

  • the terms of each individual contract;
  • the nature of the asset;
  • the circumstances of any delay or disruption to the provision of any works or services, or to the supply chain;
  • whether the delay or disruption can be avoided, overcome or mitigated; and
  • the approach taken by your public sector client.

The below advice is based on a 'normal' market standard project agreement, but specific legal advice should be sought based on individual circumstances. We use 'ProjectCo' to refer to the private sector service provider, and 'authority' to refer to the contracting authority.

Contingency planning

Thorough contingency planning is essential. This can be as basic as who holds the keys and codes to enter the premises in the event that staff are required to self-isolate, and having back-up plans allowing access to project bank accounts if needed.

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Victoria Miller

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ProjectCos are subject to an express duty to prevent and mitigate in accordance with good industry practice as a condition precedent to many contractual relief mechanisms.

Contingency planning also covers access to critical spare parts and supplies both now and in the future - for example, a lift part. These parts will not generally be held by facility managers, who will be relying on supply chains.

It is highly likely that the services specification will contain a requirement for "emergency planning" or "disaster planning". ProjectCos are also subject to an express duty to prevent and mitigate in accordance with good industry practice as a condition precedent to many contractual relief mechanisms, as set out below.

Potential forms of relief

Force majeure

Force majeure events are those which it was anticipated were likely to have a catastrophic effect on the ability of either party, although usually the ProjectCo, to fulful its obligations under the project agreement. As neither party is likely to be in a better position that the other to manage either the occurrence or the effects of force majeure, and the events may continue for a long period of time, these events are treated differently from 'relief events' under the contract and the financial consequences are shared.

See our Out-Law Guide: Will Covid-19 trigger a force majeure clause?

The drafting of force majeure clauses in project agreements is based on catastrophic events which, at the time, were considered highly unlikely to occur: armed war, terrorism, nuclear contamination, chemical or biological contamination. This exhaustive list does not contain pandemics such as the Covid-19 virus.

Force majeure is not particularly helpful in relation to operational projects as deductions can still be applied. That said, the onus is on the public sector and private sector partners to work together to agree modifications to the project agreement to take the force majeure into account. If agreement can't be reached and the force majeure continues for a significant period, usually six months, then compensation on termination is payable.

Relief events

Relief events are generally events with an external cause which have a negative impact on the ProjectCo's ability to perform its obligations under the project agreement and which are beyond the control of the ProjectCo.

Examples of relief events which could potentially be relevant here include:

  • failure by any statutory undertaker, utility company or local authority to carry out works or provide services;
  • any lock-out, go-slow or similar generally affecting the building maintenance or facilities management industry or a significant sector of it;
  • failure or shortage of power, fuel or transport.

Arguably, these examples would likely be limited to a 'doomsday'-style scenario, following an extreme intensification of Covid-19 effects across the UK.

Normally the only relief given in respect of one of these events is relief from termination, as these events should be insured and short-lived. Some projects will allow for relief from deductions, but this would need to be checked on a per-project basis.

Importantly, the project agreement will usually stipulate time frames within which any information in respect of the relief event must be provided. Depending on the drafting of these provisions, supplying the necessary information within these timescales may amount to a condition precedent to any claim. It is therefore possible that a failure by the party claiming the relief event to provide the necessary information within the specified timescale can result in that party losing its entitlement to claim relief.

The party affected by the relief event is generally under an obligation to take all reasonable steps to mitigate the consequences of the event on the performance of its duties under the contract, and to use all reasonable endeavours to remedy the failure to perform as soon as practicable.

Excusing causes

In the health sector, there is an excusing cause which applies to the effects of any outbreak of medical contamination. 'Medical contamination' is defined by reference to a "disease carrying agent" which cannot be prevented or substantially removed through cleaning or infection or contamination techniques which effectively results in the facility being unsafe to use for the purpose it was intended by patients or staff.

It is feasible that Covid-19 will be captured by the definition of medical contamination. This means that the ProjectCo may be able to claim an excusing cause to the extent that the pandemic adversely impacts on its ability to provide services under the contract.

Any potential claim for relief is subject to an express duty to prevent and mitigate in accordance with good industry practice. ProjectCo must therefore be able to effectively demonstrate that it has taken all appropriate prevention and mitigation measures against the consequences of Covid-19 that would reasonably be expected to be introduced by a skilled and experienced service provider in accordance with the project agreement. This duty to prevent and mitigate also applies to force majeure and relief events.

ProjectCos should be considering their employees who may be exposed to health risks, and also seeking confirmation from their various service providers that they too have put in the appropriate protections.

As with relief events, the project agreement will stipulate timeframes within which any information in respect of the excusing cause must be provided. Again, provision of the necessary information within these timescales may constitute a condition precedent to any claim.

Where no contractual relief is available through these mechanisms, you should engage as soon as possible with the authority with a view to agreeing a protocol, or similar, which would apply should the impact of Covid-19 become more severe and adversely impact the performance of the services under the contract.

Change in law, guidance or relevant standards

Service providers are subject to a general obligation to comply with all relevant law and guidance, as well as relevant standards depending on the asset class – for example, NHS requirements.

To the extent that the coronavirus outbreak becomes more severe and, as a result, there is a qualifying change in law/relevant change in law or change in the relevant standards, the ProjectCo will be able to seek relief under the terms of the project agreement.

Options available to the local authority

Change

Authorities can use the change mechanism in the project agreement to request that services are reduced or performed differently, or that additional services, such as cleansing, are required. The change mechanism would allow the ProjectCo to request relief and compensation.

Step-in rights

Most project agreements allow the authority to step in if there is "an immediate and serious threat to the health and safety of any user of the facilities" or "to prevent or address material interruption in the provision of one or more of the services".

The ProjectCo should not be penalised provided that the step in has not arisen as a result of its breach.

Emergencies

Where an 'emergency' arises, the authority can instruct the ProjectCo to procure additional or alternative services to ensure that the emergency is dealt with and the normal operation of the facilities returns. The additional cost of this will be met by the authority and no deductions are applied. An emergency is an event which threatens to cause death or injury or serious disruption to the lives of a number of people and which is effectively beyond the capacity of the emergency services, or which prevents the services operating under normal circumstances and requires the mobilisation and organisation of the emergency services.

General issues

Health and safety

See our Out-Law Guide: Coronavirus: UK health and safety obligations.

ProjectCos should be considering their employees who may be exposed to health risks, and also seeking confirmation from their various service providers that they too have put in the appropriate protections.

Insurance

Project insurance is unlikely to be useful other than in relation to deep clean type activities. It is highly unlikely that any business interruption policies will cover coronavirus-related losses as they typically require physical damage.

Frustration

Frustration operates automatically by operation of law and discharges parties from further performance of a contract in extreme circumstances, where it would be unfair to continue holding the parties to their bargain under the contract. However, frustration is a high test and is rarely applicable. It also provides a drastic outcome of automatic termination, without party choice or control.

The expected effects of Covid-19 are unlikely to frustrate a long-term contract for services under a project agreement. An example of how the contract may be frustrated would be where it is impossible for ProjectCo to perform the contract because the authority has revoked, or has had revoked, all of its delegated powers. It is difficult to predict this outcome at this stage, but it should be noted in the event that the authority is required to take drastic action due to emergency laws being put in place.