The expiry of PFI contracts

What will happen on expiry of the PFI contracts in the UK and what will the fall out of their coming to an end look like? The National Audit Office Report of last year warned and recommended that planning for PFI expiry should commence seven years before the exit date. 

Local Partnerships (a Joint Venture between Local Government Association, HM Treasury and the Welsh Government) in their report “Preparing for the Expiry of Private Finance Initiative observes as follows:

“One of the most important decisions that needs to be taken is whether the public authority intends to continue to use and operate the assets, or whether it intends to vacate and dispose of them. Within this decision-making process is the consideration of an extension of the existing arrangements or a re-procurement, to look for someone else to manage and maintain the assets into a future lifecycle. Unless the authority has decided to cease provision of the services, consideration of the future for the assets will require a full appraisal of all options available. If the ownership of the assets does not revert automatically to the public authority”


The Building Schools for the Future contracts contain a procedure for a final survey to be carried out 18 months before the expiry date, to assess whether the facilities have been and are being maintained by the Contractor and Project Co can notify them of the rectification and/or maintenance work required to bring the condition of the schools to the required standard and specify a period to the carrying out of works. The cost of the survey from the Contractor is withdrawn from the retention fund. There are similar provisions in the Hospital PFI contracts.

 The role of the private sector and the SPV

In PFI contracts the government or other public sector body is responsible for a service or facility, the use of the building or other assets. The private sector provides the capital, designs, builds and operates the facility and services over the contract term of thirty years or so. The private sector provider has responsibility for services and there is a mechanism for payment of fees by the public sector. The public sector pays the private sector funded fee for the service over the life of the contract. The payment of the fee is dependent on the performance/value of use of the facility and associated services.

The creation of a “Special Purposes Vehicle” (SPV) consortium is made up of a building contractor company, a facilities management company and Equity Finance Providers entered into the Project Agreement. The SPV company designed and built a facility and it was run for a number of years and it provided a fully managed facility to the client under a number of sub-contracts.         

Operational risk

The transfer of the operational risk to the private sector is an essential feature of PFI projects. Payment is based upon performance so that the responsibility and risk throughout the contract term is in accordance with the output specification with the Health Trust, in the case of PFI hospitals, or the Educational Authority, in the case of PFI schools.

The payment mechanism contains an availability element which is paid in full if the facilities/service is fully available but withheld if any part of the facilities or service is not available. A performance element is paid in full if required performance standards are met, but which is subject to deductions where performance is sub-standard.

Performance penalties and deductions

The Estates Maintenance contractor carries out maintenance services throughout the operational term and if they are found to be in breach of their obligations they will suffer penalties and unavailability deductions.

In many cases sub-contracts are governed by a co-operation agreement that contains dispute resolution procedures. Complex schedules identifying what constitutes a defect and what is a maintenance issue, respective roles and disputes over which each sub-contractor is liable can be determined by an allocation of responsibility by the SPV and which can be challenged in the Dispute Resolution procedures contained in the Co-operation Agreement.

The payment mechanism in PFI contracts ordinarily allows authorities to make deductions from the unitary payment where there is a failing in the provision of services or original construction. The project company may  adjudicate to recover what it has incurred.

Can the unavailability, performance deductions and penalty points be challenged as an unlawful “penalty”?

On Handback at the expiry, the mechanisms of unavailability deductions and penalty points will operate, so that these can be deducted from the “Handback Account”. A question in the Handback process is whether the unavailability deductions or penalty points are an unlawful “penalty”. The commercial reality and the accepted purpose will determine the validity of a liquidated damages clause. (Triple Point Technology Inc v PTT Public Company [2021] UKSC 29, the Supreme Court). LADs will not be penal if they are in the “legitimate interests” of the party that imposes them. The Supreme Court in Cavendish Square Holdings -v- Talal El Makdessi and Parking Eye -v- Beavis [2015] UKSC67 decided whether the LADs clause is a genuine pre-estimate of loss or not is whether it is out of all proportion to a legitimate interest the party enforcing it.

The Technology and Construction judgment of Alfred McAlpine Capital Projects Limited -v- Tilebox Limited [2005] EWHC 281 decided when a LAD’s clause will be a penalty clause? There had to be a substantial discrepancy between the level of damages stipulated in the contract as LADs and the actual level of damages that were likely to be suffered before the courts will say the agreed pre-estimate will be unreasonable.

If LADs were debated before the contract was executed, considered by the parties and by their legal advisors, the agreed liquidated damages will be reasonable.

The Supreme Court in Cavendish ruled that the test of whether a LADs clause is legitimate is whether it is out of all proportion to any legitimate interest of the employer/owner/developer in achieving the target completion date.

These arguments may well come to the fore in Handback disputes, at the end of the life of the particular contract. 


If the building achieved practical completion more than 12 years ago, the project companies may struggle to pass deductions or costs of repairs through to the building contractor because this 12 year limitation period will have expired or will soon expire. If the project companies cannot bring a claim against the building contractor for defects and if it cannot pass some losses through to the EM Sub-Contractor the cost of repairs could fall to the authority and they could be forced into insolvency as a result.

As former Legal Counsel with Bovis Lend Lease where I helped to draft the Medical Equipment Contacts for Leeds Oncology and for St Mary’s Hospital Roehampton and where I advised upon, drafted and negotiated PFI contracts, I am well placed to advise contactors and Facilities Management, their suppliers and sub-contractor providers in dealing with the fallout from PFI Handback.

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