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High Court Sounds Death Knell on Mental Hospital PFI Contract

Private Finance Initiative (PFI) contracts are instrumental in delivering public facilities at a manageable capital cost. However, as is sadly well known, they do not always run smoothly and, in a case on point, the High Court opened the way for an NHS trust to terminate one such contract in respect of a mental hospital project.

The trust had contracted with a special purpose company which agreed to design, construct and operate the hospital (the project agreement). At the same time, a funding agreement was reached with the bank that was to finance the project. Disputes arose, however, and the trust obtained adjudication decisions that identified a number of service defaults by the company. By virtue of those decisions, the trust was entitled to exercise its termination rights under the project agreement.

In accordance with the terms of the funding agreement, the trust served a termination notice on the bank. The bank accepted that notice as valid. Prior to termination, however, the trust was also required to serve a notice giving details of, amongst other things, sums that it claimed to be owed by the company. The bank argued that that notice was not sufficiently clear and unambiguous to be valid. The trust was also said to have failed to comply with the funding agreement’s requirement that it carry out proper inquiries as to any other liabilities or defaults on the company’s part that might affect the bank’s position.

In rejecting the bank’s arguments, however, the Court found that the notice, although brief and succinct, contained sufficient detail to achieve compliance with the funding agreement. On a true interpretation of the funding agreement, the trust was neither obliged to fully quantify all claims, including liabilities and obligations, nor to provide the bank with evidence that it had made proper inquiries. The Court granted the trust a declaration that it was entitled to terminate the project agreement.



 
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