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Facilities Management Contracts – PFI Risks

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many FM Contractors remain unaware of the true risks to which they are exposed or how to mitigate such risks when negotiating the terms of the FM Contract with the special purpose vehicle (“SPV”).

Although the majority of Facilities Management Contractors are aware that the risk profile of PFI contracting is significantly more onerous than that under traditional forms of procurement, many FM Contractors remain unaware of the true risks to which they are exposed or how to mitigate such risks when negotiating the terms of the FM Contract with the special purpose vehicle (“SPV”).

There is a worrying trend that the other parties within the PFI chain think it acceptable to place more and more risk on the FM Contractor, risk in respect which the FM Contractor has no control and which is frankly nonsensical to allocate to the FM Contractor. Unfortunately the FM Contractor’s cause is not helped by some key players within the industry accepting such provisions, often through ignorance, which sets a precedent in the eyes of the funders and SPV’s. A selection of key commercial issues that the FM Contractor should be alert to when considering PFI risk profiles are set out below.

1 Limitation of Liability

The FM Contractor’s annual liability under the FM Contract, including for deductions, should be capped at a sum equivalent to 100% of the annual fee paid to the FM Contractor. In the event that the FM Contract is terminated then the FM Contractor’s liability is usually increased by a further 100% of the annual fee. There will be some liabilities that are unlimited, but these should be restricted to insured losses, fraud, prohibited acts, abandonment, wilful default and certain indemnities in respect of physical injury or damage to property.

2 Deductions and Defects

A significant issue for the FM Contractor is the imposition of deductions upon the occurrence of unavailability. The SPV frequently seek the right to allocate deductions against the FM Contractor even when it is clear that the unavailability was caused by the Building Contractor and further often argue that the FM Contractor can only recover wrongly allocated deductions from the Building Contractor; such a position should be totally unacceptable to the FM Contractor.

The FM Contractor should negotiate a position where it has no liability for those deductions caused by Building Contractor defects. Any dispute as to whether the FM Contractor is liable for the deduction should be resolved directly with the SPV and should not involve the Building Contractor. The SPV may seek to argue that the FM Contractor is not prejudiced by being required to pursue the Building Contractor but this is not true; consider the costs incurred in recovery, litigation risk, Building Contractor insolvency, limitation clauses, limitation period and of course the risk of termination due to the application of deductions or service failure points.

There also needs to be a clear delineation between liability for maintenance and replacement so that the FM Contractor is not exposed to increased costs because the SPV is unwilling to dip into the Lifecycle reserve. This will also highlight the absurdity of the SPV trying to make the FM Contractor liable for Building Contractor defects where it is the SPV who controls expenditure of the lifecycle reserve.

3 Insurance

The FM Contractor should take a keen interest in the insurances effected by the SPV and should ensure that the adequacy of policies are confirmed by its own insurance adviser. The SPV may seek to make the FM Contractor liable for the adequacy of insurance and although such liability should be resisted, if the FM Contractor is to assume such risk then it is essential that it understands the terms and conditions upon which any such insurance has been placed.

Of particular interest to the FM Contractor should be the Business Interruption Insurance (“BII”) which indemnifies the holder for losses suffered (which should include deductions) in the event that the Facility is unavailable due to the occurrence of one or more of the risks covered under the Material Damage section of the insurance policy. It is however common practice for BII policies only to cover the interests of the SPV and Funder and the FM Contractor should note that the insurer usually reserves a right of subrogation against the FM Contractor in the event that the BII is called upon due to an act or omission of the FM Contractor. Further, BII policies are frequently worded so that they only provide indemnification in the event that the SPV is unable to recover its losses elsewhere, which presumably precludes indemnification to the extent that the SPV is able to claim deductions from the FM Contractor.

It is apparent from the above that there are a number of issues that can undermine the interests of the FM Contractor in the BII. In order to secure protection the preferred position would be for the FM Contractor to be either a named party under the BII or to restrict its liability for deductions where the SPV can recover its losses under the BII. In the event that neither of the preferred options are available then clear and precise wording is required within the FM Contract to ensure that the FM Contractor is able to rely upon BII to recover any deductions that it is liable for.

The issue of uninsurability and excesses is another area where the SPV frequently seeks to pass unreasonable risk to the FM Contractor. The FM Contractor should not be taking risk for any excesses save where they relate to a claim caused or requested by the FM Contractor and further the risk of uninsurability should sit with the SPV to ensure that the SPV is able in turn to secure full entitlements under the Project Agreement.

4 Interface Agreements

An Interface Agreement is a tripartite agreement between the FM Contractor, the Building Contractor and the SPV. Although many Building Contractors initially resisted the use of Interface Agreements, they are now often seen by the Building Contractor as a conduit for passing liability to the FM Contractor and their provisions therefore require careful consideration.

The FM Contractor should place caps on its liability to the Building Contractor and such caps should not increase the FM Contractor’s liability over and above that agreed in the FM Contract. The FM Contractor should be particularly aware of its potential liability to the Building Contractor for delay to completion and should seek to avoid putting itself in a position where the Building Contractor could seek to recover liquidated damages from the FM Contractor, such damages potentially dwarfing any profit that the FM Contractor would hope to make from the project.

The Interface Agreement should set out in detail what the FM Contractor is expecting from the Building Contractor, usually provided for by setting out a list of requirements as an Appendix to the Interface Agreement. The FM Contractor must however be careful not to assume any design liability.

The Interface Agreement should also address the issue of Building Contractor access to site to undertake snagging and rectifying defects forgetting not to take into account the costs that the FM Contractor will incur in shadowing the Building Contractor where the Building Contractor is not CRB compliant. A mechanism should be agreed whereby the Building Contractor is notified of defects within the defects liability period and given the opportunity to inspect and rectify so as to minimise the imposition of deductions. The FM Contractor should consider the practical difficulties of notifying the Building Contractor of defects outside the defects liability period and should further consider a mechanism whereby the FM Contractor simply rectifies minor defects and then pursues the Building Contractor under the Interface Agreement for recovery.

5 Design Liability

It is the Building Contractor who designs the Facility and who must take responsibility for defective design along with his design team. The FM Contractor may have provided the Building Contractor with its requirements to provide the Services but this should not absolve the Building Contractor from design liability. The FM Contractor needs to be wary of any requests to confirm the suitability of the design because if any design issues arise then invariably the Building Contractor will blame the FM Contractor rather than accepting liability itself.

6 Utilities

Utility risk can be significant and the FM Contractor needs to particularly understand the risk placed upon it in the event that energy consumption exceeds expectations. The FM Contractor should caveat its responsibility so that it is not liable for any increased energy usage outside of its control or for reason of the design simply not being able to achieve the efficiencies that were promised.

7 Completion

The Building Contractor may well request a duty of care from the Independent Tester and in such circumstances it is critical that the FM Contractor likewise receives the same. There have been situations where the Independent Tester has wrongly certified completion and it this scenario the commercial pressure upon the Building Contractor to rectify is significantly reduced, leaving the FM Contractor with an incomplete Facility and exposed to increased costs of working and potential deductions. If the Independent Tester owes the FM Contractor a duty of care then he will have to give equal weight to the interests of the FM Contractor when certifying completion.

8 Project Agreement issues and Indemnities

There is a tendency for the SPV to seek an all embracing “sweep-up” clause in respect of Project Agreement risks along the lines of “FM Contractor to undertake all SPV obligations in respect of the operational phase as are provided for in the Project Agreement”. Such a provision should be resisted by the FM Contractor who should insist on the FM Contract being a stand alone document setting out the entirety of the FM Contractor’s obligations, something easily achieved by stepping down each applicable clause of the Project Agreement. The SPV’s requirement for a sweep up clause serves little purpose other than to benefit the SPV’s lawyers.

Likewise requests for indemnities should be largely resisted save where such indemnities are a replication of Project Agreement indemnities. General indemnities in respect of breach of contract, damages or losses should not be given.

9 Equivalent Project Relief and Dispute Resolution

The FM Contractor will be aware that it is the preference of the public sector to avoid joinder of disputes with the result that there may be a disconnect between disputes resolved at Project Agreement level and those resolved in the FM Contract. However, this may not prevent the public sector from trying to bind the FM Contractor into the outcome of the dispute at Project Agreement level, notwithstanding the fact that the FM Contractor plays no part in such disputes. Such a position must be resisted.

The FM Contractor should ensure that it has extensive rights to participate in any dispute between the SPV and public sector which impacts upon any dispute between the FM Contractor and SPV. This may be achieved in a number of ways, such as, name borrowing or a robust commitment from the SPV to progress FM Contractor disputes with the public sector and not to compromise any dispute without the approval of the FM Contractor.

In agreeing Equivalent Project Relief provisions the FM Contractor must ensure that it has adequate rights of redress either directly or indirectly against those parties to whom the FM Contractor’s entitlements are linked.

By taking into account all or some of the above, all of which will be resisted to varying degrees by the SPV but all of which are risks that SPV’s should and can assume, the FM Contractor will be redressing some of the disproportionate and unjust risks allocation that is demanded by the SPV and Funder.


MJD Solicitors | Matthew Dillon

Matthew Dillon

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