Portsmouth City Council v Ensign Highways Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Edwards-Stuart,Mr. Justice Edwards-Stuart |
| Judgment Date | 14 July 2015 |
| Neutral Citation | [2015] EWHC 1969 (TCC) |
| Date | 14 July 2015 |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Docket Number | Case No: HT-2015-000048 |
[2015] EWHC 1969 (TCC)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Royal Courts of Justice
Rolls Building, 7 Rolls Buildings
London, EC4A 1NL
Mr. Justice Edwards-Stuart
Case No: HT-2015-000048
Peter Fraser Esq, QC and David Johnson Esq (instructed by Bevan Brittan LLP) for the Claimant
Sean Brannigan Esq, QC and Richard Osborne Esq (instructed by Dentons UKMEA LLP) for the Defendant
Hearing dates: 19 th and 20 th May 2015
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
In this action the claimant ("PCC") seeks declarations in relation to the performance of certain of its obligations under a long term PFI contract ("the Agreement") made with the defendant ("Ensign") on 30 July 2004. The dispute is about the manner of awarding Service Points by PCC for breaches by Ensign of its obligations under the Agreement. Ensign is a special purpose vehicle comprising a joint venture between Colas Ltd and Colas SA (its parent). Colas Ltd ("Colas") was Ensign's subcontractor for the performance of the work.
The Agreement concerns the long term rehabilitation, maintenance and operation of PCC's highway network. It was one of the first of its kind in the country. The first five years of the project were known as a Core Investment Period, during which Ensign was required to bring the highway infrastructure up to a defined standard. This it did — at a cost of some £58 million. During the remaining 20 years of the life of the Agreement Ensign was to be responsible for the maintenance and cyclic renewal, where appropriate, of the highway network. Ensign hoped to recoup its initial investment through the payments to which it would be entitled during the term of the contract.
Following the Core Investment Period PCC claimed that its highway network was probably the best in the United Kingdom and during the first few years the project appeared to be a great success. Indeed, between 2006 and 2010 it won several awards.
The Agreement incorporated a regime for awarding Service Points for breaches by Ensign of its obligations under the Agreement. 1 Schedule 17 to the Agreement contained a table which set out a large number of Default Events for which Service Points could be awarded and, against each Default Event, a "Maximum Event Value". The Maximum Event Value for each Default Event originally 2 consisted of a single figure between 1 and 10. It is common ground that, until about December 2013, PCC treated the figures for the Maximum Event Value as the upper limit of a range. Accordingly, where the Maximum Event Value was greater than 1, the number of Service Points awarded would depend on PCC's view of the gravity of the breach.
PCC assessed and awarded Service Points on a monthly basis and, initially, the system was operated in a manner that seemed to be regarded as satisfactory by both parties.
But after a few years cuts in central government funding to local authorities began to take their toll and in 2012 PCC began to form the view that if the Agreement continued to be operated in the same manner for the remainder of its term it would become unaffordable. In December 2013 PCC engaged a consultant, a
Mr. Jayasundara, to negotiate financial concessions from Ensign and its funders. He apparently took the view that the Agreement was a "pretty awful contract" from PCC's point of view. Understandably, PCC did not wish to pay the £140 million which it calculated it would have to pay Ensign in order to terminate the contract.According to Ensign's skeleton argument, which on this aspect I did not understand to be seriously challenged, at Mr. Jayasundara's suggestion PCC embarked on a strategy of awarding Ensign large amounts of Service Points in order to force it to accede to PCC's commercial demands in a renegotiation of the Agreement. This involved, amongst other things, awarding the maximum amount of Service Points for every default, refusing to communicate with Ensign in relation to breaches, finding breaches in areas which Ensign might find hard to remedy and storing up Service Points over several months so that Ensign could be "ambushed" with a large award of Service Points at one fell swoop.
Unsurprisingly, Ensign was very disturbed at these developments and, on 20 June 2014, it notified PCC that it intended to refer the dispute about the award of Service Points to Expert Determination in accordance with the terms of the Agreement. Rosemary Jackson QC was appointed Expert and she received written submissions and heard evidence from four representatives of PCC who were tendered for cross examination. On 6 February 2015 she issued a detailed and careful Determination in which she concluded, in fairly trenchant terms, that PCC had acted in bad faith, without mutual co-operation and unfairly. However, I should note also that Miss Jackson did not conclude that Ensign's performance was always as it should have been: her conclusion was that in general it was delivering the required service but that the Agreement did not really provide any means of achieving long-term improvements. In addition, it seems that there was a view within PCC that the performance standards required under the Agreement were unnecessarily high, and that it was therefore an unnecessary luxury. Mr. Jayasundara himself had a particular fixation that Ensign had not invested as much as it should have done during the Core Investment Period.
For the purposes of this judgment, it is not necessary to say any more about the Expert Determination at this stage, save to observe that in its submissions at this hearing Ensign relied heavily on some of the evidence that was given to the Expert. Ensign's justification for this, which was both ingenious and plausible, was that this was evidence of the commercial circumstances that lay behind the Agreement. It submitted that instead of the court, a tribunal which cannot be expected to have any experience of operating a contract such as this, having to rely on its own judgment as to what amounted to commercial common sense, in this case the court had before it a body of evidence which showed, from a practical and commercial point of view, what was required to make the contract work (Day 2/63–64). Ensign submitted also that the court could rely on this evidence with some confidence, because it came, not from Ensign, but from employees of PCC. I will return to this submission later in this judgment.
At the hearing PCC was represented by Mr. Peter Fraser QC and Mr. David Johnson, instructed by Bevan Brittan LLP, and Ensign was represented by Mr. Sean Brannigan QC and Mr. Richard Osborne, instructed by Dentons UKMEA LLP.
The contract in outline
The Agreement is dated 30 July 2004. It is for a 25 year term. It is, as one would expect, a complex document and it contains over 60 sections. The first two Recitals are as follows:
"A PCC's objective is to provide a highway network which is safe affordable and facilitates the economic development of Portsmouth in a manner consistent with its other wider policies.
B PCC desires to achieve best value from the existing highway infrastructure in Portsmouth."
PCC is under the duty imposed by section 3 of the Local Government Act 1999, known as the Best Value Duty, which requires it to:
"… make arrangements to secure continuous improvement in the way in which its functions are exercised, having regard to a combination of economy, efficiency and effectiveness."
The definition of Routine Maintenance in the Agreement refers to "… work which is short-term or cyclic in nature and necessary to keep the Project Facilities in good and safe working order". There follows a long list, as an indicative guide, of the types of work that can be classed as routine maintenance. These include everything from maintaining safety and other fencing to vegetation management and the repair or replacement of tiling and plaques in subways, not to mention the more obvious requirements such as surfacing roads and maintaining kerbs.
The obligation of Ensign under the Agreement is to provide and finance the services required under the Agreement for the duration of the Contract Period, a period which ends on 31 March 2030.
Ensign's services have to be provided in accordance with the Service Requirements and, amongst other things, in a manner that does not detract from the image and reputation of PCC as a highway and local authority (clause 3.4.5).
Clause 24, the provisions of which are set out in more detail below, provides a regime for the award of Service Points. By clause 24.1.1 Ensign was under an obligation to notify PCC of any breach of its obligations under the Agreement as soon as practicable after becoming aware of it. Clause 24.1.2 entitles PCC to serve a notice requiring Ensign to remedy any breach which is capable of remedy within a stated period. If Ensign fails to perform any of its obligations under the Agreement or if a breach has not been remedied within the period required by a notice issued under clause 24.1.2, PCC may award Service Points against Ensign. The Service Points are to be "calculated" by reference to Schedule 17 to the Agreement.
If 150 or more Service Points are awarded in any 12 month period, PCC may issue a warning notice to Ensign. If 200 or more Service Points are awarded in a 12 month period, PCC is entitled to increase its level of monitoring of Ensign at Ensign's expense. At 250 Service Points or more in a twelve-month period (or the issue of four warning notices within a 5 year...
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