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We All Stand Together : Interface Agreements in PFI

Subcontractor co-operation agreements, or interface agreements as they are often known, are now commonplace in larger PFI projects. Their purpose is to protect thinly-capitalised special purpose vehicles from costly disputes between subcontractors. This is sometimes referred to as the "horizontal" approach to regulating inter-subcontractor claims.

Contractual Co-operation

Interface agreements enable subcontractors to co-ordinate and regulate the relationships during both the construction phase and the operational phase of a PFI project, without there being, in the main, any recourse to the project company. To be fully effective, it is usually desirable for the project company and all its construction and service provider subcontractors to enter into the agreement (with provision to join in any future subcontractors at a later date).

To be or not to be...

Different consortia develop interface agreements to different levels of detail. They can have a narrow scope, for example merely regulating the reallocation of main concession agreement liabilities and other claims between subcontractors, or they can encompass much more. Some of the more interesting aspects include:

  • design review procedures: it is in the parties' interests that the design of the project asset is signed off by all parties, including the service providers, as it progresses. It is often not feasible on large scale, complex construction projects that such sign off is achieved immediately prior to or at financial close. A procedure for how this review and signing off is to be undertaken can be included in an interface agreement to reduce the risk of later disputes;
  • statements of requirements: these statements are specific cooperation requirements that the subcontractors have of each other and sometimes the project company, such as the supply to service providers of specific operational facilities and manuals. In addition, these statements are commonly used to 'flesh out' design assumptions made by service providers which are additional to the project design requirements. These can be used as parameters for the design review procedure mentioned above;
  • indemnities: the subcontractors are able to negotiate between themselves different indemnities than project sponsors and funders would permit the project company to give, in relation to employee death, personal injury and damage to property;
  • caps on liability: it is not uncommon for the subcontractors to cap their liability to each other. The level of such caps take depends on the perceived commercial risk that the subcontractors present to each other (often different during the construction period and the operational period of the project, particularly in respect of the building contractor), or in respect of specific types of risk: classically, these liabilities and caps fall outside those in the subcontractors to the project company, protecting the project company and funders against the sub-contract caps being eroded by subcontract disputes;
  • reallocation of deductions: if the project company incurs a liability or payment deduction under the main concession agreement and in turn passes on that liability or deduction to a subcontractor pursuant to the terms of its subcontract, that subcontractor may seek a reallocation under the interface agreement if it believes another subcontractor is in fact responsible. In contrast to 'pure' inter-sub contractor claims as mentioned above, any such reallocation should be addressed at subcontract level by crediting the cap of the subcontractor against whom the deduction was initially made and debiting the subcontractor(s) to whom the deduction is subsequently reallocated; and
  • management of claims: the interface agreement can set out procedures for multi-party "parallel claims" where the project company is required to bring claims under the main concession agreement on behalf of more than one subcontractor; this can include the setting up of a dispute committee to manage the handling of such a claim.

Occasionally there is concern amongst subcontractor parties with the project company not taking any responsibility for the performance of the other subcontractors, as might be the case in a traditional contracting structure - the key concern being the credit risk on recovery of valid claims that they have against a subcontractor who they have not chosen to contract with. In truth, by agreeing to form part of a consortium to bid for a PFI project with a highly capitalised project company, the subcontractor has done exactly that; it has consented to work together with the others, often over a period of 20 to 30 years. A more valid concern is that the project company should not absent itself from sub-contractor disputes. It should remain involved in order to promote ongoing working relationships.

A vertical alternative?

An alternative approach, used in some earlier PFI projects, is for there to be a "vertical" mechanism, pursuant to which, each subcontractor makes claims under the terms of its subcontract through the project company, who in turn takes conditional responsibility as against the subcontractor for the performance of the other subcontractors and would be required to make recovery from the other subcontractor. This approach has been used less often than the horizontal interface agreement for a number of reasons, including:

  • it implies increased management obligations and cost for the project company, which has to pursue and regulate intrasubcontractor claims;
  • the project company at best would only be permitted by its equity shareholders and funders to take responsibility for such claims on an "as recovered" basis, so this would not resolve the subcontractors' perennial concern about the creditworthiness of their cocontractors. This also is likely to put a greater strain on the socalled "parallel loan" mechanism, commonly instigated to protect enforceability of such "pay-whenpaid" provisions under English law; and
  • finally, its detractors claim it can disincentivise subcontractors from liaising and cooperating with each other, as they turn to and rely on the project company to pursue any claims between them. This is hardly an attitude to be promoted for the successful working of a long term PFI project.

In summary, where PFI projects gain complexity, so the need to manage risks and relationships grows accordingly. A well developed interface agreement can be a vital weapon in the project company's armoury to achieve just that.

David Metzger & Nadia Al-Aidarous
Clifford Chance, International Construction Newsletter
Summer 2004

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