Relief Events in PFI Projects

We are often asked to advise a party to a PFI arrangement (whether Authority, Project Company or Service Sub-Contractor) in relation to Relief Events. The main queries that we advise on are whether one has arisen, what the effect is and whether it is possible to challenge it.

What is a Relief Event?

HM Treasury's guidance [i] defines Relief Events as:

"events which prevent performance by [Project Co] of its obligations at any time, in respect of which the [Project Co] bears the financial risk in terms of increased costs and reduced revenue but for which it is given relief from termination for failure to provide the full Service."

The circumstances that constitute a Relief Event may vary from project to project. However, Relief Events are generally events with an external cause which have a negative impact upon the Project Company's or a Service Sub-Contractor's capacity to perform their obligations under the Project Agreement and which are beyond the control of the Project Company or relevant Service Sub-Contractor. Examples of potential Relief Events are fire, flooding, external shortages of fuel or transport or strike action.

The commercial purpose of the Relief Event regime is to strike a risk balance between the parties to the PFI arrangement and ensure that, while the relevant Service Sub-Contractor (and potentially the Project Company) is spared the consequences arising from an event; it remains incentivised to ensure that the required Service is performed as soon as possible.

Consequences of a Relief Event

Ordinarily, where there is a failure to provide the required Services under a Project Agreement the Project Company and relevant Services Sub-Contractor would expect the following consequences:

• the deduction of Performance/Unavailability Deductions from the monthly payment; and
• the award of Service Failure Points (which can result in the triggering other remedial rights including the issuing of Warning Notices, enhanced monitoring of the Services, step in, termination of the Project Agreement etc.).

However, on the occurrence of a Relief Event the party which has been prevented from carrying out its obligations under the Project Agreement can claim relief from the award of any Deductions and Service Failure Points which would ordinarily flow as a result of the event.

Claiming a Relief Event

The Project Agreement will stipulate the process with which the Project Company and/or the Service Sub-Contractor must comply in order to claim a Relief Event. While this process is often project specific, and hence will need to be considered on a project by project basis, there are number of common provisions which parties should be aware of.

• In the event that a party wishes to claim a Relief Event it is for that party to demonstrate to the reasonable satisfaction of the Authority that the Relief Event has occurred; that the party could not have avoided the Relief Event and that the Relief Event directly prevented the performance of the Service.

• A Relief Event cannot be claimed where the event has arisen "as a result of any wilful act or default of the party claiming relief".

• The Project Agreement will usually stipulate timeframes within which any information in respect of the Relief Event is to be provided. Depending on the drafting of these provisions, provision of the necessary information within these timescales may constitute a "condition precedent" to any claim. Accordingly, it is possible that a failure by the party claiming the Relief Event to provide the necessary information within the specified timescale can result in that party losing its entitlement to claim a Relief Event.

• The party affected by the Relief Event is generally under an obligation to take all reasonable steps to mitigate the consequences of the event upon the performance of the Services and to use all reasonable endeavours to remedy the failure to perform the Services as soon as practicable.

Any dispute between the parties as to whether or not a Relief Event has occurred and/or which party was at fault will need to be resolved in accordance with the provisions of the dispute resolution procedure set out in the Project Agreement.

Practical Considerations

Firstly, as noted above, the Project Company and/or the Service Sub-Contractor is generally under an obligation under the Project Agreement to take all reasonable steps to mitigate the consequences of the Relief Event upon the performance of the Services and to use all reasonable endeavours to remedy its failure to perform the Services as soon as practicable.

In the event that the Project Company and/or the Service Sub-Contractor fails to comply with its duty to mitigate the consequences of a Relief Event then the Project Company and/or the Service Sub-Contractor is not entitled to rely on the Relief Event to the extent that it has failed to mitigate the consequences flowing from the Relief Event.

Secondly, where an Authority disputes a Project Company's and/or the Service Sub-Contractor's entitlement to claim relief as a result of a Relief Event on the basis that either:

• the Relief Event only occurred as a result of a "wilful act or default" on behalf of either the Project Company and/or the Service Sub-Contractor; or

• the Project Company and/or the Service Sub-Contractor failed to mitigate the consequences of a Relief Event;

then the burden of demonstrating that the Relief Event occurred due to the Project Company's and/or the Service Sub-Contractor's default will normally rest with the Authority.

Finally, while the Relief Event provisions within a Project Agreement do not usually stipulate any timescale within which the occurrence of a Relief Event should be challenged, we would note that the performance monitoring regime under a Project Agreement will often:

• state that the performance monitoring reports submitted by the Project Company are the sole basis on which Deductions and Service Failure Points are calculated; and

• identify a time limit within which the Authority is required to challenge any error and/or omission within the performance monitoring reports.

Accordingly, if an Authority wishes to dispute the occurrence of a Relief Event or that the Project Company and/or the Service Sub-Contract has taken reasonable steps to mitigate the consequences of the Relief Event, to the extent that the performance monitoring reports do not reflect the Deductions and Service Failure Points attributable to the disputed Relief Event then, dependant on the terms of the Project Agreement, the Authority may need to challenge the contents of the relevant performance monitoring reports within the specified timescale or otherwise risk losing its entitlement to award Deductions and Service Failure Points in respect of the event.

If you wish to discuss this topic in more detail please contact Thomas Weld.

[i] Standardisation of PFI Contracts Version 4 (March 2007)