Government can change its position on a PFI contract, but it must do so fairly

The Administrative Court has quashed a Government decision not to support a Highways Maintenance Private Finance Initiative ("PFI") in R (on the application of Birmingham City Council) v Secretary of State for Transport [2024] EWHC 1487 (Admin).

Key points

• Even when a public authority issues guidance that it intends a private organisation to rely on, the wording must still be clear, unambiguous and without qualification to give rise to an enforceable substantive legitimate expectation.
• A failure to communicate a clear and significant change of position on the part of the decision maker to the affected organisation amounted to unfairness.
• Entities subject to public law decision making should understand the determinative factors so they have the opportunity to engage and make representations.

Background

On 6 May 2010 Birmingham City Council (the "Claimant") entered into an agreement ("Project Agreement") with Amey Birmingham Highways Limited ("ProjectCo") for delivery of a £2.4 billion 25-year project related to Birmingham’s highway network and related infrastructure ("PFI Project"). Following this, in July 2010, the Department for Transport ("DfT") issued a PFI credit letter ("PFI Credit Letter") to the Claimant which issued PFI credits for the purpose of financing the PFI Project.

At the time that the PFI Credit Letter was issued, the relevant guidance in relation to PFIs was contained in the Local Government PFI Project Support Guide (2009-10) (the "Guide"). The Guide envisaged post contract signature changes and the possibility of termination in 'exceptional circumstances', with examples of such circumstances being given.

Following commencement of the Project Agreement, there were various issues with the performance of the Project Agreement and litigation ensued between the Claimant ProjectCo and ProjectCo's subcontractors as a result.

From May 2019, there followed a prolonged period of negotiation between the Claimant and DfT regarding the way forward for the PFI Project, following a change in ProjectCo's subcontractors. A letter from DfT indicated that they "[stood] by the terms of [their] existing PFI agreement" and that their "intention [was] to continue paying PFI grant at the current rate, subject to value for money". Ultimately, ProjectCo ran a procurement to appoint a new subcontractor following which the Claimant prepared an updated business case for approval by DfT and ultimately HM Treasury.

In April 2023, the Defendant wrote to the Chief Secretary of HM Treasury seeking approval for the Claimant to move to submission of its final business case. In this letter, the Defendant indicated continued support for the PFI Project. Further consideration was given by DfT and HM Treasury, before a meeting on 29 November 2023 between DfT officials and the Claimant, in which the Claimant was told that the Defendant had decided to withdraw PFI credit funding for the PFI Project ("the Decision"). It transpired that a change in accounting standards since the PFI Credit Letter was a significant factor in the Decision.

The claimant sought permission for judicial review on various grounds, including:

1. that the PFI Credit Letter and the terms of the Guide gave rise to a substantive legitimate expectation that the Defendant was able lawfully to terminate or reduce the level of PFI credits only in exceptional circumstances, as referred to in the Guide, and that no such circumstances existed here;
2. that the procedure which preceded the Decision was unfair.

Judgment

Substantive legitimate expectation

Mould J considered the Claimant's submissions as to whether the PFI Credit Letter and the Guide could be read as offering a 'clear and unambiguous' commitment with 'no relevant qualification', so as to establish a legitimate expectation. Mould J ultimately concluded that, although the ground was arguable and the Government had intended the Claimant should rely on the relevant statements in the Guide, "[n]one of those paragraphs were intended to be read as an unqualified commitment by the Government as to how it would proceed in the circumstances of any actual, given case". Nor was there any "promise or commitment that, in the absence of exceptional circumstances, the Government's support for the PFI Project would be maintained." The language used was deliberately qualified and reserved judgment to the sponsoring department. This ground was therefore rejected.

Fairness

Mould J considered various authorities in assessing whether the Claimant had a fair opportunity to be heard or make representations and whether there was a legitimate expectation of consultation. On the facts in this case, Mould J considered that the Government had changed its position from at least late September 2023, insofar as it was known to both DfT and HM Treasury that a matter relating to accounting treatment was to "stand decisively against approval of the Claimant's proposals". However, no attempt was made to communicate the relevant issues to the Claimant before the Decision, and as such the Claimant was denied the opportunity to address those issues "in the light of the greatly heightened and ultimately determinative significance which they had for the Decision."

In reaching his conclusion, Mould J noted that the decision was finely balanced, but that ultimately the ground should succeed as there was "a clear shift in the Government's position following the Claimant's submission of its [final business case] in August 2023, which was not made known to the Claimant and upon which the Claimant had no opportunity to reflect or to engage" and the ultimate reasons for the Decision had not been identified as "key or insurmountable obstacles". Fairness and the Government's conduct since 2019 demanded that the Claimant be given the opportunity to engage following the change in Government's position which was not communicated to the Claimant. This ground therefore succeeded.

Delay

Mould J did not accept the Defendant's submissions that it should have been obvious to the Claimant from May 2019 or at least from 2021 that the Defendant did not recognise a substantive legitimate expectation. Mould J considered that it was "unrealistic" to argue that the Claimant would have been in a position to pursue a judicial review in advance of the Decision in November 2023, in circumstances where until that point all the communications and discussions had been essentially positive and supportive of the Claimant.

As at the date of this blog it is unclear whether the DfT will appeal the decision.

Comment

This decision is of particular interest given the recent change of Government. It will be important for any organisations holding PFI, or other long-term contracts with the Government, to understand the scope of the Government's ability to terminate or change approach, in a situation where different political forces may come to bear.

This was envisaged in a judgment cited by Mould J in this case: "governments may change at general elections, and even if there is an expectation that a given government will carry through its policies and assurances, there can be no legitimate expectation that a later and politically different one will do so…"

Therefore, whilst this case concerns PFI credits, there will no doubt be other cases in wider contexts where the outgoing Government has been in sustained discussions or consultations regarding a decision, and the new Government will need to abide by the requirements of public law such as rationality and fairness when reaching final decisions.