Termination of PFI/PF2 contracts

The following Construction practice note provides comprehensive and up to date legal information covering:

  • Termination of PFI/PF2 contracts
  • How a PFI project can be terminated
  • Consequences of termination
  • Authority default
  • Contractor Default
  • Funders’ rights on termination
  • Risks associated with termination
  • Practical considerations

Termination of PFI/PF2 contracts

This Practice Note explains how a PFI or PF2 project can be terminated. It also looks at the consequences of termination, the risks associated with termination and practical considerations that the parties need to take into account. Note that, in the 2018 Budget (delivered on 29 October 2018), it was announced that the government will no longer use PF2 on new projects (see News Analysis: Budget 2018—what does it mean for infrastructure and housebuilding?). However, existing PFI and PF2 projects will continue to run, and given the typical lifespan of such projects this is likely to be for many years.

While both public and private sector parties have historically considered the termination of a PFI project to be a 'nuclear' option, fraught with risk and potential cost exposure, pressure on public sector budgets is significant and termination of expensive PFI projects might be viewed as a serious option by some authorities. Although there are risks attached to a termination, the potential rewards—escaping a politically unpopular, costly contract and taking greater control of service delivery—can be enticing.

Particular factors which may motivate authorities to consider termination include:

  1. a perceived lack of value for money in the Project Agreement

  2. cost/budgetary pressures on the Authority

  3. poor performance on the part of Project Co (the Contractor) under the Project Agreement

  4. fall in demand for the services being

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