Consort Healthcare (Tameside) Plc v Tameside and Glossop Integrated Care NHS Foundation Trust

The Project Agreement was executed in 2007 and at that time was expected to last for 34 years. The Project Agreement was entered into under the then government’s “Private Finance Initiative” (“PFI”).

At a very high level, the Project Agreement required the Company to spend in excess of £100 million to develop the Hospital. The Company financed that expenditure by issuing the Senior Debt and the Subordinated Debt. Having developed the Hospital, the Company would provide ongoing services in return for the Unitary Charge. The essence of the Project Agreement, therefore, was that the private sector in the form of the Company would fund the development of the Hospital rather than that cost being paid out of public funds. Having developed the Hospital, the Company would then provide other services including maintenance and would recover its investment and make a profit from the Unitary Charge over the next 34 years.

In those circumstances, even if the Project Agreement terminated because of serious breaches of contract by the Company, it would still be appropriate for the Company to receive a payment on termination. Otherwise, the Company would risk obtaining insufficient credit for the large amounts it paid to develop the Hospital in the first place. For those reasons, the Project Agreement makes provision for the Company to receive a “compensation on termination” payment (which the parties described as the “COT Payment”) if the Project Agreement terminates early. In principle the COT Payment takes as its starting point the “Fair Value” of the Company’s remaining rights and obligations under the Project Agreement which is broadly the net present value of (i) the stream of future Unitary Charges that the Company will receive less (ii) the costs that the Company would incur in performing its obligations under the Project Agreement. From that Fair Value, the Trust is entitled to make certain permissible deductions to arrive at the COT Payment due to the Company.

The Project Agreement contains two methodologies for ascertaining Fair Value depending on whether a “Liquid Market” exists. In essence, there will be a Liquid Market if there are sufficient bidders for the opportunity to become the successor to the Company under the Project Agreement for their bids to be a reliable indicator of Fair Value.

The Company and the Trust agree that the “retendering” approach and the “Estimated Fair Value” approach are seeking to value the same thing, namely the fair value of remaining rights and obligations under the Project Agreement. They disagree on whether there is a Liquid Market. However, they agree in principle that, if there is a Liquid Market, it is likely to result in a lower COT Payment to the Company on termination. That is because bidders in a retendering process are likely to experience some nervousness at the possibility of hidden costs associated with their future participation in the Project Agreement. More generally, bidders are likely to note the historic disputes between the Company and the Trust and conclude that there is a risk of further such disputes in the future. Both of these factors may lead to a reduction in bids made in a Liquid Market. By contrast, the essentially arithmetic calculation that applies if there is no Liquid Market leaves less room for such nervousness to be reflected in the COT Payment.

That introduces a significant factual dispute between the Trust and the Company as to what will happen if the Plan is, or is not, sanctioned. The Trust’s position is as follows:

The Company does not accept the Trust’s formulation of how it would act in the two scenarios set out in paragraph ‎41 largely because the Company does not accept that there is a Liquid Market or that it would be practicable for the Trust to exercise step-in rights. However, the Company realistically accepts that I am in no position to determine whether there is a Liquid Market or not. Accordingly, the Company resists the Application by arguing that, even if the Trust’s formulation set out in paragraph ‎41 is the correct one, the COT Payment due from the Trust to the Company will still be much greater than the amount of any costs that the Company could realistically be ordered to pay to the Trust. Therefore, the Company argues that the Trust is not actually running any risk of its costs going unpaid since it can exercise its contractual right of set-off in Clauses 48.1, 48.2 and 35.6 of the Project Agreement by applying any costs due to it against the much larger sum that it will owe to the Company.

It will be seen that on the Trust’s formulation, any COT Payment will be due to the Company in either four years’ time (if the Plan is not sanctioned) or in two years’ time (if the Plan is sanctioned). Therefore, it will take time for the Trust to be able to exercise any right of set-off to which it is entitled. The Company argues that this imposes no additional risk or cost on the Trust since any costs award made to the Trust will earn interest at 8% pursuant to the Judgments Act 1838 with the result that the Trust will have an effective remedy for being kept out of its money until it can exercise it set-off right.

The Trust seeks security in the amount of £926,560.25. That figure represents a 70% of the costs that the Trust estimates that it is likely to incur in connection with its opposition to the Plan. The Company has not suggested that the Trust’s estimate of its total costs is excessive.

The Trust clearly has a realistic prospect of obtaining a costs order in its favour should it succeed in its opposition to the Plan.

I also accept that the Trust can realistically expect some costs award to be made in its favour even if the court ultimately decides to sanction the Plan. That follows from the judgment of Snowden LJ in Smile Telecom (Sanction) from which I have quoted a passage in paragraph ‎8 above. Clearly the amount of costs remains a matter that is in the discretion of the court following the sanction hearing. The Trust is perhaps unlikely to recover all its costs should its opposition to the Plan fail. However, the Company did not dispute the Trust’s submission to the effect that its opposition to the Plan has already resulted in some aspects of the Plan being altered which is likely to be a relevant factor.

As noted, the Trust’s position (which is disputed) is that if the Plan is not sanctioned, there will be a retendering in a Liquid Market which completes in 48 months’ time. Even if the Trust’s position is correct, I do not consider that it would be running a significant risk of being unable to set off the costs owed to it against a much larger COT Payment owed by it.

The Trust has engaged EY to model various financial outcomes in different scenarios. EY’s opinion is that, if the Plan is not sanctioned and the COT Payment is determined following a re-tendering in a Liquid Market, the Trust will have to make a retender settlement net of costs of somewhere between £41.3m and £81.3m. That figure is obviously much higher than the £926,000 costs award that the Trust considers would be made in its favour.

The Trust argues that, notwithstanding EY’s estimates, it still suffers a significant risk of not being able to set off a costs award against its liability to make a COT Payment because of the likelihood of construction defects being discovered as part of a “Centre of Best Practice Survey” (the “COBP Survey”) that it is currently conducting. The COBP Survey seeks to uncover previously unknown construction defects in the Hospital. The survey itself is expected to be completed in August 2024 with a process of identifying what needs to be done in order to correct the defects, and the likely cost of correction, likely to take a further 14 months.

The Trust has put forward evidence from Mr Manley (of the Trust’s consultants (“P2G”)) who designed the COBP survey to the effect that COBP surveys on other similar projects have tended to show a wide range of non-compliance and a corresponding need for rectification works. Mr Manley’s opinion is that on all of the surveys in which P2G have been involved there has never been a situation where there have been no further defects. He expresses the opinion that he would expect the deductions flowing from the COBP Survey at the Hospital to “wipe out the entire Service Payment”. He says that he is expecting some 5,000 to 10,000 non-compliant events to emerge from the survey.

In a similar vein, Mr Beal of EY expresses the opinion that on other PFI contracts, significant defects have been discovered after termination. He gives the example of the Royal Liverpool University Hospital PFI Scheme where, after the construction company (Carillion) went into liquidation, rectification costs increased by more than five times the original estimate after a full survey was carried out.

The difficulty with this evidence is that with the COBP Survey due to complete by August 2024, it would have been open to the Trust to provide some evidence of actual defects that it has discovered so far. That it has not done so, and has instead relied on high level impressions that Mr Manley and Mr Beal have based on previous experiences on different projects does not incline me to conclude that there is a significant risk that those defects will reduce the COT Payment by such a large amount as to cause the Trust’s set-off right to fail.

The Trust makes a separate point to the effect that it will have to wait up to 4 years to exercise its right of set-off. That is true. However, to the extent it obtains an award of costs in its favour, interest at the 8% Judgments Act rate will accrue on unpaid costs. Provided the Trust can exercise its right of set-off that interest will operate to reduce the amount of COT Payment that the Trust owes.

The Trust argues that there is a separate problem with setting off interest. It submits that in an administration, an administrator could make an early declaration of an intention to make a distribution thereby ousting contractual set-off and triggering set-off pursuant to the Insolvency Rules. Under the Insolvency Rules, it was argued that future accruals of Judgments Act interest could not be set off against the COT Payment.

At the hearing before me, this was presented as something that an administrator could do. No evidence was given suggesting that it was something an administrator would do although Mr Bayfield KC shared some experiences from the Lehman administration. It was not said, for example, that potential administrators had been approached with those administrators saying they proposed to make an early declaration of intention to distribute. An early declaration of an intention to distribute strikes me as not straightforward since any receipts from bidders in a retendering process would be uncertain in amount and possibly due to be received in 48 months’ time.

Based on the evidence that was before me at the hearing, I regarded the risk that the Trust articulated as being a lawyer’s concern about a way an administrator might act which did not disclose a significant risk that an administrator of the Company would actually act in that way. Following the hearing at which I made my order, the Trust sent me further material on this point. However, since I had by then made my order, and since my order had to be based on evidence available at the hearing, I have not read that further material.

Nor do I accept the Trust’s point that the risk is more acute still if the Company goes into insolvent liquidation, since it was common ground between the parties that the “relevant alternative” is an administration.

I conclude that the risk of the Trust being unable to set off Judgments Act interest against the COT Payment is no higher than the associated risk in relation to the costs themselves.

The Trust says that, if the Plan is sanctioned, then it is “currently minded” to exercise its Initial Termination Right. The Trust’s position is that following the exercise of that right, there would still be a Liquid Market. However, in that case, the retendering process would need to be completed in a total of 24 months. The Trust would not have the total of 48 months (consisting of up to 30 months in which step-in rights are being exercised plus 18 months of re-tendering) that would be available if the Plan is not sanctioned.

In his oral submissions on behalf of the Company, Mr Smith KC did not invite me to make factual findings to the effect that the Trust would not, or could not, exercise its Initial Termination Right if the Plan is sanctioned. Indeed, as noted in paragraph ‎42 above, the Company recognised the impossibility of me making findings on disputed questions of fact such as whether there was a “Liquid Market” or not. The focus of Mr Smith KC’s oral submissions was that, even if the retendering process took place over 24 months rather than 48 months, that could not make that much difference given the substantial headroom available even on the Trust’s own analysis of likely COT Payments following a re-tendering process culminating in 48 months’ time.

As a matter of pure logic, there was some common sense to the Company’s submissions. The Hospital has indeed been functioning for several years and one might well debate the likelihood that any construction defects identified will be so significant as to counteract the substantial COT Payments being modelled. In addition, given that there appears to be plenty of headroom in the COT Payment if there is a re-tendering that is completed in 48 months’ time, one might well intuitively query why there would not be similar headroom if the re-tendering is completed in 24 months’ time. Finally, there is some force in the point that the Trust’s risk involves a lower amount of costs given that it might well be unlikely to obtain all of its costs if the Plan is sanctioned.

However, the question should be approached by reference to all the evidence that is actually in front of me. One straightforward proposition emerges from that evidence, which is not seriously in dispute. If the Company is ordered to make a payment of material costs to the Trust following the sanction hearing, the Company is unlikely to be able to comply with that order when it falls due for payment. The Company seeks to establish that the actual risk of non-payment of costs is minimal because of the level of COT Payment that the Trust can expect to receive in due course. However, none of the evidence as to likely COT Payments focuses on a re-tendering that has to be completed in 24 months’ time.

The Company seeks to portray that lack of evidence as a failure by the Trust to evidence its case sufficiently. However, I do not agree. There is a clear risk that the Company will not be able to pay any costs falling due for payment in August 2024. In those circumstances, if the Company seeks to persuade me that the risk is negligible, even if a re-tendering takes place in a 24 month timescale, in my judgment it needs to do better than simply advancing submissions that reason by analogy with the evidence of likely COT Payments in 48 months’ time.

A re-tendering in 24 months’ time will, by definition, have had only half the time of a 48-monthly tendering process to attract bids and bidders. Moreover, while bidders could expect to have the results of the COBP Survey in August 2024, the evidence before me suggests that it will take a further 14 months for bidders to know what fixing those defects is likely to cost. By way of counterpoint to the Company’s submissions set out in paragraph ‎61, I see a clear logic to the proposition that bidders participating in a shorter process, in which full information on the likely cost of construction defects becomes available over halfway through, might well be inclined to bid less. I also see a clear logic to the proposition that a shortened process like this might attract fewer bidders which in itself might reduce the price payable.

The evidence before me does not seek to model how EY’s estimate of likely re-tendering payments made following a 48-month process would be affected if the process instead had to be completed in 24 months. Both sides advanced sensible arguments as to what the effect might be, but I had no evidence from a person acquainted with the area. I attach little significance to the fact that Ms Wilson, in her evidence on behalf of the Trust, described the risk of a failure of set-off as a “non-trivial possibility which cannot be ruled out as being fanciful”. Ms Wilson is the Trust’s solicitor and has had no more evidence from someone knowledgeable in the field than I have. The fact that she declined to use any kind of overstatement is to her credit and is not a secure guide to the level of the risk.

EY’s calculation is that in order for any set-off against a COT Payment to be possible, the re-tendering proceeds would have to be in the order of £13.9 million. I am not prepared to conclude at this stage based on the evidence I have been shown, which has not been tested in cross-examination, that retendering proceeds would necessarily be higher than this amount in a 24-month process. It follows that I conclude that there is at least a realistic and material risk that, if the Plan is sanctioned, the Trust will not be able to set off the full amount of any costs made to it against the COT Payment.

It is common ground that the threshold conditions set out in CPR 25.13(2)(c) are satisfied. I have also concluded that there is a real risk of the Trust not being able to set off its entitlement to receive costs from the Company against any COT Payment due to the Company. That real risk, in my judgment, is most acute in the scenario where the Plan is sanctioned as, based on my assessment of the evidence, I conclude that the risk of set-off failing if the Plan is not sanctioned is not significant.

Those conclusions, in my judgment, indicate that it is appropriate to exercise discretion to require the Company to provide some security for costs. I am not persuaded that the differences between the Plan and “ordinary adversarial litigation” are sufficient to dissuade me from that course.

The Company refers to paragraph [57] of the judgment of the Court of Appeal in Chernukhin v Danilina [2019] 1 WLR 758 to the effect that:

In principle, security should be tailored so as to provide protection against the relevant risk.

The Company formulates the “relevant risk” as being the risk of the Trust ultimately being unable to obtain the economic value of any costs award by setting it off against the COT Payment. It argues that, since that relevant risk is low, particularly in the scenario where the Plan is not sanctioned, the court should either decline to make an order for security for costs, or should set the security at a low level.

I quite accept that, if a statistician were asked to evaluate that formulation of the “relevant risk” he or she might proceed by evaluating (i) the respective probabilities of the Plan being sanctioned or not; (ii) the likely award of costs in either scenario and (iii) the probability of these costs not being covered by the Trust’s set-off right. That process might culminate in an estimate of an “expected loss” to the Trust.

However, I do not consider that is the approach I should follow in this case. The purpose of security for costs is not to compensate the Trust for “loss of a chance”. Its purpose is to secure the Trust against the “relevant risk” identified by CPR 25.13(2)(c) namely the risk that the Company will be unable to pay the Trust’s costs if ordered to do so. In Chernukhin v Danilina, the relevant risk was that of non-enforcement of a costs order against a foreign litigant. The Court of Appeal rejected the proposition that that risk should be measured on a “sliding scale” with Hamblen LJ saying at [64] and [65]:

64.

In my judgment, once it has been established that there are “substantial obstacles” sufficient to create a real risk of non-enforcement, the starting point is that the defendant should have security for the entirety of the costs and there is no room for discounting the security figure by grading the risk using a sliding scale approach.

65.

That is the starting point but it by no means follows that security for all or indeed any of those costs will be ordered. The quantum of security is a matter of discretion and discretionary factors such as, for example, delay or stifling, may affect the amount of security to be ordered, if any.

In my judgment, the Company’s submission summarised in paragraph ‎70 mischaracterises the “relevant risk” to which the Court of Appeal was referring. The relevant risk is the risk that the Company will be unable to pay costs if ordered to do so. The Trust is subject to that risk which is not addressed fully by the existence of the Trust’s right of set-off. The starting point, therefore, should be that the Trust should obtain security for the entirety of its costs.

However, in my judgment, that is not the end point in the particular circumstances of this case. This is not a classic situation, of the kind that would arise in ordinary adversarial litigation where (i) a defendant is likely to be awarded costs only if it wins so that (ii) if a claimant does not pay a costs order on the due date for payment that suggests that a good proportion of the defendant’s recoverable costs might go unpaid. A costs award in the Trust’s favour might be less than £926,000 (if the Plan succeeds) and, even if the Trust is not paid costs on the due date, there is a good prospect of the set-off right mitigating the effects of that failure. Even though those matters are not susceptible to a “sliding scale” approach of the kind rejected in Chermukhin v Danilana, it is right that these points of difference with the classic situation should be recognised when I exercise my discretion.

Moreover, any security for costs will in my judgment have to come from the Funds since it is the Funds who have been providing the RP Funding to date. I accept that the Funds have a complicated “risk versus reward” calculation to perform and I should therefore have regard to the risk of an order for security stifling the Plan.

In the circumstances of this case, I consider that the competing constraints are appropriately balanced by requiring the Company to provide security for costs for half the amount that the Trust has requested.

The Company argues that I should impose a further condition namely that, if the Plan is not sanctioned, the security given should be refunded so that the Trust has to rely on its set-off right for the entirety of its costs rather than having recourse to the security provided. It argues that this approach is justified by my conclusion that there is not a significant risk of set-off failing if the Plan is not sanctioned.

I reject that argument for reasons similar to those set out in paragraph ‎72. The purpose of security for costs is to protect the Trust against the risk of the Company being unable to pay costs that it is ordered to pay. The order for security must be made now and looking at matters now, that risk is present.

I also consider that the “balance of prejudice” points against the Company’s suggested approach. Litigants are entitled to expect that costs orders made in their favour will be paid when due, but on the Company’s approach, despite security being made available, the Trust will be declined recourse to that security if the Plan is not sanctioned and will have to wait up to four years to exercise its set-off right. Moreover, once the Company has provided security, it suffers no incremental prejudice if that security is used to pay costs that the Company owes since the Company should have been paying those costs anyway. Any risk of “stifling” will have passed by the time any costs order becomes payable. By contrast, there is a risk of prejudice to the Trust if any security has to be returned if the Plan is not sanctioned. While I might well evaluate the risk of the set-off failing as low today, circumstances might change such that ultimately the Trust cannot exercise its set-off right. In that case there would be real prejudice to the Trust as it would not obtain effective payment of costs ordered by the court.

I award the Trust its costs of the application. I consider the Trust to be the overall successful party. It has obtained an order for security for costs in circumstances where the Company argued that no such order should be made.

The Company argues that costs should be reserved until it is seen whether the Plan is sanctioned. I do not agree as I consider that argument subject to the same flaws as the similar argument summarised in paragraph ‎77 which I have rejected.

Nor do I agree that, because the Trust has obtained only 50% of the security that it sought, the Company should have to pay only 50% of its costs. The Company has been unsuccessful on almost all the arguments that it put forward as a principled objection to the provision of security for costs. It is true that I have accepted the Company’s assessment of the magnitude of the risk of set-off failing if the Plan is not sanctioned in preference to the assessment put forward by the Trust. However, that was simply an element of failure on the way to the Trust’s overall success in the Application.

The Company was also critical of what it submitted to be the Trust’s late deployment of arguments based on costs risk even if the Plan is sanctioned. I do not accept that criticism and indeed any such criticism did not form a substantial component of oral submissions at the hearing before me. The Company did not, for example, say at the hearing that it had had insufficient time to meet this argument which was fully set out in the Trust’s skeleton argument.