Jan Middleton

The Chinese curse “may you live in interesting times” has a particular resonance for public-private partnership (PPP) and PFI lawyers at the moment. Hot on the tracks of the difficulties arising out of European Union (EU) procurement issues come the potential difficulties raised by Section 6(3) of the Human Rights Act 1998, which came into force last year.
The definition of a public authority includes “any person certain of whose functions are functions of a public nature”. We are still at the speculative stage of how the courts will define this in practice, although one case is to be given an airing in the House of Lords in the near future.
Even when we do have some legal guidelines, there may remain a reason for lawyers to get their knickers in a twist: private sector contractors doing business with the public sector quite properly want to be able to assess the business risks involved in any commercial decision. Normally, the answer to uncertainty about risk management is to seek contractual indemnities. There is no problem with a public authority giving an indemnity – they have a general power to do anything necessary, usually including the power to enter into such contracts as are necessary on such terms as are deemed appropriate.
No difficulty is foreseen in mutual indemnities under the act, whereby one party is protected from financial loss caused by another partner breaching its obligations. But this is a fundamentally different situation from that where the contractor decides an indemnity from the public authority is the answer to its difficulties in assessing the commercial risk that might ensue from the act. This type of indemnity would indemnify the contractor against financial loss following any successful action by a victim against the contractor.
The reasoning is that it would be a sensible business solution to an uncertain legal situation. Yet such a mechanism may be blown away by the public law concept of ultra vires. The act's obligations must prevail over commercial considerations. Section 6 makes it unlawful for a public authority to act in a manner incompatible with the European Convention on Human Rights (ECHR). As a public authority must ensure human rights, how can it legally compensate a contractor who fails to do that? Added to which, the definition of a public authority includes a 'hybrid' contractor. The waters get murkier.
If a statute identifies considerations that a public authority must legally examine, a decision will generally be invalid if relevant considerations are ignored. Failure to perform a duty imposed by statute may in itself be unlawful.
Public authorities are constrained from making ex gratia payments. If a payment cannot be justified legally, then it will be ultra vires. Although it may sometimes be justifiable commercially for a public authority to make what in strict contract terms is an ex gratia payment, it is an entirely different matter when that payment may in itself actually amount to an unlawful act.
A commercial lawyer may lead you to conclude that there is no difficulty, that it is all a matter of private contract law and business considerations. Many in-house public sector lawyers do, however, foresee a problem, and are considering how to deal with it in practical terms. Meanwhile, private sector lawyers specialising in public law issues find themselves pulled like a wishbone, not wanting to undermine the attractiveness of PPP/PFI projects by throwing up yet more hurdles, while at the same time being reluctant to approve arrangements that may fall foul of the ultra vires principle.
Even the Local Government (Contracts) Act 1997 does not seem to offer assistance, as it does not absolve local authorities of the duty to consider whether a particular contract is within its powers. If there is a fear that the substantive provisions or indemnities are inconsistent with the duties to uphold ECHR rights, then either the certificate should not be given or the relevant provisions should be excluded from its scope. Moreover, even when a certificate is given, the contract can still be challenged as ultra vires through judicial review proceedings by third parties.
Jan Middleton spent 11 years as an in-house procurement specialist and is currently based in Denton Wilde Sapte's public law team.