AIIP Policy Position Paper: Relational Contracting

March 2024 

Issue 

1. This Policy Position Paper sets out information and guidance for public bodies to assist with decision making and the consequential implementation of provisions of Project Agreement contract terms (including the application of Payment Mechanism terms) on the basis that such contracts are relational contracts. 

Dissemination and scope 

1. This PPN is applicable to all contracting authorities, including central government departments, executive agencies, non-departmental public bodies, local authorities, NHS bodies and the wider public sector (excluding Devolved Administrations). Together these are referred to in this PPN as ‘contracting authorities’. This PPN covers goods, services and works contracts being delivered in the UK. 

2. Please circulate this PPN across your organisation and to other relevant organisations that you are responsible for, drawing it to the specific attention of those with a commercial and finance role. 

Timing 

3. With immediate effect until the expiry of any relevant Project Agreements.

Background 

4. In 2022, the Infrastructure Projects Authority commissioned Mr Barry White and Mr Andrew Fraiser to produce a report considering and addressing the status of behaviours, relationships and disputes across the PFI sector and to provide recommendations for how to improve them moving forward. 

5. The authors commented that: 

“Anything that can be done to reduce either the number of disputes in operating PFI Contracts, or the percentage of disputes being referred to formal dispute resolution is, in our view, in the public interest… We often heard consultees express concern that “value had been lost from the project” as a result of the dispute and, on further enquiry, it became clear that this

comment was either referring to the amount of time and money that had been spent by all parties on legal costs, and/or the erosion of trust/goodwill between the parties that had arisen as a result of the relevant dispute”. 

6. At the same time, the Courts have been publishing decisions on disputes arising on relational contracts, such as those adopted in the Private Finance Initiative. 

7. These decisions provide assistance for contracting authorities and support decision making within long term arrangements and, if followed, should improve behaviours and reduce the disputes referred to in the White Fraiser Report. 

8. The above action points summarise the position determined by the Courts in England and Wales when asked to consider issues of good faith and relational contracting behaviour and should be applied by contracting authorities in all operational contracts. 

Action 

9. All contracting authorities should ensure that any substantive decisions made in applying the Project Agreement terms in their Private Finance Initiative projects are made in accordance with the tenants of good faith and relational contracting recently supported by the Courts. 

10. Contracting authorities shall: 

1. co-operate with contracting parties to enable to performance of the Project Agreement; 

2. not take action preventing or hindering the performance of the Project Agreement; 

3. perform their role with integrity and fidelity to the bargain set out in the Project Agreement; 

4. collaborate with their contractual counterparties with trust and confidence involving a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and expectations of loyalty; 

5. not act in a manner which is dishonest, improper, unreasonable, 

opportunistic, contrary to the parties’ bargain and shared objectives in respect of the delivery of the Project up to the expiry of the Project Agreement, and/or otherwise regarded as commercially unacceptable by reasonable and honest people;

6. not act in an arbitrary, irrational, perverse and/or capricious manner (whether by taking into account matters which it ought not to take into account, by refusing or neglecting to take into account matters which it ought to take into account, or by coming to a conclusion so unreasonable that no reasonable authority could ever have come to it) when exercising any contractual power or discretion; 

7. act properly, lawfully, transparently and in an accountable manner with a collaborative, solutions-focussed approach; 

8. be mindful of wider statutory duties with regard to the ongoing and secure delivery of critical public services when making decisions and taking actions. 

11. The above should be in addition to an ongoing commitment to act in a manner consistent with the Nolan Principles.