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Strategy Delivery and Commissioning

711.2. Dispute Resolution Procedures

Dispute circumstances are intrinsic in any PPP construction projects and could influence the success and failure of projects, thereby generating additional costs for all parties[27] [28]. PPP construction project issues, concerns, and disputes occur as a result of numerous factors such as technical, climatic, and logistical events, while resolution of PPP construction project disputes is influenced by people’s ideas, manners, activities, and cultural implications.[29]

Some issues arising throughout the lifetime of the PPP contract, especially during the Construction Phase, cannot be solved through issue management processes and will inevitably end up in dispute. Therefore, a proper mechanism to secure resolution is needed. In such cases, the private partner often argues that a usual litigation procedure through courts can be slow, expensive, and sometimes even misjudged or misguided, as there are not too many experts that are familiar with the complexities of PPP agreements. This party will also often argue that the arbitration process is favoured as the process is faster, even though the required resources can often be expensive and the same legal procedure needs to be followed.

Therefore, governments may legitimately argue that a proper court procedure is better as the need to build up a precedent base and the compelling case is far greater than in arbitrations. In this context, the courts can be provided with the opportunity to grow the expertise required to deal with the complexities of PPP agreements and to promote a measure of transparency regarding the interpretation and enforcement of PPP agreements. Ultimately, the choice will be country specific, taking into account factors such as the judicial environment and the state of the arbitration processes in that jurisdiction.

11.2.1. Binding and Non-Binding Determinations

Binding and non-binding determinations will be implemented differently in different countries as well as in different types of PPPs. As noted, some countries will prefer the litigation measures taken through the courts and some will have a preference to use Dispute Resolution Boards (DRB). Within the Construction Phase, the most usual method is to use the Dispute Resolution Board, which will usually provide a binding resolution in common law countries, but not in civil law countries.

Some countries have Dispute Avoidance Boards (DAB) in place, which can be helpful in resolving disputes throughout the life span of the project. The function of the DAB is dispute avoidance. DABs meet with the parties regularly during the delivery of a project to discuss emerging issues and help the parties to resolve them on a consensual basis. This method has been very successful in quickly resolving any issues, with minimal cost to the parties and the most productive outcome for the project. DABs also serve a decision-making function. Either party to a dispute can refer it to the DAB for a written determination.

One more option when dealing with disputes is a “fast track dispute resolution”. This method is often final and binding on all parties in common law countries (but not in civil law countries), with an option to be appealed. Fast track dispute resolution usually refers to the usage of an Independent Expert to establish facts, the determination of which is within the capability of a suitably qualified class of person.

Examples include the following:

· Calculation of any refinancing gains;

· Application of any inflation-indexation mechanism; and

· Application of the economic test to determine whether the proceeds of the material damage insurances should be applied to reinstate the project.

In these cases, an independent financial expert would be appointed through agreement by both parties.

11.2.2. Dealing with Step-In Situations

A step-in occurs when another party temporarily assumes some or all of the obligations of the private party. It may be implemented by either government step-in or lender(s) step-in.

11.2.2.1. Step-In by the Government

The South African National Treasury Guidance on PPPs (2004)[30] states that the government may want the right to take urgent action in respect of the services to avert a serious threat to an essential public concern (such as public health, safety of persons and/or property, national security, or the environment) or to discharge a statutory duty. The need for this right may be due to matters outside the project or due to a breach by the private partner of its obligations under the PPP agreement.

The step-in by the government usually constitutes short-term involvement where an urgent and necessary solution is needed. It also usually happens only in projects where core services are provided by the government such as the case of hospitals, schools, and so on.

In cases where there is no private partner breach, the private partner is relieved from the obligations that the government has taken on by stepping-in. This also relieves the private partner of any monetary penalties and/or deductions in respect of its non-performance of those obligations. Furthermore, if the step-in does not involve the private partner but affects its duties and obligations to perform its work, then the government must continue to make any required payments to the private partner when due — irrespective of whether the services under the agreement have been delivered or not.

If the step-in by the government arises due to the private partner’s breach, then the private partner should remedy any such breach at its own expense and should meet the government’s costs of stepping-in. If the breach by the private partner persists after the government has stepped-out, then the lenders have the right to step-in.

11.2.2.2. Step-In by Lenders

The lenders’ step-in occurs primarily when termination of the PPP agreement could occur. They step-in to ensure the continuity of the project if the private partner defaults under the PPP agreement or the financing agreements. In some countries, the government will sign a “direct agreement” with the lenders and the private partner, which creates a mechanism for the continuation of the project (in some cases, for only a limited period of time). This allows the lenders to remedy defaults following a threatened termination of the PPP agreement and the financing agreements.

The following steps are based on the main principles on which lenders implement a stepping-in approach.

· The lenders must voluntarily step-in to resolve the issue in question;

· The government must not suffer due to the step-in process, and the PPP contract must carry on according to the original set up, including any penalty deductions;

· The private partner must inform the lenders of all private partner’s defaults, non-payment of the penalties, and any other issues that my affect the project;

· The lenders may only exercise their step-in rights upon payment of all such liabilities to the government; and

· Agreed remedial work within the time frame attached to it must be supplied by the lenders in order to assist in rectifying the issues that the private partner needs to achieve.

The Jarvis Case Study from the UK (appendix A) provides an illustration of the use by lenders of their step-in rights.

 

[29] McInnis, A. (2003). New Forms of Non-Adversarial Contracting Focusing upon the New Engineering Contract: Keynote Lecture 1. Second International Conference on Construction in the 21st Century. “Sustainability and Innovation in Management and Technology.”

[30] South African National Treasury, First Issue. (March 2004), National Treasury PPP Practice Note Number 01 of 2004: Standardised PPP Provisions.

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