As in any complex contract, especially those of a long-term nature, it is not possible to foresee every event that may happen and affect a PPP contract. Therefore, changes will happen and this can often lead to disputes.
Also, it is logical that some provisions in the contract may require interpretation in some of their aspects, and it is also logical that differences and discrepancies will emerge on issues that require an assessment of costs or a valuation (see box 5.35 for some samples of typical dispute matters).
Governments usually reserve for themselves the right of interpretation of the contract, and the private partner has in such cases only the right to appeal to a court (administrative courts in civil code countries). This implies costly processes and endangers the continuation of the service provision.
In this context, it has become common practice to regulate "dispute resolution procedures" in the contract or create a "dispute resolution board", which is discussed below.
The main mechanisms used worldwide to solve disputes (not all of them available in any particular country) are as follows.
- Sector regulator.
- Judicial system.
- Mediation (which may be considered an option for direct negotiations under a Dispute Resolution contract system).
- Dispute Resolution Board (comprising an independent expert or, better and more frequently, a panel of experts).
- Arbitration: domestic arbitration or international arbitration (for example, through the International Chamber of Commerce [ICC], or the International Centre for Settlement of Investment Disputes [ICID] ). An example of the role of arbitration in a relevant project may be seen in Ontario Highway 407 Toll Road.
In some cases (especially in civil code countries), the result of a dispute resolution process outside the judicial system will not be binding on either party. Therefore, if the parties wish to avoid escalating the conflict to the courts, they must negotiate an agreement based on the result of the dispute resolution process.
Some civil code countries have, however, opened the door to arbitration panels or dispute resolution boards consisting of independent experts whose opinion will be binding on both parties (for example, in Uruguay).
In some countries and for some sectors, disputes are resolved by an independent regulatory body. The private partner may have concerns over the regulator’s independence.
This PPP Guide considers it good practice to include specific provisions in the contract regarding dispute settlement. This should include a dispute resolution process (DRP) and a dispute resolution board (DRB) — even if the decision of such a board is non-binding and will only be implemented when and if both parties accept the result. This is because their inclusion may save significant time and is inherent to the spirit of a PPP.
A proper DRP will first encourage and facilitate the search for a directly negotiated agreement (through high level negotiations between the parties). I initial negotiations do not resolve the dispute, mediation may be available as an option. “Mediation involves negotiation with the help of a neutral third party. The mediator's role is to facilitate negotiations without expressing a view on either party's position” (PPPIRC).
Typically, a DRB will include at least two independent experts, one designated by each party, and another designated by mutual agreement or by the agreement of the two original experts. In some processes, the third expert is only called in case of disagreement between the two nominated experts.
When drafting the dispute resolution processes in the PPP contract, it is important to ensure that the provisions are appropriate and enforceable in the relevant jurisdiction by checking with legal experts. The website of the PPP Infrastructure Resource Centre provides a useful checklist for that analysis. The dispute resolution process in the contract may also have to be consistent with requirements of treaties entered into by the relevant government (for example, investor-state dispute resolution processes). These requirements should have been identified during the legal due diligence for the project.
Some sophisticated markets include an ability in the DPR for the general public (users) to trigger a dispute resolution with the government, or the private partner through the government or an ombudsman.
In addition to containing an appropriate dispute resolution process, the following issues must also be considered to ensure that potential bidders can be confident in the effectiveness of the dispute resolution process.
- Unless such a waiver already exists under the relevant PPP law, the contract should include a waiver by the government of any immunity from claims/prosecution under the contract. In the absence of such a waiver, potential bidders will not bid since they cannot be confident that the government will meet its obligations under the contract.
- The location of the dispute resolution may be an issue for international investors, who may be concerned that they will not get a fair hearing in the host country (especially in EMDEs), regardless of the form of dispute resolution used. However for governments, having the dispute resolution occur in another country may be an unacceptable dilution of their national sovereignty. A realistic approach to this issue is required, as potential bidders will not bid if they are not confident of the integrity and fairness of the dispute resolution process.
 See reflections on Dispute Resolution Systems Available in PPPIRC, at http://ppp.worldbank.org/public-private-partnership/legislation-regulati...
 ICSID is an autonomous institution that forms part of the World Bank Group, established under the “Convention on the settlement of investment disputes between States and nationals of other States”. http://icsid.worldbank.org/ICSID.
 See case study 4 in Paving the Way (WEF, 2010), page 98.
 See Dispute Resolution Checklist and Sample Wording in http://ppp.worldbank.org/public-private-partnership/ppp-overview/practic....