This background provides a summary of some common types of claims that can be made by a Project Company under a PPP contract, noting the ability to claim will depend on the specific PPP contract and the underlying legal framework, including the risk allocation agreed between the parties. For guidance on typical risk allocation arrangements between the Procuring Authority and the Project Company see the GI Hub’s PPP Risk Allocation Tool [1]. The purpose of this background information is to set the context of typical types of claims and some common types of claims procedures. A selection of common types of claims are outlined below and are detailed in this subsection:
- Claims for the Procuring Authority’s breach pf contract
- Material Adverse Government Action (MAGA)
- Change in law or relief from sanctions
- Force majeure
- Scope change
Claims for the Procuring Authority’s breach of contract
An issue of Procuring Authority non-compliance or breach of the PPP contract which negatively affects the Project Company’s ability to deliver its works or services will typically lead to a claim for additional time and costs. When a breach of a contract is defined as a default, then it could give also rise to termination rights. For example, failure to provide land or access to a site on time, failure to make a payment on time, failure to execute third party agreements on time, failure to secure relevant approvals, or failure to deliver interfacing infrastructure. Other actions that negatively affect the Project Company’s ability to deliver its works or services can also lead to a right to claim.
Major Adverse Government Action (MAGA)
There are several risks in a PPP project that have the potential to significantly impact a project but are not under the direct control of either party. For example, actions or inactions of a government agency (other than the Procuring Authority) that have a material adverse impact on the project and the Project Company. It is typical that the Project Company will want the Procuring Authority to retain this risk as the Procuring Authority is a government agency and has a greater degree of control over such events. Several jurisdictions describe this type of event specifically as a ‘Material Adverse Government Action’ or ‘MAGA’, and PPP contracts generally include provisions allowing the Project Company to seek relief with respect to the materialisation of a MAGA event. Other jurisdictions may have other mechanisms but will typically allow the Project Company to claim relief.
Change in law or relief from sanctions
A change in law or a sanction can also have an impact on the Project Company as the Project Company is required to adhere to the relevant rules and regulations of the jurisdiction in which it operates. Which party is required to pay any additional costs related to a change in law will depend on the risk allocation agreed in the PPP contract. The PPP contract will typically set out the circumstances in which a party can seek relief as a result of specific changes in law, and which changes in law will not carry with them any entitlement to relief. There may also be potential for the Project Company to benefit from a change in law, meaning that any compensation payments for change in law can flow in either direction. The 2017 version of the World Bank’s Guidance on PPP Contractual Provisions [2] provides detailed commentary on different types of change in law regimes.
Force majeure
The phrase force majeure typically refers to events that are outside of the control of the parties, could not have been anticipated and make it impossible for a party to comply with the PPP contract. Force majeure provisions are common in PPPs and what constitutes a force majeure event may be set out in the relevant PPP contract or in the relevant law (particularly in civil law jurisdictions). The occurrence of force majeure events are commonly approached in a manner which allows the parties to be relieved of their contractual obligations, as these events are unforeseen and out of the control of either party. The risk of an event’s occurrence is often shared between the parties. Force majeure events are rare. The data analysis indicates that 7% of projects suffered a force majeure event and most claims of force majeure were a last resort.
A Project Company is typically required to have insurance to cover certain force majeure events which are insurable. Insurance will be in place as a method to transfer the risk of the insurable force majeure to a third party insurer. The Project Company will typically pay any required insurance premium. The Procuring Authority should be aware of any insurance held by the Project Company or that should be held by the Project Company. The Procuring Authority should be aware of the effect of an event becoming uninsurable, where the Procuring Authority may need to effectively self-insure.
Scope change
There are typically two key types of scope changes that may require different approaches from the Procuring Authority to manage:
- Minor scope changes. Minor scope changes should be manageable within the scope change provisions of a PPP contract without having a significant impact on the agreed risk allocation.
- Significant scope changes. A significant proposed scope change may be more complex to assess and to implement. Procuring Authorities should be aware that the contract may impose limits on the ability of either party to initiate changes of this nature within the scope change mechanism set out in the PPP contract. Renegotiation may be the appropriate mechanism to use where such changes are required, but termination may also need to be considered. Significant scope change will also have the potential to affect the risk allocation agreed in the PPP contract. Renegotiation is detailed in Chapter 4 (Renegotiation) and termination is detailed in Chapter 7 (Default and termination).
Typically, either the Procuring Authority or the Project Company may request a scope change. The Procuring Authority will often have the right to direct a minor scope change. Such a change will be subject to agreement on time and costs and this will affect how the process is managed by the Procuring Authority. The specific procedure will depend on the PPP contract and the underlying legal framework.
Example - Accelerated airport expansion
The Queen Alia International Airport Expansion project in Jordan experienced a significant scope change when it became evident that passenger numbers were higher than had been predicted. The original plan had been to expand the airport in two stages, however it became clear that the first stage of expansion would not be sufficient to account for the passenger growth. While construction was continuing, both parties agreed that it would be more efficient to change the design so the expanded terminal was able to handle higher volumes than had been originally estimated. This was a situation where a clear benefit was visible and, with the extra revenue of higher passenger numbers, the negotiation was relatively simple. The incentives to both sides were aligned and a superior service to the users was achieved.
For more information, see the Queen Alia International Airport Expansion Case Study.
[1] Available at http://ppp-risk.gihub.org.
[2] Available at http://ppp.worldbank.org/public-private-partnership/library/guidance-on-ppp-contractual-provisions-2017-edition.
