The following guidance outlines the key issues that should be considered when approaching a dispute in relation to a PPP contract using some select common dispute resolution mechanisms.

A. Understand the rights and obligations of the Procuring Authority and use contractual provisions to protect the rights of the Procuring Authority rather than as punitive measures

Disputes can be created by issues associated with complex contractual terms including the agreed risk allocation between the parties, claims for compensation or additional time, application of payment deductions, Procuring Authority obligations and other procedures and defined time requirements. These issues can be exaggerated where the parties do not have a strong fundamental understanding of PPPs and the specific terms of the relevant PPP contract. Having a strong fundamental understanding of the agreement between the parties is essential.

The Procuring Authority should be aware of the legal frameworks that govern the relationship between it and the Project Company. There may be legal principles in both civil law and common law jurisdictions that are relevant to what is otherwise agreed between the parties in the PPP contract. A specific example of this is the obligations of a regulator acting as a Procuring Authority. This has been a difficult issue in the energy sector where the level of discretion granted to the regulator in the setting of tariffs has caused issues to Project Companies. The Procuring Authority should be aware of all its obligations under the PPP contract and under the applicable laws.

Strict and unfair enforcement of contractual provisions can also lead to disputes. For example, a strict reading of PPP contracts as they relate to claims and payment deductions. A claim can refer to a claim for compensation or additional time. Management of clams is detailed in Section 3.5 (Claims). A Procuring Authority will retain some risk under a PPP contract. The Procuring Authority may create larger issues for a project if it draws out and fails to manage appropriately any claim with respect to those risks.

Payment mechanisms and deductions are typically linked to performance and agreed during the procurement phase. Payment deductions should be applied as was agreed in the PPP contract. Performance monitoring and the application of payment deductions detailed in detail in Section 3.2 (Performance monitoring).

The Procuring Authority should use payment mechanisms and deductions to incentivise the Project Company to perform in an appropriate manner. An issue can arise if there is an unnecessarily strict enforcement of payment deductions in an inconsistent or unfair manner. For example, the Procuring Authority may be tempted to strictly apply a payment deduction against the Project Company with an unrelated goal in mind, perhaps to create leverage to resolve a wider dispute.

As well as being caused by the action of the Project Company, a project can also be negatively affected by the actions of a Procuring Authority. A Procuring Authority managing its budget deficits may be incentivised to apply payment deductions in a very strict manner. For example, this subject arose in interviews in the UK where local authorities had had their budgets cut and were perceived by the private sector to be under pressure to interpret all obligations and performance standards very strictly.

In some jurisdictions this behaviour may fall foul of general legal obligations to act in good faith. In addition, such behaviour risks damaging the relationship between the parties, and increasing the costs of disputes, which will have a harmful effect on the project in the longer term.

The Procuring Authority may decide that certain procedures are unworkable and that it will formally waive or amend the unworkable contractual requirements and agree to a less formal and more workable process. Waiving rights under a contract should only be undertaken after receiving legal advice, to ensure an appropriate waiver is effected (i.e. that the Procuring Authority is waiving only what it is intending to waive and not waiving any other rights under the PPP contract).

B. Monitor the performance of the Project Company to be aware of potential issues and to mitigate the risk of disputes

C. Be receptive to claims and settle them early where it is appropriate to do so

D. Treat disagreements and disputes objectively: Do not allow a poor relationship with the Project Company to affect the approach taken to a dispute and do not let the existence of a dispute affect an otherwise positive relationship

E. Clarify ambiguous and unclear contract drafting before it leads to a dispute

F. Ensure settlement agreements are prepared with appropriate legal input to ensure the dispute or disagreement is unambiguously resolved

G. Consider the full costs of escalating a dispute and the chosen dispute resolution mechanism


Key advantages

  • Can avoid time and cost implications of dispute resolution mechanism escalations

  • Can resolve disputes faster, leading to a smaller impact on the relationship between the parties

  • The parties themselves have the discretion to agree on the appropriate resolution

Key disadvantages

  • If a Procuring Authority is not adequately prepared, negotiation can result in an outcome that reduces value for money

  • Can waste time when the parties are unlikely to agree to a mutually acceptable outcome because their views are too far apart

  • Has the potential to detriment an otherwise positive relationship where there is no progress being made


H. Actively seek out negotiated outcomes to disagreements and disputes, as such outcomes have the potential to be significantly more efficient

I. Appropriately prepare for and assemble adequate resources before entering into negotiation

J. Consider associated private partners (including the construction contractor) in the resolution of disagreements and disputes related to them


Key advantages

  • Lower cost than court proceedings or arbitration and is less likely to damage relationships

  • Confidential

  • More structured than bilateral negotiations

  • The introduction of a third party can help to bring new ideas to the disagreement as well as objectivity

Key disadvantages

  • May not lead to a final decision. If parties are far apart to begin with can be a waste of time

  • More expensive and time consuming than negotiation


K. Consider mediation where a more structured approach to negotiation is required

L. Appoint the right mediator for both parties

Dispute Resolution Boards

Key advantages

  • Decisions can be binding or non-binding. Can make recommendations or determinations.

  • Can guide the parties from the beginning of a disagreement

Key disadvantage

  • Costs are not insignificant and are typically fixed, irrespective of whether a dispute arises during the project term


M. Utilise Dispute Resolution Boards where available

N. Set up the Dispute Resolution Board before a dispute arises, but also consider the changing needs of the Dispute Resolution Board for the project

O. Appoint the right Dispute Resolution Board for both parties

Expert Determination

Key advantage

  • Can resolve disputes quickly and in a cost-effective manner

  • A determination will typically be contractually binding subject to certain exceptions

Key disadvantage

  • Only appropriate for certain matters of a technical nature, and not for matters which require the provision of evidence

  • Determination will not be as enforceable by a court like a court decision or arbitral award


P. Where available consider expert determination for disputes that are of a technical nature

Q. Appoint the right expert for expert determination

Court proceedings

Key advantage

  • Provides a final determination

Key disadvantages

  • Is an adversarial process and may lead to a deterioration in relationships

  • Typically the most expensive and time consuming of all dispute resolution mechanisms


Key advantages

  • Provides a final determination

  • Customisable to parties’ preferences

  • Can be more efficient in terms of time and costs than court proceedings

Key disadvantages

  • Is an adversarial process and may lead to a deterioration in relationships

  • Can be perceived by members of the public to lack transparency (if conducted in private and the results are confidential)


R. Consider the full implications of moving a dispute to court or arbitration

S. Choose the right arbitrator(s)

T. Prepare to provide detailed evidence when moving a dispute to court or arbitration

Attachment: Dispute negotiation checklist

  • What are the Procuring Authority’s objectives for the negotiation?

  • Be clear about what your understanding of the underlying cause of the disagreement or dispute is.

  • Consider the Project Company’s understanding of the underlying disagreement or dispute.

  • What are the strengths and weaknesses of the different sides of the disagreement or dispute?

  • A key objective for the Procuring Authority should be to reach a common understanding on the underlying cause of the problem leading to the disagreement or dispute, including any associated legal and technical issues.

  • What are the skills needed to assess the underlying cause and carry out the negotiation (legal, financial, technical, insurance, tax, other)?

  • The Procuring Authority may need to appoint external advisors.

  • Consider the effect any decision may have on all interested parties.

  • Assess who should be involved in the negotiation. It may be beneficial for the construction or operations contractor to be present.

  • Depending on the significance of the dispute and settlement options, the Procuring Authority may need to seek approval from another relevant government department.

  • Are negotiators on all sides sufficiently empowered to resolve the matter?

  • What are the strengths and weaknesses of the participants in the negotiation?

  • Once technical and legal aspects have been clarified, the commercial aspects can be properly evaluated. Commercial aspects should be considered on both short-term and long-term basis.

  • Evaluate the Procuring Authority’s ‘worst case scenario’ option, preferred option and compromise option.

  • Where limited information is available (or the cost implications of fully understanding the underlying issue are great) the parties should attempt to reach a settlement based on the information available.

Questions & Answers

View our list of previous questions and answers or submit a question to our PPP Contract Management team.