The North West Rail Link PPP is proving to be a pioneering one: its use of a Dispute Avoidance Board, and its breakthrough on outsourcing determinations.
Dispute Avoidance Boards (DABs) are an effective mechanism to avoid and resolve disputes on major infrastructure projects, but up until now they haven't been used on a PPP project in Australia, or perhaps anywhere. This has now changed with the adoption of a DAB on the North West Rail Link PPP, on which we advised – and along the way, we found a way to deal with one of the few drawbacks of DABs.
What are DABs?
Usually three independent people are appointed to form the DAB by the owner and the contractor at the start of a project to solve problems that arise during construction. They'll typically have, between them, significant experience in delivering similar projects and project-related dispute resolution – a blend of engineering, project management and legal expertise.
Their first, and most important, function 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 is akin to proactive mediation, and has been highly successful in resolving issues on major projects before they become intractable disputes.
Alongside this is a decision-making function. Either party to a dispute can refer it to the DAB for a written determination. The DAB's determination can be binding, or non-binding, depending on what the parties agree when they establish the DAB.
Innovation in the DAB model – outsourcing determinations
On most Australian DABs, the determination is binding, unless a party appeals and refers the dispute to arbitration or litigation. While this can give certainty, its disadvantage is that determinations tend to result in a winner and a loser. The loser's resentment can then hinder the DAB's more important dispute avoidance role.
The parties on the North West Rail Link project have tried to address the problem caused by determinations by removing the decision-making function from the DAB. Instead, any determinations which might be required will be outsourced to an independent expert agreed upon by the parties or selected by the DAB, if the parties can't reach agreement on the expert.
By outsourcing determinations the parties hope that the DAB will be able to emulate the past success of other DABs in avoiding disputes, without being tainted by determinations or decisions which one party will almost certainly consider to be incorrect.
Adapting DABs to reflect the PPP structure
To understand why DABs have not been used on PPPs, we need to see how PPPs differ from traditional construction contracts in several key respects.
The government agency enters into a PPP contract with the SPV, who in turn enters into a traditional D&C contract with a D&C contractor, and an O&M contract with an O&M contractor.
The D&C and O&M contracts will typically reflect the risk allocation in the PPP contract, and will state that the relevant contractor can only get additional money from the SPV if the SPV can recover it from the government agency under the PPP contract. They will also typically allow the relevant contractor to control how the SPV conducts "pass through" claims, ie. claims under the PPP contract which concern corresponding claims under the D&C or O&M contract.
The loan agreement between the SPV and its debt financiers will typically require the SPV to notify the debt financiers of any claims made by the D&C or O&M contractor for extra time and/or money, and will prohibit the SPV from settling such claims without the consent of the debt financiers.
The first obstacle to using a DAB on a PPP is consent. Not only would the government agency, the SPV, the D&C contractor and the O&M contractor all need to agree to a DAB, the debt financiers' consent might be needed too.
Once the consent is obtained, the next obstacle is the nature of a dispute on a PPP. Most disputes in which government might become involved on a PPP project will be three-party disputes: the government, the PPP company and the D&C contractor. The PPP company's financiers will also have a legitimate interest in the outcome of any disputes. These additional parties change the dynamics of a normal DAB process, compared to a traditional D&C contract. A DAB on a PPP project would therefore need to reflect this contractual structure and these dynamics.
The traditional DAB model was adjusted on the North West Rail Link PPP to reflect this fact. In particular, although the DAB Agreement was between TfNSW, SPV and the DAB members, each of the D&C Contractor, the O&M Contractor and the Financiers were aware of, and effectively endorsed, the composition of the DAB. The D&C Contractor and O&M Contractor will also attend DAB meetings, in the ordinary course. A representative of the Debt Financiers must also attend DAB meetings, if requested by TfNSW.
DABs in PPPs – as easy as ABC?
The North West Rail Link PPP is proving to be a pioneering one in at least two ways.
First, it shows that DABs and PPPs are not mutually exclusive, contrary to some industry opinion. While we don't expect every new PPP to have a DAB, we do know that this proves that it's a realistic option for some, at least. With a bit of careful negotiation and planning, future PPPS can enjoy the benefits of a DAB evolved to meet their needs.
Secondly, the power of a DAB in avoiding disputes is preserved – perhaps even enhanced – by the outsourcing of its determinations to an independent expert, thereby insulating the DAB from the resentment of the loser.
These two breakthroughs will not only help the parties in the North West Rail Link PPP deliver the project more smoothly, but should also help drive the evolution both of DABs and PPPs.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.