CHAPTER 2 LITERATURE REVIEW
2.6. Conflict, Dispute and their Resolution in Infrastructure PPPs
of these behavioural dynamics in the context of infrastructure PPP projects needs to be done, with empirical evidence.
involve pooling of skills and resources from multiple stakeholders in the public and private sector in addition to sharing risks and responsibilities over a long period of time – the entire PPP project cycle (typically 20 – 30 years or more). This arrangement in itself is likely to result in a number of issues (De Schepper, Dooms and Haezendonck 2014; Osei-Kyei and Chan 2015).
Considering the multiple stakeholders involved in infrastructure PPP projects, a question may arise on which of the many parties is responsible for initiating DR on the projects (Chou 2012).
Also, infrastructure PPPs pool organisations with different interests, cultures, and in some cases opposing values on trust and cooperation (Ejohwomu, Oshodi and Onifade 2016). These differences may influence their response to disputes and conflicts. Moreover, it may be challenging to reconcile some differences especially the ones between the private and the public sector (Zou et al. 2014). While the government is focussed on delivering public services to beneficiary communities (among other functions), the private sector is interested in remaining competitive on the market, and maximising their profits, among others (Ng, Wong and Wong 2012). On some occasions, exclusion of the beneficiary communities from key decisions on infrastructure PPP projects has resulted in the communities opposing the project. This has led to disputes on some occasions (Henjewele, Fewings and Rwelamila 2013).
The DR process in infrastructure PPPs is typically an extended process that requires open communication and trust (Henjewele, Fewings and Rwelamila 2013). As highlighted in earlier sections of this thesis, the government or their representative is a counterparty to the PPP project contract, together with the private project company – typically in the form of an SPV. To facilitate successful project delivery, the SPV engages with equity investors, debt financiers, as well as D&C, and O&M companies (Regan, Smith and Love 2011). Furthermore, the government typically transfers most of the risks to the private sector with due consideration of their ability to manage them (Hodge and Duffield 2010). For instance, in Australia, unquantifiable social risks affecting the general public are typically allocated to the public
partner whereas commercial risks are mainly transferred to the private sector (Chung, Hensher and Rose 2010).
With the many parties / organisations that are typically involved in infrastructure PPP projects, multiple contracts between different project players are inevitable. These contracts often have differing DR provisions (Hayford and Mueller 2021). A typical infrastructure PPP project has an upstream PPP agreement between the government and SPV in addition to contractual arrangements between the SPV and contractors such as the head D&C and O&M contractors.
The contractors may also have separate contracts with a number of subcontractors. Under any of these contracts, disputes can arise at any point. For instance, a dispute between the SPV and an O&M contractor may trigger or be triggered by a dispute between the government and SPV.
This is commonly referred to as a “pass-through” or “linked” dispute. Hayford and Mueller (2021) illustrate that such a linked dispute would typically result in parallel DR processes between the SPV and the government agency, and between the O&M contractor and the SPV – unless the two separate contracts between the respective parties allow for consolidated DR processes, a scenario which had not been encountered by the authors on any PPP project in Australia. With the parallel DR processes, the possibility of different outcomes from the processes increases. For example, the outcome of the DR process between the government and SPV may differ from that between the O&M contractor and the SPV. This could potentially result in liability gap for the SPV especially if the claim by the contractor exceeds the settlement from the government. Hayford and Mueller (2021) highlight that to address this, Australian PPP project contacts usually include linked claim clauses and corresponding project relief provisions. Generally, a “linked claim clause” would require the SPV to pursue any corresponding claim with the government (in the upstream contract) that is inked to a claim received from a contractor or subcontractor (from downstream contract) following the DR provisions in the upstream contract. This is accompanied by a “suspension clause” that calls for suspension of the downstream DR procedures to allow progression of the upstream DR
processes. There also exists a “project relief clause” where the downstream parties are expected to be bound by the DR outcome of the upstream processes and emphasises that the downstream entitlements do not exceed the award to the SPV from the upstream DR process. However, if the SPV does not satisfactorily pursue the linked claim with the government, the validity of the suspension clause ceases, and the downstream parties are at liberty to progress the claim to the downstream DR process.
2.6.2. Sources of conflicts and disputes in infrastructure PPPs
The sources of conflicts and disputes in infrastructure PPP projects have generally not been widely studied – with most studies focusing on traditional infrastructure projects (Mahato and Ogunlana 2011; Mitkus and Mitkus 2014; Ejohwomu, Oshodi and Onifade 2016). While investigating the major causes of disputes on dam construction projects in Nepal, Mahato &
Ogunlana (2011) concluded that ineffective environmental assessment as well as inadequate public involvement and consultation from early stages of the project were the major causes of disputes. Mitkus & Mitkus (2014) stated that the major cause of disputes in infrastructure projects is poor communication between the contractor and the client. Ejohwomu, Oshodi &
Onifade (2016) listed 64 causes of disputes in infrastructure projects – highlighting the three biggest ones as poor financial forecasts by the client, insufficient project funds, and bad relationship between the project implementation team and the general public.
Osei-Kyei et al. (2019) reviewed literature on the root causes of conflicts and disputes in infrastructure PPPs as summarised in Table 2.2.
Table 2.2: Summary of sources of conflict in infrastructure PPPs
Cause of conflict
(Chan et al. 2011) (Cheung and Chan 2011) (Ng, Wong and Wong 2012) (Tang et al. 2013) (Babatunde et al. 2015) (Osei-Kyei and Chan 2017b)
Unfair risk allocation x
Lack of a clear understanding of the parties’ roles and responsibilities x
Unexpected tariff changes x
Excessive contract variations x
Political interference x
Ambiguous goals and objectives x
Inadequate compensation to displaced persons x
Unreliable service delivery x
Delay in rectifying defects during service delivery x
Adopted from Osei-Kyei et al. (2018), p.3
Based on empirical data collected in China and Ghana, Osei-Kyei et al. (2019) concluded that the highest-ranking causes of conflicts and disputes in infrastructure PPPs were unfair risk allocation, delayed decision-making by parties, inadequate understanding of parties’ roles and responsibilities, political interference and absence of proper communication channels.
In a case study analysis of the London Underground PPP project, Currie and Teague (2015) determined that the major sources of disputes in infrastructure PPP projects include: varying interpretation of contractual terms by each party, amendments to contractual requirements, misinterpretation of specific standards, and fault attribution when a performance defect arises.
Although some researchers (Raisbeck, Duffield and Xu 2010; Chasey, Maddex and Bansal 2012) have commended the PPP delivery model for its superior cost and time efficiency, McCann, Aranda-Mena and Edwards (2016) pointed out that delays in project implementation, cost overruns and related penalties such as liquidated damages, lead to disputes on infrastructure PPP projects. Siddiquee (2011) also stated that some infrastructure PPPs become unpopular to the general public in Australia due to inaccurate traffic forecasts and the subsequent high toll prices charged to road users. Some examples of such projects include the Sydney Cross City Tunnel and the Sydney Airport Railway Link (Zou, Wang and Fang 2008).
It would seem that due to the limited literature available on sources of conflicts and disputes in infrastructure PPPs, there is need for more empirical research to build the knowledge base.
2.6.3. Current DR practices for infrastructure PPPs
There are several dispute resolution techniques that are commonly used on infrastructure PPPs.
Generally, the DR styles that are recommended for any given infrastructure PPP project are specified in the contract documents and emphasis on their application is stressed unless it is
absolutely necessary to deviate from the contract stipulations (Harisankar and Sreeparvathy 2013). Depending on the circumstances, the DR methods of conciliation, litigation, negotiation, mediation or arbitration are applied on infrastructure PPP projects (Osei-Kyei et al. 2019).
These methods are sometimes applied through other processes such as independent expert determination, dispute boards, or adjudication (UNESCAP 2011; Uygun 2015). Similar to the arrangements in other construction projects, it is usually emphasised that disputes are resolved amicably, before adversarial techniques are employed. Amicable DR techniques may include mediation, negotiation, and conciliation. On the other hand, arbitration and litigation are generally regarded as adversarial techniques.
During negotiation, parties engage in consultation and direct dialogue to deliberate on issues in a peaceful manner. Negotiation is usually one of the first DR steps in infrastructure PPPs because it facilitates amicable resolution of disputes and preserves working relationships (Osei- Kyei et al. 2019). However, the outcome of negotiation proceedings is not usually legally binding as it is not enforceable in courts of law (Chan and Suen 2005). Thus, if parties are dissatisfied with a negotiation outcome, they can escalate the matter to another DR approach, as witnessed in South Korea on the Yongin Light Rail Project (Jang et al. 2018) where arbitration was sought.
Mediation is like negotiation; but, during the mediation process, a mediator who is considered as impartial helps the parties involved in a dispute to realise mutually acceptable outcomes.
Similar to negotiation, the mediation outcome is usually not enforceable in courts of law (Harisankar and Sreeparvathy 2013). Likewise, during conciliation, a neutral party is appointed to facilitate the DR process. During both conciliation and mediation, the neutral parties may have joint meetings with the parties involved in dispute or privately meet each of them to discuss the issues (Hinchey 2012). Some authors argue that there is hardly a difference between conciliation and mediation further highlighting that the two terms are interchangeably used to refer to assisted negotiation (du Preez, Berry and Oosthuizen 2010). In some countries such as
South Africa – whose legal system springs from that of Holland and England, a non-binding ruling is usually expected from mediation especially when the mediator has not managed to lead the parties towards a mutually agreeable solution at the discretion of the parties in dispute.
However, in situations where there is no expectation for the mediator to make a recommendation, the process is regarded as conciliation (du Preez, Berry and Oosthuizen 2010).
During arbitration, an arbitrator – who is considered as a neutral third party reviews the cases fronted by the different parties involved in a given dispute and makes a ruling. The parties involved in dispute are not necessarily required to work towards a mutually agreeable settlement. Instead, they argue their cases and an arbitrator makes a decision (Osei-Kyei et al.
2019). It is worth noting that the regulations governing arbitration may vary in different countries. As such, many infrastructure PPPs where project parties originate from different countries usually utilise international arbitration (Gaillard 2015). The ruling from arbitration may or may not be binding depending on the contract stipulations. In situations where it is binding, the process of enforcing the ruling is specified in the project contract documents.
Unlike litigation, arbitration offers the advantage of allowing disputes to be resolved outside courts of law (Marques 2018). However, arbitration has been cited to cause significant delays and accompanying cost overruns on some projects such as the Nathpa Jhakri Hydro-electric Project in India. On this project, it was stated that arbitration procedures delayed the project by approximately three years (Government of India 2008).
Litigation involves a judicial system where decisions made by the court are legally binding for all parties involved. Normally, it is considered as the last DR option in infrastructure PPP projects (Marques 2018). Litigation typically happens in courts of law and is led by a judge or group of judges who decide in accordance with the law and the rules of justice (Harisankar and Sreeparvathy 2013). Because of this, the litigation panel has on some occasions been accused of approaching disputes from a perspective of general lawlessness and procedure impropriety
such as when parties abuse their powers, act against general principles of natural justice, or do not fulfil their contractual obligations, among others. In instances where disputes require specialist technical knowledge that is not covered by the combined competence of the jury, the court’s jurisdiction may be restricted unless the illegalities of the case leading to the dispute are apparent (Zheng et al. 2021). This was seen in a court case in India involving Uttar Pradesh Power Corporation, and NTPC Ltd and others. On this case, the Supreme Court noted that cases associated with determining tariffs were outside the competencies of the jury because they required knowledge of the law, engineering, project and contract management, finance, commerce, and economics (Harisankar and Sreeparvathy 2013).
Dispute boards have become popular on construction projects – including infrastructure PPPs, in the recent past (Dorgan 2005). In infrastructure PPPs, a variation of dispute boards has been applied. For instance, a dispute board with both conflict avoidance and dispute resolution functions was constituted on the Sydney CBD and Southeast Light Rail PPP project (Australia).
However, on the Sydney Metro PPP (Australia), the dispute board was constituted primarily for the conflict avoidance function (Worthington et al. 2017). Of recent, dispute boards with both avoidance and resolution function are encouraged on infrastructure PPPs. Dispute boards characteristically comprise three members that are appointed in the early stages of the project.
Typically, members of dispute boards have considerable experience in implementing similar projects, as well as aspects of DR. They are usually well-respected individuals with combined expertise in the law, finance, contract and project management, as well as engineering. The ruling of dispute boards can be interim-binding, non-binding, or final and binding – depending on the terms set by the project parties when the dispute boards are set up. As such, it is not rare for project parties to challenge a dispute board’s ruling and escalate matters to litigation or arbitration (Chapman 2009).
Adjudication can either be statutory or contractual. In statutory adjudication, a statutory authority which is mandated to adjudicate between parties in dispute. The enforceability of a
ruling from adjudication depends on the individual contract. In some cases, the outcome from adjudication is final and legally binding whereas in other cases, an adjudication ruling can be contested. When the latter happens, another DR approach such as litigation or arbitration can be pursued to override the ruling from adjudication (Sheridan 2009).
The DR techniques described above are mostly applied on disputes involving parties with contractual agreements in the infrastructure PPP project set-up, but not other key project stakeholders like trade unions, civil society groups or beneficiary communities of the project.
For disputes that involve the latter groups, open dialogue through consultation and engagement with their leaders is usually recommended.
On most infrastructure PPP projects, the project contract documents specify the order in which DR procedures should be pursued when disputes arise, and subsequent procedures are applied when the preceding ones fail. Typically, the order of application of DR techniques is as follows:
(1) negotiations between the parties’ senior executives or their nominated representatives; (2) mediation by an agreed unbiased party; (3) independent expert or panel review (or dispute board); (4) arbitration; and (5) litigation (Moseley 2020). However, this order may vary from project to project even for projects implemented in the same country as demonstrated by Sinha and Jha (2020). Referring to infrastructure PPP projects executed in India, Sinha and Jha (2020) noted that the DR-related contract provisions for the Durgapur Express Project, National Highway (NH) (km 581 to km 646) specified the first step of DR would be conciliation involving the chairperson of the National Highways Authority of India (NHAI) and the concessionaire chief executive officer (CEO). In the event that the dispute was not resolved within 15 days of starting the conciliation process, legally binding arbitration would commence.
In the same way, the contract documents of the Bhubaneshwar-Puri project (km 0.00 to km 59.00) specified conciliation as the first step of DR, followed by arbitration. They also allowed for adjudication as a substitute to arbitration. In the event that adjudication was done, the ruling from the adjudication process would not be legally binding and it was acceptable to appeal to
courts of law. On the other hand, the DR clauses of the project from km 80.00 to km 135.74 on NH 7 specified the first stage of DR as mediation. If the dispute was not resolved through mediation, it would be recommended for settlement between the chairperson of NHAI and the concessionaire board of directors. In the event that settlement was not successful, binding arbitration would commence. By contrast, the DR clauses of the Surat-Dahisar section of NH 8 (km 263.00 to km 502.00), and the Varanasi-Aurangabad section of NH 2 (km 786.00 to km 978.40), specified that disputes would be resolved in line with a DR procedure whose details were not obvious (Sinha and Jha 2020).
2.6.4. Issues affecting DR in infrastructure PPPs
Some of the issues affecting DR in infrastructure PPPs are linked (Cruz, Marques and Cardoso 2015; Currie and Teague 2015). For instance, an inadequate communication plan can be linked to ambiguity on oversight responsibilities for the actions of some of the infrastructure PPP projects parties, which can also be traced back to insufficient detail on DR protocols in regulatory documents for infrastructure PPPs (Currie and Teague 2015). Also, disharmonised training in DR, exclusion of behavioural considerations during DR, and inactive involvement of project staff in DR can be linked to poor collaboration (Musenero, Baroudi and Gunawan 2023). In addition, some issues have an impact on multiple DR approaches. This is unsurprising considering that DR techniques are usually implemented sequentially when a dispute is not resolved after application of the preceding ones (Moseley 2020). Details of the issues affecting DR in infrastructure PPPs as well as the DR practices they affect are discussed in subsequent paragraphs.
Public partner’s oversight-related issues, affecting negotiation
In most infrastructure PPPs, the government is a partner, regulator as well as manager of the PPP contracts (Hodge 2005). The issues that are associated with this set-up were experienced in the United Kingdom on the London Underground Project (Currie and Teague 2015). This project had a DR system consisting of two processes – fault attribution and dispute resolution.
As part of the fault attribution process, the public partner – London Underground (LU), computed and reviewed the private companies’ penalties and bonuses on a daily basis and attributed responsibility as appropriate; the private companies were allowed 5 days to review LU’s attributions. LU’s double role as partner and attributor caused a discrepancy in the DR process. For example, LU was reported to have hesitated to participate in joint negotiation- based performance improvement activities that were initiated by one of the private partners. LU is also said to have declared that while they were responsible for overseeing the performance of the private companies, they were not responsible for reviewing their own performance (Currie and Teague 2015). This exhibited a sense of an unequal partnership that can be likened to a contractor-client relationship (Forward 2006). Also, while it was established that LU reviewed the performance of the private companies, the DR procedures were not specific on the party responsible for reviewing LU’s performance. Similarly, on the Spencer Street Station Redevelopment project in Australia, the negotiation style of the government was reported as being inspired by their perception of an unbalanced partnership with the private entities of the PPP contract. This was likened to a slave-master relationship (Hannan 2004; McCann, Aranda- Mena and Edwards 2016).
Regulatory framework and legal issues, affecting all DR techniques
Many country-specific infrastructure PPP regulatory documents do not detail the recommended DR protocol when dispute is encountered on any given project. In India, for instance, the PPP rules that were sighted at the time of writing this thesis do not give elaborate DR guidelines for protecting infrastructure PPP parties from time-consuming and costly litigation (Harisankar and Sreeparvathy 2013). Equally, while the Australian National PPP Guidelines stress the significance of relationship management and DR, they do not elaborate on the process of achieving them (Department of Infrastructure and Regional Development 2015). Likewise, the regulations governing infrastructure PPP delivery in Nigeria do not provide for alternative dispute resolution (ADR) methods in place of litigation (Uwaegbulam 2016) despite ADR