22 Sep 2009
Resolving PPP disputes through arbitration
You should strive for clarity when incorporating agreed traffic management measures into concession deeds.
Arbitration is an appropriate way to dealing with disputes in PPPs.
A dispute arising out of a Material Adverse Effect claim by a Australian toll road concessionaire has been decided in a recent arbitration. The tribunal dismissed the claim. This has important ramifications for State, equity and debt participants in economic infrastructure projects delivered using private finance initiatives.
First, the disputed claim exposed the importance of clearly identifying traffic management measures associated with the toll road. Agreed traffic management measures frequently form part of the concession arrangements. Their implementation is important for the concessionaire who considers them to affect the flow of traffic onto the toll road - and that traffic flow is central to the modelling upon which debt and equity rely.
Agreed traffic management measures are therefore simply a component of the assumptions which support the revenue stream. Once the assumption changes it will almost invariably lead to a claim that the revenue has also changed. In the arbitration the tribunal had to grapple with the proper interpretation of an agreed traffic management measure. The take-home message is to strive for clarity when these measures are incorporated into concession deeds.
Secondly, the dispute necessarily involved competing evidence as to the effect of a changed road network in the vicinity of the toll road. This was mainly by way of expert evidence. The dispute lent itself to an approach whereby the claimant's contentions, complete with supporting expert evidence, were delivered together. There was then a round of defensive contentions and evidence followed by reply. Arbitration is readily able to accommodate this type of approach.
Arbitration was also appropriate because the case involved the consideration of traffic engineering concepts and modelling of considerable complexity. The tribunal included an expert traffic engineer. This assisted the communication of these concepts and arguments to the tribunal.
In general, arbitration proceedings are private and parties can agree to make them confidential. Privacy means that the proceedings (and in particular the hearing) are not open to the public, so only the parties, their representatives and legal advisers have an unqualified right to be present. This is not the case with court proceedings where the general rule is that members of the public may attend the hearing and many of the documents associated with the proceeding are made publicly available.
Obviously governments and listed companies will have certain disclosure obligations which will mean that the outcome of an arbitration is unlikely to be confidential. However the privacy afforded by arbitration can assist to reduce the risk that details of the dispute will enter the public domain and the dispute will become politicised during the pendency of the arbitration. This can be of particular importance on concession contracts, as these require the government and the concessionaire to maintain a good working relationship for many years (sometimes up to 30 years). For this reason it is vital that political considerations do not make it harder than it otherwise might be to resolve disputes.
Arbitrations of this type can also require the tribunal to determine a remedy which falls outside the traditional realms of relief that can be granted (eg. changing the term of the concession). This was not required in this arbitration because the claimant was unsuccessful. The arbitration agreement nevertheless provided for the tribunal to decide the matter "in accordance with considerations of general justice and fairness", rather than according to law.
What this in fact means has only received limited consideration in Australia. However the phrase is often used interchangeably with "amiable composition" and "ex aequo et bono". These are two concepts which arose in continental Europe and consequently have received greater consideration in European jurisdictions.
In Australia it is lawful for an arbitration agreement to specify that the dispute be decided in accordance with considerations of general justice and fairness" or "ex aequo et bono or as amiable compositeur" rather than by law, As this flexibility is not available to the domestic courts it reinforces the preference to insist on arbitration to resolve these types of disputes.
Thanks to Jonathon DeBoos for his help in writing this article.
 Esso Australia Resources Ltd v Plowman (Minister for Energy & Minerals) (1995) 183 CLR 10.
 See Woodbud Pty Ltd v Warea Pty Ltd (1995) 125 FLR 346; Allmore Constructions Pty Ltd v Failli (2004) 20 BCL 65.
Section 22(2) of the Uniform Commercial Arbitration Acts, which govern domestic arbitrations in Australia.
 Article 28(3) of the UNCITRAL Model Law, which governs international arbitrations in Australia pursuant to the International Arbitration Act 1974 (Cth).