6.3.1  Project Alliance Agreement (PAA)

A project alliance is a complex business relationship51. Its key value proposition is that Owners trade off their traditional contractual rights (under a 'risk transfer' contract) in exchange for NOPs bringing to the project their good faith in acting with the highest level of integrity and making best for project decisions that will drive the delivery of outstanding outcomes in all project objectives.

Concerns have been expressed53 that there is a potential risk of a 'disconnect' between the aspirational use of alliancing terms and practical application of these terms where a project becomes 'distressed'.

A variety of alliance agreements exist both within a state and across states. These agreements contain significant differences relating to key terms as noted below:

•  NOP profit margins: Sometimes fixed as a lump sum upon agreement of the TOC and sometimes variable as a percentage of TOC.

•  No blame clause: Sometimes unconditional and sometimes heavily modified or not used.

•  Dispute resolution: Sometimes silent and sometimes express provisions for resolution beyond the ALT (outside the alliance).

•  Incentive/penalty arrangements on time: Sometimes included, generally not.

•  Owner reserved powers: Significant variation in the extent of powers reserved by the Owner.

•  Reimbursable costs: Sometimes defined in the PAA, sometimes not.

•  Performance security by NOPs: Sometimes required, generally not.

Specific terms that are not clearly and consistently defined and therefore require further attention include:

•  no blame / no suit

•  good faith

•  best for project

•  collective assumption of risk

•  outstanding outcomes (game breaking)

•  risk/reward (commercial framework)

•  agree to agree

The development of a national standard form of legal alliance agreement would be of benefit to both Owners and NOPs. Alliancing is maturing as a form of project delivery and the development and use of standard legal forms are appropriate. For Owners, a properly and equitably drafted standard alliance agreement will go some way to addressing the possible commercial capability asymmetry discussed previously in this Study, and possibly reduce the potential for a lowest common denominator approach to terms, conditions and selection processes by Owners.

For both Owners and NOPs a standard form of agreement and selection processes with standard terms and conditions that may be modified to suit project specifics should also enhance transaction efficiency. It would also improve certainty around the legal language in the agreements compared to the aspirational intent. However, it needs to be noted that this is only a part solution and some terms such as 'good faith' and 'best for project' might prove elusive to a satisfactory definition. Further research and industry engagement is necessary on how best to provide this certainty.

The Study also noted that sometimes the same legal advisor acted for both the NOP and the Owner during the PAA negotiation. The rationale appears to be that this reduces overall costs and improves transaction efficiency, and because it is an alliance, the parties are so aligned that the legal agreement contains few contentious clauses. Hence, it does not warrant separate legal advice for the parties. This view is not universally accepted. The alliance does not formally exist until the PAA is executed. As noted elsewhere, the Owner and NOPs are almost certainly misaligned commercially until after the TOC is agreed. Furthermore, the PAA will inevitably contain various clauses that reflect the unique specifics of the project and the particular Owner's requirements for such matters as Reserved Powers. The NOPs may or may not be aligned with all of these requirements. As stated previously, an alliance is a complex business relationship; the parties (Owner and NOPs) require separate legal counsel to establish and formalise that relationship. Moreover, the Owner is obliged to discharge its accountability in regard to the public interest, and NOPs to their corporate boards and shareholders.