Most disputed claims on PPPs are initiated by one of the SPV's contractors or sub-contractors. The D&C contract and the O&M contract will typically contain 'linked-claim' provisions that:
• require the SPV, if it receives a claim from its contractor that arises out of an event that entitles the SPV to bring a corresponding claim against government, to advance the corresponding claim against government, and comply with the directions of the relevant contractor in respect of the conduct of the corresponding claim;
• suspend the contractor's right to pursue its claim against the SPV, so long as the SPV is complying with the directions of the contractor in respect of the corresponding claim against government; and
• limit the SPV's liability upon its contractor's claim to the amount the SPV can recover from government under the PPP contract, and indemnify the SPV against any costs it incurs in prosecuting the corresponding claim against government, but only if the SPV complies with the directions of the relevant contractor in respect of the corresponding claim.
The PPP contract will also often contain a provision dealing with linked-claims that requires the SPV to ensure that any claims initiated by its contractors are made in good faith and are not in excess of their entitlements, and to advise government in writing of how the SPV responds to the contractor claim. Often, government will also refuse to engage directly with the contractor in relation to the claim, on the basis that government's contract is with the SPV, and it is up to the SPV to manage its contractors.
Unfortunately, these arrangements leave the SPV in an invidious position. If it simply makes a corresponding claim against government it could find itself in breach of its obligations under the PPP contract, especially if it considers its contractor's claim could be in excess of the contractor's entitlement. But challenging its contractor's claim could undermine its ability to maintain a corresponding claim against government.
The SPV rarely has equity reserves needed to pay liabilities to its contractors, in excess of those that were forecast. Accordingly, it needs the benefit of the limitation of liability and indemnity in the linked-claim clause in its downstream contracts. Without these, the SPV could end up insolvent, if its liability to its contractor is determined to be greater than government's liability to the SPV - an entirely plausible outcome if the disputes under each contract are determined separately. Indeed, its legal costs alone could send it to the wall, if not paid by the contractor. Accordingly, it has no choice but to advance the corresponding claim, even if it considers the claim to be beyond the contractor's entitlement.
One solution sometimes suggested is for the SPV to be more strongly capitalised, to enable it to cover liabilities it incurs to its contractors as a result of actions it takes independently of government to manage its contractors. But the liabilities it could incur if it wrongly delays its D&C contractor could be massive. And more equity relative to debt would have increased the SPV's cost of finance, resulting in it requiring a higher service payment or capital contribution from government. This could be the difference between winning and losing the bidding process for the project. Would government really have been prepared to pay significantly more, to contract with a SPV that has the capacity to manage its contractors independently of government? Usually not.
A better solution is to accept the pass-through nature of the SPV as the inevitable consequence of a cost effective, limited recourse debt structure - with the rigour and risk transfer it brings to a PPP project - and to develop a dispute resolution process that brings together the parties with the real interest in the outcome of the dispute (i.e. government and the relevant contractor).
A three-party CEO negotiation process, with government and the relevant contractor leading the discussions, and the SPV mostly observing, would be a good start. Even better would be a Dispute Board that facilitates regular discussions between the 3 parties, with a view to helping the parties to resolve their issues amicably. Similarly, for disputes that can't be resolved by agreement, contractual requirements to consolidate formal legal proceedings (whether arbitration, expert determination or court litigation) in respect of linked-claims would be a more pragmatic approach to the resolution these disputes.
For disputes that also involve others, such as a subcontractor to the D&C or O&M contractor, the same principles would apply - involve them in the negotiations or discussions aimed at amicably resolving the issue, and require separate legal proceedings to be consolidated.