Dispute resolution is an essential part of guaranteeing the incentives to comply with long-term compromises. This is because contracts are incomplete and disputes may arise on interpretation or technical issues, the contracting parties could agree to specify clauses on dispute resolution mechanisms to handle these disputes. A dispute resolution procedure properly described in the contract (e.g. arbitration) is likely to be faster and less costly than going to a court to settle a controversy (Iossa, Spagnolo and Vellez, 2007). It is important to mention that dispute resolutions, unlike tariff changes-which are addressed within the PPP contract-, address changes to the contract itself. It is nearly impossible to draft a contract that can foresee all conditions and changes that will occur within the life span of the PPP. When conditions change there needs to be mechanism to revise performance; distributions of benefits, costs and risks; legal frameworks; economic shifts; etc., all acceptable to all parties involved. The mechanisms should settle the way in which communications, agreements and discussions are set. Without these dispute resolution mechanisms contracts can have the risk of being terminated or cancelled, which can be very costly to governments, private contractors and the public in general.
There are 5 types of resolution options applicable for long-term PPP contracts:
• PPP Oversight Committee Discussion (OCD)
• Mediation
• Arbitration/binding arbitration
• Litigation
• Termination
Under OCD there is intervention usually when contracts are at the implementation phase. If OCD fails to come up with an agreement between technical specialists and managers, the case is presented many of the times to Senior Managers and Owners of various parties (government and private), who are given a chance to review these issues within the context of the overall partnership relationship of the project. The OCD has the power to demand information sharing with each party involved in the disputed in order to discuss objectively possible solutions.
Mediation requires both sides to agree to appoint a qualified official, independent of either of the two parties who is knowledgeable about the PPP contract and the specific sector. Often mediators have legal backgrounds as lawyers or even judges. It is common that both sides will request that a mediator (or an arbitrator) to be independent from all national political and economical pressures, and therefore it is better to have a non-national from the country government, nor from the country of the contractor. The mediator listens to both side's testimonies and issues a recommended solution within a specific deadline. The limitation of mediation is that neither side is bound to accept mediator's recommendations.
Under arbitration both sides agree to appoint a single arbitrator or a panel of arbitrators to heart their case. The ICSID of the World Bank and other international and local bodies of arbitration specialists are becoming increasingly experienced in resolving disputes of PPP contracts in infrastructure. Under this mechanism disputes among the operator, regulator and government are standard and bound to arise under any contractual agreement (Guasch, 2005). Unlike mediation, where both parties are free to ignore the recommended solution of the mediator, arbitration is usually classified as "binding" - meaning that both parties commit up front that they will accept and abide by the findings of the arbitrator. Thus, it resembles an official court of law, but it has the advantage that it can be much cheaper and quicker than going through a formal litigation process in courts. Finally, arbitration panels can be set up in a matter of weeks or months.
Contract termination or cancellation is the extreme position when any agreement can take place due to i) extreme change in circumstances, or ii) when all channels for dispute resolution have been exhausted. There are two types of termination "for cause" and "no cause". "No cause" termination has usually detailed procedures for how all the accumulated costs of the project, including past investments, outstanding project-backed loans and current inventories will be allocated and how termination payments (including penalties) must be made. Large PPPs with project-backed loans require the full amount of their outstanding loans, plus fees, to be paid if the Government terminates the contract or buys out the PPP. In for cause termination there has to be an explicit circumstance that affects the payments and compensations in order to minimize the overall costs if PPP continues.
It is important to point out that the design of the dispute resolution mechanism is a key issue for the success of the contractual relationship, especially given the need to avoid costly service disruptions and the long-term nature of most PPP contracts. In addition it must prevent strategic behavior by the contracting parties because it can undermine the efficacy of dispute resolution mechanisms such as final offer arbitration, and inefficiently affect the risk allocation among PPP partners.