Moving a dispute to court or arbitration is an adversarial process and should be considered as a last resort. As such processes are adversarial they are potentially damaging to the reputation of the parties. An advantage is that the processes will deliver a binding decision delivered by a third party and so may prove to be more efficient where the parties are unlikely to otherwise agree to a mutually acceptable resolution. The outcome of such proceedings is binding and can typically be enforced through the courts, subject to rights to appeal the decision (which will depend on the forum and the jurisdiction).
Arbitration can be agreed in the PPP contract as an alternative process to court proceedings although the parties may still have access to the court systems for specific issues (such as issues requiring immediate court intervention). The parties may not always be able to agree to arbitration as an alternative to local court proceedings in a particular jurisdiction. Additionally, individual jurisdiction's applicable laws may not allow for disputes to be decided in a forum other than a local court.
Arbitration is often preferred by private partners because it is perceived as being more neutral than the use of local courts particularly in relation to contracts with government entities. It may also be a non-negotiable requirement for lenders as lenders will be less willing to accept the risks associated with local courts.
Arbitration is more customisable than court proceedings, which can have the effect of making it faster and cheaper. For example, arbitration may allow for the streamlining of document disclosure processes, as compared to more stringent court requirements. There is ongoing debate that typical arbitration procedures have, in fact, become more time consuming.
Some disadvantages of arbitration over court processes are that the parties have to pay the costs. Arbitration can also be less fexible than court proceedings for multi-party disputes. Disputes in PPPs are often multi-party disputes as significant risk is passed through the Project Company to its contractors.
Arbitration is also different to court proceedings in that it is conducted in private and often confidential. This will typically benefit the Project Company, whereas it may be a positive or a negative attribute for the Procuring Authority. On the positive side the Procuring Authority may see the benefit of keeping any spurious disagreement around the project out of the public sphere and the media. However, there can be negative implications for the Procuring Authority if the public perceives the confidential nature of arbitration as a hindrance to government transparency. In several jurisdictions court proceedings are preferred due to their higher level of transparency.
The data shows that 39% of disputes were settled in court as opposed to 22% through arbitration. It should be noted, however, that this is based on a relatively small sample size. Only 42 projects were found to have data on court proceedings and as arbitration is conducted in private and is often confidential the results may be skewed, indicating a higher incidence of settlement through court proceedings. Within PPP contracts arbitration was a common and widely used dispute resolution mechanism. Arbitration provisions were in 56% of the PPP contracts reviewed globally, with 54% of the PPP contracts adopting domestic arbitration and 17% adopting international arbitration.