The Role of Arbitration Agreements in Resolving Disputes in Public-Private Partnership (PPP) Infrastructure Projects

This essay lays the groundwork for a thorough investigation of arbitration in PPP conflicts, focusing on its core concepts, benefits, and the particular factors that make it the best option in this situation. Stakeholders, including governments, private companies, and investors, can navigate the complex world of public-private partnerships with greater assurance and efficiency while ensuring that disputes are dealt with effectively and fairly by understanding the role of arbitration in PPP dispute resolution.

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5/17/20247 min read

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NEED/ ADVANTAGES OF ARBITRATION IN PPP DISPUTES

Recently, arbitration has emerged as one of the most practical methods for resolving disputes between a concessionaire and the government body that awarded the contract. A majority of concession agreements do include arbitration provisions, which is understandable given its relative benefits in terms of swift resolution and adjudicators' technical expertise. Although any agreement that completely prevents legal action is unlawful according to Section 28 of the Indian Contract Act, an exception has been properly introduced to protect arbitration proceedings.

It is important to remember that arbitration is required under the Punjab Infrastructure Development and Regulation Act, 2002.[1] The Arbitration and Conciliation Act, 1996,[2] which is based on the UNCITRAL model legislation, governs arbitration in India. It offers a structure for legally binding arbitration rulings with few opportunities for appeal in a timely way. It should be emphasized that institutional arbitration has gained popularity in various industries, in addition to the ad hoc arbitration courts that the parties may agree to establish.[3]

It can even be said that the courts have taken care not to interfere with the governance by the State in Public Private Partnerships.[4]

Given below are some advantages of arbitration as a dispute resolution mechanism in PPP disputes-[5]

Neutrality and Impartiality: An independent and neutral forum for conflict resolution is offered via arbitration. Arbitration enables the parties to choose arbitrators who are skilled and knowledgeable in the particular industry and legal issues involved in the PPP project, unlike litigation in national courts where parties may worry about the potential bias of judges or juries.

Flexibility: Through arbitration, the parties can customize the dispute settlement procedure to meet their unique requirements and preferences. The arbitration can be tailored to the specifics of the PPP project by allowing them to determine the rules, processes, and venue.

Expertise: Arbitrators in PPP disputes are generally specialists in the relevant fields, such as building, developing infrastructure, or financing. As a result of the arbitrators' increased technical and business-specific knowledge, decisions may be made more intelligently and effectively as a result of this competence.

Privacy and Confidentiality: Arbitration hearings are generally private, preserving the privacy of critical commercial and financial information. In PPP projects, where the publication of sensitive information could have negative repercussions, this confidentiality can be particularly crucial.

Speed and Efficiency: Litigation in national courts typically takes longer than arbitration proceedings. In PPP projects, speed is essential because delays in dispute resolution can cause project delays, higher costs, and even significant harm to the public interest.

Enforceability: The New York Convention on the Recognition and Enforcement of Foreign Arbitral rulings usually makes it simpler to enforce arbitration rulings abroad. This convention offers greater certainty in cross-border PPP disputes by enabling parties to enforce arbitration rulings in more than 160 nations.

Reduced Costs: Even though arbitration can still be expensive, it frequently works out to be less expensive than protracted legal action in national courts. The parties can profit from faster processes and lower administrative and legal costs.

Finality: Since arbitration decisions are frequently final and binding, there is less chance of drawn-out appeals and additional delays in the resolution of conflicts. The parties may be able to move forward with their PPP project or end the partnership because to this finality's ability to give them closure and clarity.

International Acceptance: PPP ventures frequently involve participants from many legal systems. International disputes are well suited for arbitration since it offers a neutral forum for settling disputes between parties from different nations with different legal systems.

Preserving the Business Relationship: Even after a disagreement has been settled, the government and a private sector organization may still collaborate on PPP initiatives. Arbitration enables the parties to settle their disagreements while maintaining their ongoing commercial connection, which may be advantageous for the project's successful completion.

ISSUES WITH ARBITRATION IN PPP VIA CASE STUDIES

Arbitration is sometimes noted to be particularly time-consuming, increase project costs, and create a hostile atmosphere for investment.

The Nathpa Jhakri Hydroelectric Project serves as an example of how arbitration causes project delays and cost inflation. The project involved building a 1,500 MW hydroelectric dam across the Sutlej River. The first phase of the contract called for river diversion and some construction, and it had a 56-month completion deadline and a bid price of Rs. 439.38 crore. After 131 months and a cost of $635.80 crore, the project was finally finished. Even if there were several causes of delay, including geological conditions and changes to the drawings, the wait in the arbitration was not insignificant. The Dispute Resolution Board (DRB) resolved a significant number of claims, however even after three years, the parties did not accept its recommendations on Extension Time claims (EoT). The contractor received an extension of time and costs due to delay in May 2008 after the arbitral tribunal established to investigate EoT in April 2005 made its decision. After 10 years after the contract's projected completion date, payment to the contractor was finally made via settlement between the parties in November 2008; three of those years were a result of a delay in the arbitration process.[6]

Another issue is the involvement of courts in arbitral proceedings.

The Dhabol Power Project case, one of the largest foreign investments in India in the 1990s, serves as an example of how court interference negates the benefits of arbitration and helps portray India as an unwelcoming place for foreign investors. The central government and the Maharashtra state government opted to avoid a settlement of the dispute through international arbitration, which was formally agreed to in the relevant agreement, even though India had by that time joined the New York Convention and passed the 1996 Act. Even though there were a number of issues, such as a lack of transparency, allegations of corruption, environmental concerns, and other human rights concerns that the government should have addressed at the stage of awarding the project, the government's agencies' refusal to submit the dispute to arbitration and the concurrent intervention by the judiciary impeding the arbitration procedure have done a great deal of long-term harm to India's prospects. Again, arbitration will be less appealing if the decision is subject to court review. Additionally, it is noted that the panel has a propensity to focus on procedural matters because retired judges and practicing attorneys make up the majority of the panel.[7] Arbitration's efficacy as a substitute procedure has frequently been hampered by this lack of flexibility.[8]

ARBITRABILITY IN PPP INTERNATIONALLY

According to research and case studies, Korea, Mexico, and Australia have the necessary robust legal and regulatory frameworks for PPPs that are intended to encourage infrastructure investment.[9]

CHINA

Arbitration hearings involving PPP contract disputes bring up a variety of fascinating concerns. Firstly, the jurisdiction and processes may be impacted by the distinction in the legal character of the government responsibilities outlined in the PPP contract. Secondly, there may be overlap between arbitration and other administrative options. A PPP contract's extensive closing process makes it likely that there will be objections, complaints, administrative reconsiderations, and administrative litigation, which presents the issue of how to deal with the connections between the various dispute resolution processes. Thirdly, issues that merit discussing in arbitration include the effectiveness of the procedure, civil and state compensation, revocation when the contract's purpose cannot be achieved due to the government's failure to perform, interest arrangements in compensation, and the viability of the liquidated damages clauses.[10]

USA

In the USA, law relating to PPP differs from state to state due to their strong federal structure. While most states allow for arbitration as a means of dispute resolution, generally district courts are a more preferred means of dispute resolution. There is no one method that can be considered standard across jurisdictions in the United States. However, some state laws mandate mediation or the employment of conflict resolution boards in certain situations.[11]

Russia

PPP issues are frequently brought to Russian state courts. In general, international arbitration may be used to resolve disputes under Concession Agreements, but the arbitration must take place in Russia. Although there are no specific dispute resolution clauses in the PPP Law, interpretation of the arbitration law indicates that conflicts governed by the PPP Law cannot be resolved through arbitration.[12]

5. CONCLUSION

The use of arbitration in Public-Private Partnership (PPP) disputes is supported by both the many benefits it offers and the inherent necessity for a specialized method to settle the complex problems that frequently occur in such projects. I have examined these benefits throughout this paper, illuminating how arbitration can hasten procedures, uphold privacy, and offer sector-specific knowledgeable arbitrators, all of which are essential components in the effective resolution of PPP disputes.

My research has also shown that arbitration in the context of PPP contracts presents some difficulties. Through case studies, I have examined these problems in depth, highlighting issues including potential lack of transparency, complicated legal procedures, and the need for a careful balance between public and private interests. These case studies have shed light on the fine line that needs to be drawn in order to guarantee fair resolutions to PPP disputes.

Additionally, I have gone beyond national boundaries to investigate the state of arbitrability in PPP projects globally, with a focus on countries as various as China, the USA, and Russia. This global viewpoint has brought to light the arbitrability's complex nature, which is influenced by the interaction of national laws, international treaties, and the changing dynamics of PPP investments. By doing this, I have discovered the difficulties and chances that stakeholders encounter when negotiating the global aspects of PPP arbitration.

In essence, arbitration in PPP disputes stands as a dynamic and indispensable tool for resolving intricate matters in the context of public-private collaborations.

[1] Punjab Infrastructure Development and Regulation Act, 2002.

[2] The Arbitration and Conciliation Act, 1996.

[3] Harisankar K. Sathyapalan, Sreeparvathy G. ‘Rethinking Dispute Resolution in Public-Private Partnerships for Infrastructure Development in India’ [2013] 5(1) JID 21.

[4] Jal Mahal Resorts v. KP Sharma and Ors 2014 8 SCC 804.

[5] Ajit Kumar Sinha, Kumar Neeraj Jha ‘Dispute Resolution and Litigation in PPP Road Projects: Evidence from Select Cases.’ (2020) 12(1) JLADREC.; Harisankar K. Sathyapalan, Sreeparvathy G. ‘Rethinking Dispute Resolution in Public-Private Partnerships for Infrastructure Development in India’(2013) 5(1) JID 21.

[6] Harisankar K. Sathyapalan, Sreeparvathy G. ‘Rethinking Dispute Resolution in Public-Private Partnerships for Infrastructure Development in India’(2013) 5(1) JID 21.

[7] Amit Kapoor, ‘Contracts in Public Private Partnerships for Infrastructure Development: A Legal Perspective’ (2008) in ADB and Government of India, ‘Criticality of Legal Issues & Contracts for Public Private Partnerships’ Position Paper and Workshop Report. Ministry of Finance, Government of India 7.

[8] Harisankar K. Sathyapalan, Sreeparvathy G. ‘Rethinking Dispute Resolution in Public-Private Partnerships for Infrastructure Development in India’(2013) 5(1) JID 21.

[9] Ajit Kumar Sinha, Kumar Neeraj Jha ‘Dispute Resolution and Litigation in PPP Road Projects: Evidence from Select Cases.’ (2020) 12(1) JLADREC.; Harisankar K. Sathyapalan, Sreeparvathy G. ‘Rethinking Dispute Resolution in Public-Private Partnerships for Infrastructure Development in India’(2013) 5(1) JID 21.

[10] Leo, ‘Legal Nature and Arbitrability of PPP Contracts’ (Law.asia, 10 May 2018) <https://law.asia/legal-nature-arbitrability-ppp-contracts/> accessed 28 September 2023.

[11] ‘Public Private Partnerships: USA’ (Bracewell, 1 October 2021) <https://bracewell.com/insights/public-private-partnerships-usa> accessed 28 September 2023.

[12] Herbert Smith Freehills LLP-Lola Shamirzayeva, Olga Revzina and Roman Churakov, ‘In Review: Governing Rules and Procedures for PPP Projects in Russia’ (Lexology, 8 April 2021) <https://www.lexology.com/library/detail.aspx?g=e565bb75-c31b-44c4-a8df-9fe3cf18ba42> accessed 28 September 2023.