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An Effective Dispute Prevention and Resolution Process is Key in Complex Infrastructure Projects

The Dispute prevention and resolution process in important infrastructure projects needs to be effective, quick, adapted to the realities of the project and the requirements of the parties and stakeholders.

Sebastian L. Pyzik – spyzik@woods.qc.ca
Alexandre Baril-Furino – afurino@woods.qc.ca

I. Introduction

Major construction and infrastructure projects in Quebec and Canada are often developed through public-private partnerships (“PPP“), which are governed by complex contractual agreements between the various stakeholders and parties.

These contractual agreements frequently provide for a multi-step (or multi-tier) dispute prevention and resolution (“DPR“) process, which eventually escalates to arbitration or adjudication before the Courts.

Right from the contractual negotiation stage it is important that the parties and stakeholders collaborating on a PPP or major infrastructure project pay particular attention to the DPR process provided for in the contractual documentation, specifically because conflicts and disputes between partners are common in these types of projects.

We discuss below the various sources and types of conflicts and disputes in the context of a PPP or infrastructure project (II), the advantages and disadvantages of each stage of a typical DPR process (III) and the main considerations that should guide a DPR process for this type of project (IV).

II. Conflicts and Litigation in PPP and Infrastructure Projects

A PPP exists when a private entity (the private partner) partners with a government agency (the public partner) to build and operate public infrastructure, such as a road, bridge, transport network or hospital.

The private partner agrees to design, finance, build, operate and maintain the infrastructure for a significant period of time, generally ranging from 20 to 35 years, commonly considered the “concession period”.

Throughout the concession period, the government agency will make staggered payments to the private partner for its services. Therefore, following the concession period the infrastructure is transferred over to the government agency.

Thus, a PPP or a major infrastructure project generally involves the construction of a large-scale facility and its operation over a long period by a private partner, at a cost payable by a public partner.

This context is conducive to disputes between the parties, but also with the subcontractors involved in the project. Notably, because the private partner or the infrastructure itself is susceptible to incur building or operational difficulties throughout the lengthy concession period.

In this type of project, disputes generally concern the parties’ respective liability regarding defects or deficiencies, “extras”, deductions from payable amounts and penalties related to infrastructure performance.

Moreover, these disputes are generally complex and technical, considering amongst other things, the nature of the work which often utilizes the latest technological advances, innovations, and methods.

In addition, disputes are generally based on an ever-changing factual framework given the length of the concession period and the wide range of operational and usage problems that may arise throughout.

Furthermore, disputes require consideration and application of the particular contractual universe related to the project, since these contractual documents contain,inter alia, specific definitions of defects or deficiencies.

Finally, the contractual responsibilities of the parties may vary according to the project and the jurisdiction in which it is located.

Given the above, an effective DPR process needs to be considered and implemented in the context of a PPP and major infrastructure project. The next section will look at the typical steps of a DPR process for this type of project, as well as the advantages and disadvantages of each stage.

III. The Advantages and Disadvantages of Each Stage of A Typical DPR Process for a PPP and Infrastructure Project

The DPR processfor each individual PPP and infrastructure project are not identical, however each DPR process involves similar steps, which eventually escalates to arbitration or judicial adjudication before Courts.

We generally find the following steps:

  • Negotiation between the parties: this stage can be divided into several levels, initially negotiation at operational level, failing an agreement this is followed by negotiation at parties’ executive level;
  • Mediation;
  • Independent Expert Adjudication;
  • Arbitration or Court Adjudication;

These steps have several advantages and disadvantages, which we describe below.

A) Negotiation Between the Parties

Negotiation between the parties is a crucial step to any DPR process, as it allows the parties to try quickly and confidentially to reach a settlement, before significant resources are deployed, and litigation is needed.

Although the parties’ counsel may directly or indirectly participate in these negotiations, the costs associated with it are negligible compared to those associated with an arbitration or other typical steps of a DPR process.

Moreover, even if a dispute is not entirely settled during these negotiations, they sometimes make it possible to find certain points of agreement and to limit litigation to the remaining disputed points.

That said, dividing this step into several levels can create several drawbacks. First, the subdivision minimizes the importance, impact, and usefulness of the first negotiation level (non-executive operational level), in that the parties tend to remain entrenched in their respective positions until the senior level (executive level). In addition, the inherent delays associated with each stage of the DPR process means that a division of the negotiation stage between the parties slows down the overall progress of the process and may cause significant delays.

Thus, we are of the view that the parties should seriously mobilize from the outset of the negotiation stage and that it is generally more advantageous for the negotiations to be held immediately between the relevant executives or individuals holding the negotiating power.

B) Mediation

Mediation, a well-known step in the DPR process, is an important stage which has the same benefits as negotiation between the parties.

However, these benefits are increased as the parties deploy more resources to participate in mediation and are naturally more motivated to find a confidential settlement agreement to avoid the costs and unknowns of litigation.

In addition, another undeniable advantage of mediation is the participation of a mediator. In fact, a qualified, experienced, and competent mediator who understands the specific technical aspects of a case is a valuable asset to any negotiation. This not only facilitates and promotes discussions between the parties, but also allows them to have the confidential assessment of an impartial third party as to various elements of the case. The parties may include in the DPR process a list of qualified, experienced, and competent mediators regarding each subject to speed up the selection of the mediator and avoid eventual nomination conflicts.

The disadvantage of mediation in the DPR process is that it can be unnecessary or dilatory when one or more parties do not intend to participate seriously. Mediation is at its core a voluntary process. However, in the DPR process it is usually a mandatory step before escalating to the next stage, therefore it can result in unnecessary costs and delays for the parties.

C) Independent Expert Adjudication

Expert adjudication is a DPR process step that is becoming increasingly popular in complex infrastructure projects. In fact, it is common for parties to provide in their DPR process that disputes, which are generally less important in terms of scope or pecuniary value, are necessarily decided by an expert.

The advantage of this step is that it allows a dispute to be decided by a technically competent person, usually an engineer, in an expedited manner with a hearing that may not necessarily involve lawyers.

However, the challenge for the parties is to determine in the DPR process whether expert adjudication is voluntary or mandatory, and which disputes should be adjudicated by an expert (as opposed to arbitration or Court adjudication).

It is also important for the parties to determine in the DPR process whether an expert award can be appealed to an arbitrator or Court, and if so, the applicable standard of review. If, for example, the DPR process provides for a de novo appeal of all the expert awards, this stage of the process risks becoming irrelevant because the parties will hesitate to invest significant resources at this stage given the risk of having to repeat the same or a similar process later through arbitration or in Court.

D) Arbitration or Court Adjudication

Adjudication through arbitration or in Court is the ultimate step in the DPR process.

At the outset, it should be noted that arbitration seems preferable to the judicial Courts in PPP or important infrastructure project, particularly since it is confidential and allows for speedier resolution (assuming the parties provide for a quick process with strict deadlines). The process is also generally more flexible and can be adapted to the realities of the parties.

Furthermore, similar to mediation, having a qualified, experienced, and competent arbitrator, particularly considering the technical aspects of a case, is essential and increases the legitimacy of the arbitrator’s decision between the parties. The parties may include in the DPR process a list of qualified, experienced, and competent arbitrators regarding each subject to speed up the selection of the arbitrator and avoid eventual nomination conflicts. It should also be noted that the parties can appoint a panel of three arbitrators, instead of a single arbitrator, which may be relevant in complex disputes.

To the extent that the parties choose arbitration, it is also important to determine whether the decision can be appealed before the Court.

IV. Conclusion: Key Considerations Guiding the DPR Process In PPP And Infrastructure Projects

We believe that the DPR process for PPP and infrastructure projects needs to be adapted to the realities of the project and the requirements of the parties and stakeholders.

There is no universal DPR process which applies to all situations. There are advantages, disadvantages and challenges associated with each step of the DPR process, however an unsuitable and untailored DPR process may be particularly disadvantageous for the parties.

Therefore, we believe that all DPR processes should contain the following elements:

  • Mandatory negotiation between the parties and/or with a mediator;
  • A rapid escalation to arbitration if the parties fail to reach an amicable settlement. Judicial Courts should generally be avoided;
  • Fewer intermediate steps between negotiation and arbitration, particularly given the inherent delays associated with each stage of the DPR process;
  • The prior identification of competent and qualified mediators and arbitrators, particularly at the technical level, to whom the parties agree to submit their dispute.

In our view, these elements are essential, as they promote the timely and effective resolution of disputes. Speed and efficiency are essential to the DPR process for PPP and infrastructure projects, especially given the complexity of the files, the constantly evolving factual framework and the impact of conflict resolution on other issues.

While speed and efficiency require the parties to deploy more resources in the short term, they ensure that dispute resolution will be timely and that the arbitration, or even the eventual award, will not become obsolete or theoretical given the passage of time.

In sum, we are of the view that the parties and stakeholders collaborating on a PPP or important infrastructure project must ensure, from the very beginning of the project, that the DPR process is effective, quick, adapted to their requirements and to the realities of the project.A DPR process that does not meet these criteria may lead to significant consequences for the stakeholders and parties involved in the project.

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