PPP Dispute Settlement: Arbitration or Commercial Mediation Recommended

10:09:47 AM | 7/15/2019

After many years of adopting the public-private partnership (PPP) model for investment projects and having identified shortcomings, the Government has been working to improve the legal framework for this form of investment and is determined to build a transparent and secure legal foundation.

Law on PPP Investment to take effect from 2021

Mr. Hoang Quang Phong, Vice President of the Vietnam Chamber of Commerce and Industry (VCCI), said Vietnam is expected to have continued rapid economic growth and its demand for infrastructure development will thus need more resources in the coming time. And, the PPP model is considered a social funding source for infrastructure development.

In the past time, to meet the growing demand for infrastructure development, the PPP investment model has been applied in Vietnam and affirmed to be an effective solution to draw private fund. According to PPP project data from the Government, as of January 2019, as many as 336 PPP contracts were signed, including 140 BOT (build - operate - transfer) projects, 188 BT (built - transfer) projects and eight other projects.

“Currently, the Government is also drafting a Law on PPP Investment which is expected to be presented to the National Assembly for discussion during its gathering in October 2019. This is a very important regulatory framework to further promote private investment flows into infrastructure development,” Mr. Phong said.

In order to prevent and resolve PPP contract disputes in the infrastructure sector, we have a lot of good experience from some countries, Mr. Phong said. Good practices that we can learn are approaching and prioritizing PPP dispute settlement through commercial arbitration and commercial mediation.

“This is an effective option that helps reduce the likelihood of turning a PPP dispute into an investment lawsuit under bilateral investment treaties (BITs) or new free trade agreements (FTAs),” he noted.

Currently, the draft Law on PPP Investment has been publicly announced by the Ministry of Planning and Investment for comments from organizations, businesses and people.

Ms. Vu Quynh Le, Deputy Director of Procurement Management Department, the Ministry of Planning and Investment, said, with opinions collected, most agreed on the necessity for a limit to the scope of PPP application and proposed PPP application for Group B-classified projects onwards. According to the draft Public Investment Law, traffic and electricity projects with an individual investment capital of VND240 billion - VND4,600 billion are classified as Group B projects. In addition, statistical data showed that a majority of PPP projects have a total investment of over VND200 billion (233 out of 336 projects, or 69.34% of the total; if BT projects are not counted, 113 out of 148 projects, or 76.35% of the total, have over VND200 billion of investment capital). Therefore, the Ministry of Planning and Investment proposed to cap a limit on PPP investment at VND200 billion.

With respect to PPP project classification, the draft law bases on project size associated with the decision-making authority. Specifically, the National Assembly shall approve State-funded projects worth VND20,000 billion or more. The Prime Minister shall ratify projects valued at VND4,500 billion or more (except for projects specified at Point a, Clause 2 of this Article) and projects worth less than VND4,500 billion of which the centrally funded value accounts for VND1,500 billion or more.

Regarding the roadmap, the law on PPP is currently being discussed for the first time. Based on comments collected from the initial poll round, the draft will be submitted to the National Assembly at the gathering slated for late 2019. It is expected to be passed in 2020 and go into force in early 2021.

Contractual respect to build the trust of investors in contracts

Notably, the formation of contract, enforcement and completion in every PPP project are posed to many potential issues which may give rise to disputes amongst parties concerned.

In a PPP contract, the State will have two roles as the partner of investors and the regulator of that PPP contract.

PPP projects often have a long life cycle and are thus exposed to many risks, said Dr. Pham Duy Nghia, professor at the School of Public Policy and Management, Fulbright University Vietnam. In particular, there are legal risks caused by changeable laws, financial risks, tax risks and administration risks. These risks will bring about an expense increase in projects. This not only causes damage to stakeholders but possibly leads to long-standing disputes, project stoppage.

According to Dr. Nghia, to address these risks, there are two basic solutions. Firstly, when drafting and designing contracts, present risks and future risks must be taken into consideration. PPP projects usually last for 20-30 years. During this time, laws may be changed very quickly, with many new ones to be issued and existing ones to be amended in addition to forex changes. For that reason, PPP contracts need to anticipate law and forex changes. At the same time, parties concerned need to devise appropriate clauses such as disclaimer cases, suspension of liability, damage claims and contract performance.

Second, hiring barristers or using commercial mediation measures for disputes are recommended. If investors do not understand the process, they will need a lot of time to deal with lengthy administrative procedures, thus posing risks to both investors and the government. At that time, commercial mediation and legal aid tools will be good choices.

“What matters investors is whether the State complies with contractual commitments or not. For example, if the time for fee collection is set, it must be fulfilled as it is. On the other hand, if the contract contains a risk-guarantee commitment to investors, the State must pay the guarantee for investors if risks emerge, he said.

In addition, he added, if disputes arise, investors will primarily rely on their contracts as an official document. If the state violates the law, they will be able to take legal action to resolve such disputes. Therefore, the State should pay attention to properly enforce contracts to make sure that investors feel assured of contracts.

Mr. Lee Ho Won, Chairman of the Korean Commercial Arbitration Board (KCAB)

Many Korean investors are interested in projects in Vietnam. However, minimum revenue guarantee or foreign currency conversion guarantee is also one concern that needs to be clarified in the draft Law on PPP Investment.

This draft does not yet state guarantee factors for investors and premature termination of contracts. As in Korea, the agreement mentions conclusion and break conditions. Therefore, we need to have payment terms upon early termination of the contract.

Mr. IM Byung Woo, KIM & CHANG Law Firm, Korea

As regards future State funding for PPP projects, this source is often based on future cash flows. Korea’s experience showed that anticipating future cash flows in 20-30 years and State guarantee are two important risk-easing factors for both the State and investors.

For example, Hanoi - Hai Phong Highway is a PPP project which brings in annual revenue of US$40 million. But, many service users often do not know about this and they often complain about high fees for the time being. In this case, when unfortunate risks occur, State guarantees play a very important role to secure investors.

Korea’s Law on PPP stipulates that the Government has the right to unilaterally adjust contracts, if necessary, to protect national interests and public interests. Vietnam can consider adding this to the law.

Ms. Doan Thi Huyen, Deputy Director of International Law, Ministry of Justice

PPP projects often have much longer contracts than ordinary ones. During its lifetime, a lot of contextual and conditional changes may occur, causing stakeholders difficulty in continuing these projects as initially planned.

Therefore, to prevent PPP contract disputes, contracts are essentially negotiated on the principle of mutual benefit, balanced interests and shared responsibility among parties.

In addition, parties need to anticipate changing legal policies and changing circumstances to carry out contracts in the future. They should pay attention to some contract provisions for cases of law changes to continue their projects after that.

In the course of contract enforcement, the best way to prevent disputes is to do what is committed.

Mr. Kim Seung Hyeon (Alex), KIM & LEE Law Firm, Korea

Pre-arbitral settlement of disputes by the Dispute Adjudication Board under the FIDIC Contract Form (silver book). In these contracts, investors are responsible for designing and providing terms for force majeure cases. Investors can provide a clause that requires the establishment of a Dispute Adjudication Board (DAB) when a dispute arises. The establishment of DAB is necessary because it includes experts who understand the project well, can carry out site surveys and regularly consult the parties. So, when there is a dispute, they are aware of issue. DAB dispute resolution helps reduce the likelihood of bringing cases to arbitration, helping keep relationships between the parties.

Usually, DAB decisions are divided into two types: Whether final and binding or binding but not yet final in case of a party's objection. Then, one party has can take the dispute to arbitration.

Anh Mai