A PPP Contract based on NEC4

Back in 2018 I set the following exam question for my PPP law students at the University of Melbourne:

You are an in-house lawyer at the Australian Rail Track Corporation, assigned to the Inland Rail PPP project. The Project Director wants you to prepare drafting instructions for the external law firm that will draft the PPP Contract. He says the Commonwealth Government has decided to use NEC 4 as the base document. He wants the PPP Contract to look and feel like a NEC 4 document, to help attract more international companies to the project. He also wants the risk allocation to be generally consistent with that contemplated by the Commercial Principles for Social Infrastructure contained in Volume 3 of the National Public Private Partnership Guidelines, but is prepared to consider departures from that risk allocation. Please prepare the written drafting instructions for the external law firm:

  1. Identifying the relevant NEC 4 Form of Contract that you think the firm should use as the base;
  2. Outlining the amendments (including additions and deletions) that you think should be made to that Form; and
  3. Describing any other issues that you think the external law firm needs to consider.

Where you wish to depart from the risk allocation in the Commercial Principles for Social Infrastructure contained in the National PPP Guidelines, please explain your rationale for doing so.

There’s no need for you to fully draft the amendments – that’s the job of the external law firm.  

The question was inspired by this paper written by Richard Patterson and Barry Trebes.

It was a tough question for a take-home exam, but I still got some great responses. Below is the model answer that I worked up based on the responses. I’m still waiting for the opportunity to create a PPP contract based on NEC for a client.

Form of NEC contract

Students were expected to suggest the NEC 4 Design Build and Operate Contract (DBOC) as best starting point, and explain why other forms eg ECC, TSC, Alliance are less suitable.

For extra marks, students could also mention:

  • ECC contains drafting that isn’t in DBOC that might be useful (e.g the compensation event for unexpected ground conditions in cl.60.1(12))
  • ECC would be good starting point for the pass-through D&C Contract, and the Term Services Contract would be a good starting point for the pass-through O&M Contract;
  • ECS will contain some useful provisions for bidders to refer to when preparing the pass-through D&C and O&M contracts, such as shorter timeframes/cureperiods, and termination due to termination of upstream PPP contract (R23)

ARTC would be the Client under the contract, and the SPV/PPP Co would be the Contractor. 

Key amendments

Students were expected to suggest the following amendment to DBOC to turn it into a PPP Contract suitable for the Inland Rail project:

‘Light touch’ to amendments – the Project Director wants the PPP Contract to look and feel like NEC4. Accordingly, try to work with the NEC4 drafting and approach wherever possible, and minimise the amendments required in order to achieve a risk allocation which is suitable for an availability payment PPP

Finance – Add provisions relating to the PPP Co’s obligation to finance the project. These will typically include:

  • An express obligation on PPP Co to finance the project
  • A condition precedent to the effect that PPP Co has obtained unconditional legally binding commitments to provide the necessary debt and equity finance – this is usually evidenced by the execution of the Debt Financing Documents and the Equity Documents, and the satisfaction of all conditions precedent in such documents;
  • A provision detailing the procedure that applies if PPP Co wishes to refinance the debt, including the sharing of refinancing gains (as per clause 32 of the Commercial Principles).

Service – While the contract is titled “Design, Build and Operate Contract”, the core obligation in clause 20.1 is to “Provide the Service in accordance with the Scope”. To “Provide the Service” is defined broadly to mean to do the work necessary to provide the service in accordance with the contract and all incidental work, services and actions which the contract requires. The “service” will need to be described in the Contract Data part one, and can include:

  • operation services (e.g operate the ventilation system, but not those systems that will be operated by ARTC such as signalling); and
  • maintenance services for the assets that PPP Co must maintain (e.g tunnel, ventilation system), but not those assets that ARTC will maintain.

A detailed description of the services that PPP Co must provide, including the standard to which the services must be provided, and any constraints, would be specified in the Scope.

Payment Regime – The payment regime in the DBOC allows for the Client to pay on a fixed price, schedule of rates or target cost basis. Of these, only the fixed price may be suitable, if framed as a fixed monthly or quarterly availability payment. But clause 50.1 starts that the first assessment date must not be later than the assessment interval after the starting date. This will need to be amended so that the first assessment date does not occur until after Works Completion.

Abatements – clause 53.3 and the “performance table” provides a framework for abatements (and incentive payments). It may be possible to document an appropriate abatement (and incentive) regime within a “performance table”. Clause 53.4 can be deleted.

Cooperation – Clause 10.2 requires the parties to cooperate. ARTC may which to qualify this obligation in the manner suggested in clause 1.6 of the Commercial Principles.

Design – Consider including a provision in the Scope to make it clear that the Contractor is responsible for all design, including any design contained in the Scope (ie prior design work provided by ARTC). Delete third bullet point in clause 80.1.

Fit for purpose warranty – Add a fit for purpose warranty in respect of the design and the Works. 

Service Manager – the Service Manager is appointed by the Client (ARTC) to represent the Client’s interests. The Service Manager would ordinarily consult with the Client before giving communications under the DBOC, to ascertain the Client’s preferences etc. There is no need to amend the contract to move decision making authority from the Service Manager to ARTC.

Independent Certifier – The private sector investors and financiers will probably be more comfortable if Completion is certified by an independent third party certifier, rather than the Service Manager that represents the Client’s interests under the contract. Whilst there is an ability for the PPP Co to refer a dispute regarding a decision of the Service Manager to adjudication under Option W1, it might take several weeks before the dispute gets to adjudication.

Planning Approval – By the time the PPP Contract is signed, ARTC should have obtained the required Planning Approvals. If not, will need to add a provision requiring it to do so by a specified date. Need to also add a provision that requires the PPP Co to comply with all conditions of the Planning Approval, other than those that the Scope says ARTC will comply with. Clauses 60.1(4) or 60.1(16) will probably cover an instruction or court order to stop work due to a challenge to the Planning Approval, so perhaps there is no need to add an extra compensation event to cover this, but an additional specific compensation event for this would provide greater certainty.

Unforseen Site Conditions – Would these fall within 60.1(16)? Is the occurrence of an unforseen site condition an event that an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for it? Probably not. If ARTC is going to share the risk of latent site conditions, consider adding an additional compensation event based on clauses 60.1(12) and 60.2 of ECC

Change in law – clause 60.1(15) provides broader relief is suggested in the Commercial Principles, but the NEC position makes sense. The DBOC provides that a failure of the design to comply with the law is a reason for not accepting the design, and that a Defect will exist if the works don’t comply with the law, but there is no general obligation to comply with all laws in Providing the Service (as contemplated by clause 19.1 of the Commercial Principles)

Clause 60.1(16) – this clause creates uncertainty. There are likely to be disputes over whether events that delay Completion are events that an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for it. ARTC may prefer to be more specific about the events that fall into this category (e.g stop work orders due to native title claims, heritage items, challenges to the planning approval process, etc). 

Loss or damage and reinstatement – Clause 80.1 of the DBOC deals with liability for reinstatement of loss or damage caused to the railway following Works Completion quite differently to the Commercial Principles. Rather than making the Contractor responsible for reinstating such loss or damage, and insuring against this liability, the DBOC provides that loss or damage to the Affected Property (which includes the Works, following Works Completion (cl.30.2)) is a client liability. The occurrence of such loss or damage is a compensation event (cl.60.1(11)). The Service Manager can instruct the Contractor to provide a quotation for the cost and time impacts of dealing with the compensation event by reinstatement works. This regime seems fine, but ARTC should effect appropriate property damage insurance to cover the reinstatement costs.

Cure Periods for Termination Events – Most of the termination events in DBOC have cure periods embedded within the relevant termination event. See, for example, clauses 91.2, 91.3, 91.4, 91.6, 91.7. Those that don’t (91.1, 91.5, 91.8) are events which ordinarily would not have a cure right – it’s curious that they do in the PPP context. So there’s no need to add additional provisions to provide PPP Co with cure rights. Perhaps some of the cure periods provided for in DBOC could be lengthened. Additional rights and time to remedy (or overcome the effects of) a termination event can be given to the Debt Financiers under the Debt Finance Direct Deed.

Additional Termination Events – perhaps add additional termination events for change of ownership/control of SPV without consent, but R11 is probably sufficient.

Termination for convenience – add a provision that enables ARTC to terminate the PPP contract for its convenience, as per clause 25.3 and 26.3 of the Commercial Principles.

Step-in – consider including step-in rights as per clause 27 of the Commercial Principles.

Change of ownership/control – need to add provisions to reflect clause 29 of Commercial Principles.

Disclosure – ARTC may wish to disclose a copy of the PPP contract (with commercial-in-confidence provisions redacted), for transparency reasons. There is no law requiring ARTC to do so, so amending clause 28 to allow each party to disclosure such information to carry out their duties under the contract “or at law”, won’t allow ARTC to voluntarily disclose a copy of the PPP contract. Suggest a provision is added that allows ARTC to so disclose, as per clauses 36.1 and 36.3 of the Commercial Principles.

Restrictions on PPP Co – Usual restrictions on the SPV/PPP Co will need to be added, as per clause 34 of the Commercial Principles. 

Representations by PPP Co – add provisions reflecting clause 33.2.1 of the Commercial Principles.

Disputes – Option W1 would work. W1.3(4) provides for consolidation of linked claims under subcontracts (i.e the D&C Contract and the O&M Contract), but it doesn’t provide for equivalent relief/compensation (i.e compensation relief to subcontractor to be limited to compensation/relief provided by client). The latter may be unenforceable as a ‘pay when paid’ clause under the security of payment legislation. The D&C and O&M Contracts could include provisions similar to clause W1.3(5) of ECS. The adjudicator appointed under W1 acts impartially and independently (W1.2(2)), and in doing so could perform the same functions as are performed by the independent expert under cl.30.3 of the Commercial Principles. The tribunal in W1.4 could be arbitration or litigation.

Side Deeds – include Option X8. The Contract Data should require the Contractor to:

  • ensure its D&C Contractor and its O&M Contractor provide undertakings to ARTC in the form of the Side Deeds included in the Scope. 
  • provide undertakings to the Client and the Debt Financiers in the form of the Debt Finance Side Deed included in the Scope.

Ordinarily, these should be provided as a condition precedent to the PPP Contract becoming effective, in which event clause X8.5 may be deleted;

Performance bond – include Option X13.

Limitation on liability – include Option X18

Rail safety – consider adding provision that makes it clear that SPV is responsible for ensuring that its contractors hold any accreditation required under the Rail Safety National Law. Suspension or revocation of accreditation should be included as a termination event.

Building Code – ARTC is required to comply with the Building Code as though it were a funding entity for the Inland Rail Programme. The Building Code places obligations on funding entities both during the procurement of “Commonwealth funded building work” and during the conduct of the work.

ISCA Target Rating – Add a provision that requires PPP Co to achieve an ISCA rating of at least 60

ARTC Supplied Material – ARTC proposes to supply rail, sleepers, turnouts etc. Need to add provisions that:

  • require PPP Co to inspect such materials for defects upon delivery,
  • require ARTC to procure timely rectification of defects identified by PPP Co;
  • make PPP Co responsible for any defects that PPP Co ought to have identified by inspection;
  • make latent defects in materials a compensation event.

Social Outcomes – Amendments to address ARTC’s desired social outcomes in relation to workforce management, local and indigenous industry participation, housing and accommodation, health and community well-being, community and stakeholder engagement – see slide in this Industry Briefing Presentation.

GST – clause 51.5 may be sufficient. Probably prudent to at least state that all amounts stated in the contract are exclusive of GST unless otherwise stated. A more extensive GST clause may be required.

Context

Good answers would also reflect the public information then available regarding the Inland Rail project, including:

  • the PPP Contract will only apply to the 126km section of Inland Rail from Gowrie to Kagaru (G2K) in Queensland;
  • the Gowrie to Kagaru section of Inland Rail includes approximately 8.5km of major tunnelling;
  • ARTC will be the government counterparty to the PPP Contract;
  • the private partner will be responsible for the design, build, financing and maintenance of the G2K section;
  • ARTC anticipates the PPP structure will be an ‘availability charge’ type arrangement;
  • Ventilation is a key challenge – PPP Co to operate the ventilation system, to ensure the tunnel and associated rail infrastructure can be used (i.e is available)
  • G2K section will need to interface with sections of Inland Rail either side;
  • Query whether it makes sense for PPP Co to maintain the track infrastructure for G2K, while ARTC (or someone else engaged by ARTC) maintains the track infrastructure for balance of Inland Rail line
  • But ventilation system and tunnel infrastructure will need to be operated and maintained
  • ARTC intends to supply various materials (eg rail, sleepers, turnouts, culverts, ballast/capping) to its contractors
  • ARTC intends to provide geotechnical information to bidders (factual report only, not interpretations)
  • Railway to be immune from 1% AEP flood.
  • ARTC has selected the route/site

While the project concerns a railway, which is commonly thought of as “economic infrastructure”, the Commercial Guidelines for Social Infrastructure PPPs are more relevant than the Commercial Principles for Economic Infrastructure PPPs because it is proposed that the Inland Rail PPP will be an availability payment PPP, ie PPP Co’s revenue stream will take the form of an availability/service payment from ARTC. It is ARTC, not PPP Co, that will:

  • generate revenue from the operation of the railway by charging users (above rail freight operators) rail access charges for the use of the rail infrastructure; and
  • take demand risk.

A good answer will make specific reference to various sections of the Commercial Principles, to explain:

  • how the DBOC departs from the Commercial Principles;
  • what needs to the added to the DBOC, and/or
  • how the DBOC needs to be amended to better reflect the Commercial Principles

2 years later….

Despite the exam question being set 2 years ago, it’s not too late for ARTC to pursue this approach to its PPP contract, as the market is still waiting for ARTC to release its RFP for the Inland Rail PPP. Will they do so? I doubt it.

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