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Litigation Risks in Public-Private Partnerships

A public-private partnership, or P3, is a contractual agreement between a governmental entity and a private organization, typically a corporation. The contract can focus on many types of services or development but the most common are transportation and municipal infrastructure and construction of public facilities.

One famous example is Boston’s “Big Dig,” which replaced a six-lane elevated highway with an underground highway covered by parks, pedestrian paths and low-rise development. Other P3s involve contracting out the maintenance and operation of public facilities, such as San Juan’s Luis Muñoz Marin Airport. Recently, the P3 model has broadened to other types of services like the KentuckyWired Project, in which the state of Kentucky partnered with two private companies for high-speed internet access.

The most-touted public benefits of a P3 are the ability to tap into the private company’s specialized expertise and avoidance of adding debt to already burdened governments.

However, private involvement does not guarantee relief from issues inherent in any large-scale development. The Big Dig was completed nearly 10 years late and private corporations repaid Boston more than $450 million in restitution and fines.

Extreme examples aside, significant opportunity exists in the P3 arena. President Donald Trump’s infrastructure initiative, for example, seems to require or rely upon P3s to be viable in areas such as improvement of the country’s deteriorating transportation infrastructure. Additional opportunities exist on the global scale, and P3 agreements are expanding well beyond the typical highways-and-construction model. Clean energy initiatives also represent an arena potentially unprecedented in breadth of opportunity. With proper risk management and planning, the future is bright for companies willing to spend the time and money to invest in P3s.

Perhaps the most common question litigation attorneys are asked is “How do I keep from being sued?” The reality, of course, is that the U.S. legal system permits nearly anyone to file suit at any time. This seemingly unavoidable risk applies equally to P3 participants. With planning, however, a P3 participant can minimize potential claims against it and maximize its available defenses.

For private companies, there are two main areas of risk in P3 arrangements:

  • litigation filed by the public partner; and
  • litigation filed by other interested parties, usually attempting to stop the particular project.

Litigation Between Parties to the Agreement

A well-drafted P3 contract should have a dispute resolution clause providing for some type of mandatory notification of the alleged default(s), an opportunity to cure the same and, perhaps, even a mandatory alternative dispute resolution procedure to be used before a lawsuit may be filed. Governments typically loathe spending money on litigation of any sort. Accordingly, the agreement should be drafted to encourage the informal resolution of minor or easily curable issues without (the threat of) litigation.

Private partners most often find themselves as defendants in a suit filed by the government partner as a result of issues like grave construction flaws (such as the collapsing tunnel ceiling that killed a Boston woman as a result of shoddy work on the Big Dig); a major ambiguity in the underlying agreement; or a serious error on the private entity’s part in calculating or preparing its bid. Importantly, the risk associated with all such issues can be managed in advance; doing so may require more time and the investment of additional resources, economic and otherwise, on the front end, but the risk of failing to do so is considerable. Consulting with an attorney at the beginning of a P3 relationship can pay major dividends by entirely avoiding or significantly mitigating future litigation costs.

Litigation Filed by Others

Under certain circumstances, concerned citizens, non-profit or advocacy groups or even jilted competitors may file suit in an attempt to halt a project. A potential P3 participant looking to minimize these risks should consider the following questions:

  • Is there proper enabling legislation in the state where the company is doing business? More than half the states in the United States have legislation providing for P3 projects in some way, but the rest do not.
  • Is the project within the scope of any enabling legislation? Even in states with enabling legislation, P3s may be restricted to certain types of projects. For example, the Texas legislature recently failed to pass a bill that would have allowed for additional P3 transportation projects, even in the face of the president’s proposed federal investment in that area.
  • Was the project proposed and approved properly? The enabling legislation will contain requirements for the proposal and adoption of the project and, depending upon the level of government partner, additional guidelines for a local government to adopt its own rules.
  • Was the bidding process flawed? Errors in the bidding process are a surefire way to send a project back several phases or may lead to greater liability. Entities not selected for a project have every motivation to go over the bidding with a fine-tooth comb and to bring any irregularities to light.
  • Do any local zoning rules or guidelines prohibit the project? Projects should not run afoul of zoning rules or any other local requirements without a plan for the same.
  • What effect will the project have on nearby landowners, businesses or residents? Identifying and addressing individuals who may be affected by condemnation, nuisance or other similar issues is critical to the long-term potential for success.
  • What effect will the project have on the environment? Legislation or regulations may require an environmental impact study or fee before the project can be approved or begun. Even if not required, a study may be advisable depending on the character of the affected land or area.

Each project is unique and comes with its own risks and issues, but keeping these questions in mind during all phases of a project will help minimize litigation risks. Should a lawsuit be filed, prior planning and documentation will limit its impact and cost, enabling private companies to take greater advantage of the potential benefits of the P3 arrangement.

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