Dissecting PPP contracts #9: The party clause and assignment of rights

Who pays attention to the party clause and assignment of rights provisions of a public-private partnership (PPP) arrangement? For those who want to make the parties accountable—those here means us—we should. The parties are the ones entrusted by law and contract to serve the public through this development strategy. We should know who to point our fingers at and exact performance from.

When a government/implementing agency enters into a project-based arrangement with a private sector proponent (PSP), the transaction is embodied in a binding and legally enforceable contract. Like any other contract, the party clause captures the who of the PPP.

The first party, the one awarding the contract, can only validly undertake the PPP Project if empowered to do under its charter or enabling law. The implementing agency is the party that is vested with law, let us say to supply water, lease out a parcel of land or provide basic services, to perform the task but could not do so completely, efficiently and/or expeditiously, on its own. That implementing agency, after choosing from other development strategies, opts to partner with a PSP using the PPP approach.

The second party, the PSP, is that entity that secured the award after going through a competitive and transparent procedure. That PSP was predetermined to have passed three tests—the legal test, oftentimes referring to the nationality requirement and juridical status; the technical test or compliance with the track record, expertise and experience requirements; and the financial test, dealing with the financial capacity of the PSP evidenced by the capitalization, financial statements and bank guarantees.

The party clause states the name of the parties, their respective creating law, signatories, authority of the authorized signatories and the short name of the party.

The contract between the implementing agency and PSP is personal. The trust reposed on them is non-transferrable. The PSP was chosen to the exclusion of others. No other person can substitute for that PSP.

One acceptable exception to this is the operation of the assignment of rights provision, without which, no substitution, under this contemplated situation, can take place.  Assignment of rights must be pursuant to an unequivocal contractual provision.

A typical straightforward provision may be worded this way: No party to this agreement shall assign, transfer or subcontract this agreement nor assign any of its rights, obligations or duties to any other party without the prior written consent of the other party.

If this were the case, the only requirement is mutual consent in writing. Other restrictions may be imposed on the considerations of time, assignee and prior right. A lock-in period bars the transfer to another implementing agency or PSP for a certain agreed period. The PSP-assignee may also be required to be eligible like the PSP-assignor. This columnist believes that this is implied from any assignment provision. The project could not be executed based on the parameters set if the PSP does not meet the three tests. A better template would be to explicitly require this. A prior right to be designated assignee may also be vested on the lenders of PSP based on certain conditions.

The PPPs involve trust. Trust is not a faceless exercise. Let us know who to demand trust from.