Public-Private Partnerships

Public-private partnerships, also referred to as P3s, are an emerging alternative for public entities attempting to finance and execute improvements to public infrastructure in the U.S. The P3 concept is simple: a partnership between the public and private sectors for the construction of a public project. The cost of developing and executing such a project may be shifted (in whole or in part) from taxpayers to the end-users (e.g., drivers paying tolls), and the traditional risks inherent in the project are shifted accordingly.
Due to the growing popularity and broadening use of P3 projects across the country, it’s important for prospective participants to keep in mind that partnerships between public and private entities are somewhat different than traditional relationships. They feature an unusual, hybrid nature that creates unique issues and potential pitfalls. These issues should be considered closely by the contracting parties, because traditional remedies may not be available in the context of all P3 projects. This uncertainty regarding P3 projects is exacerbated by the fact that the legislation governing public-private partnerships differs from state to state.
BLENDED INTERESTS
For the most part, the reason P3 projects have the potential to cause confusion is the blended nature of the interests involved. The projects are commissioned by public agencies and funded, at least in part, by private parties. Also, compensation for the private partner may include usage, leasehold, or ownership rights in the completed project. This mixing of interests can lead to difficulty in properly characterizing the project as public or private, resulting in uncertainty for contractors, builders, and suppliers bidding for work on the project. Given that there are very specific rules in place for governance of public projects in the various states (and often different, but no less important, rules for private projects), such uncertainty is an unwelcome risk.
Contractors interested in bidding on a P3 project should be especially cognizant of the impact that “blended interests” may have on construction bonds and lien claims. Payment and performance bonds have historically been required on public construction projects to ensure completion of the work and payment of contractors. P3 projects may disrupt these statutory protections because they are likely to share both public and private characteristics. Conceivably, projects may occupy private land, or even be subject to private ownership, depending on the nature of the development agreement. This quasi-private nature has consequently led to confusion and unpredictability in some jurisdictions.¹
The same confusion may impact the availability of mechanic’s liens, which are the traditional remedy for contractors seeking payment from a private owner. While the contractor on a P3 project may have contracted with a private developer, are mechanic’s liens still available on the property if the project is (or will be) public property? The only way to answer that question is to examine the state-specific P3 legislation and the underlying agreement between the parties to determine if there are any private property interests to which a lien might attach.² However, even the existence of a defined private interest may not suffice, since some states do not recognize liens on any property where the underlying fee is owned by a public entity.³
CONTRACT REMEDIES
P3 projects may also threaten available contract remedies. What recourse does a private contractor have if its public partner fails to adhere to their bargain? In a strictly private transaction, the obvious remedy would be a breach of contract lawsuit against the other party. But state agencies and political subdivisions are generally afforded protection from such lawsuits by virtue of sovereign immunity. For this reason, contractors and other private developers considering partnerships with a public entity must be especially familiar with the limitations imposed by sovereign immunity, as well as the laws that govern waiver of sovereign immunity in their state. Where allowed by law, contractors would be well advised to negotiate a contractual waiver of sovereign immunity as a part of their P3 agreement.
There are a number of other issues that result from the blended nature of P3 projects, including interaction with construction trust fund statutes, prompt payment statutes, and the applicability of prevailing wage rate statutes. Additional unforeseen issues are likely to arise in the future. Though a complete exploration of every potential issue is beyond the scope of this article, contractors considering involvement in a P3 project should be aware of the potential for confusion and negotiate the terms of their P3 agreement accordingly. In this regard, the assistance of an attorney familiar with the laws of their state is highly recommended. ■
For More Information:
David L. Tolin, Jr. is a construction attorney in the Houston office of Ford Nassen (www.fordnassen.com), which is nationally recognized in the industry and is one of the largest construction law firms in Texas. His practice focuses on all aspects of the construction process. He can be reached at dltolin@fordnassen.com or 281.953.7704.
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Modern Contractor Solutions, March 2014
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