Introduction

Generally in alliances for delivery of projects or services, a fundamental characteristic of the alliance is that decisions are made unanimously by its “Alliance Board” and “Alliance Management Team” (or similarly named bodies). Reserved powers are the exception to this rule. Reserved powers are those matters which may be decided by the Owner and the Owner alone. Although there are numerous exceptions, reserved powers can generally be categorised into those dealing with emergencies (dealing with urgent protection of assets), scope changes, program changes, regulatory compliance, industry/sector specific (such as defence where the Owner may be subject to legislative, security or other public accountability obligations) and interest/image protection (such as media and community communication).

Some (usually Non-Owner Participants) view reserved powers as the “Big Bad Wolf” of alliance contracting, cutting at, or indeed cutting out, the very heart of an alliance - its cooperative risk-sharing framework. This standpoint encourages Non-Owner Participants to resist the inclusion of reserved powers altogether.

Others view reserved powers as a way for Owners to “have their cake and eat it too”, to reap the cost benefits of an alliance while retaining control. The risk of this view is that Owners may use reserved powers so liberally that the alliance agreement itself is in effect reverted into a traditional principal-contractor arrangement and the benefits of alliancing are lost.

However, there is a middle road. By adopting a balanced approach reserved powers can enhance the alliance relationship for all participants. Indeed, they can fit into and enhance the “best for project” framework.

Given that the Owner is the participant that needs, will own and will pay for the facility to be created by the alliance, and usually will ultimately wear the overwhelming majority of the downsize costs of any major time or cost blow outs or defects, it is perfectly understandable that the Owner will want to reserve to itself the right to make certain important decisions. Public sector Owners will have an additional set of “public interest” type matters to add to such a list.

This article seeks to provide some sign posts to assist both negotiators and drafters to find that middle road. A full copy of the article is attached.

These sign posts consist of three steps.

• Step 1: Discern the type of reserved power and the rationale behind it. Analysis of the rationales behind these types of reserved powers will assist alliance partners to assess whether they will help, or hinder, their alliance.
• Step 2: Limit the scope of the reserved power to the extent to which it is justified by alliance principles. The benefits of a balanced approach are achieved by tightly tailoring, and restricting, the reserved powers to the particular concerns of the Owner. That is, the scope of each reserved power should be limited to the extent it is justified on a best for project basis, given the particular concerns of the alliance participants.
• Step 3: Embed mechanisms in the alliance agreement which integrate the reserved powers within the cooperative framework. They may include aiming for a short list of reserved powers; reverting time and cost adjustments to the alliance board; and for alliance partners to liaise regarding exercise of reserved powers.

But first, an overview of the advantages and disadvantages of reserved powers.

The potential advantages and disadvantages of reserved powers

The potential advantages of reserved powers include:

• speeding up decision-making in circumstances where waiting for unanimous alliance board consensus would increase the damage to alliance assets (for example if there is an environmental emergency)
• in project alliances, ensuring the Owner retains sufficient control that the end asset is “what they bargained for”
• allowing alliance contracts to be used in sectors and industries which would otherwise not consider using relational contracting at all, for example, by allowing government/military bodies to retain control of security-sensitive issues such as personnel and confidentiality, and
• helping manage those risks which extend beyond the life and scope of the project and thus have larger repercussions for the Owner than the Non-Owner Participants (for example protecting the Owner entity’s image and protecting directors from OH&S penalties that may attach to them as individuals).

The potential disadvantages of reserved powers include that they can:

• undermine the cooperative culture of the alliance
• allow decisions to be made in the absence of the people best-informed and best-positioned to give advice
• create confusion over whether the alliance board or the Owner is making the decision (which can slow down the problem-solving process), and
• undermine incentive schemes by allocating responsibility to the Owner.

If framed too broadly, reserved powers can turn an alliance contract into a conventional adversarial contract, albeit with a few extra committees and painshare/gainshare mechanisms on the side. While this may be the participants’ intention, they should carefully consider the implications of such an approach.

Conclusion

Reserved powers have the potential to enhance alliance relationships and to allow alliance contracting to be used in sectors which otherwise would find it unacceptable.

This can be achieved by adopting a balanced approach whereby alliance partners:

• carefully discern the character, and rationale, of each of the reserved powers being proposed
• tailor and limit the reserved powers to the particular concerns of the alliance participants, and
• seek to integrate the reserved powers into the alliance framework.

It is by walking this middle road that reserved powers can allow the participants to reap the full benefits of their alliance.

For more information, please click here.