7.8.1 The payment mechanism provides a mechanism through which the Authority can calibrate the financial consequences of Service failures. The Authority should not seek compensation in damages in addition to levying its deductions for Service failures. Please note that this does not limit the Authority from pursuing other rights expressly given to it in the Contract (such as, for instance, termination rights, step-in rights or specific indemnity rights, or rights to require the replacement of a sub-contractor if certain levels of poor performance are reached) and does not limit any claim for specific performance or injunctive relief.140
7.8.2 Suitable drafting is as follows:
7.8 Payment Mechanism: No double remedy
(a) Subject to:
(i) any other express right of the Authority pursuant to this Contract, and
(ii) the Authority's right to claim, on or after termination of this Contract, the amount of its reasonable costs, losses, damages and expenses suffered or incurred by it as a result of rectifying or mitigating the effects of any breach of this Contract by the Contractor, save to the extent that the same has already been recovered by the Authority pursuant to this Contract or has been taken into account to calculate any compensation payable by the Authority pursuant to Clauses 21.3.2 (Compensation on Termination for Force Majeure), 21.2.5 (Compensation on Termination for Contractor Default), 21.1.3 (Compensation on Termination for Authority Default), 21.4.4 (Compensation Termination for Corrupt Gifts and Fraud), 21.5.2 (Compensation on Voluntary Termination), [21.5.4 (Compensation on an Authority Break Point Date)], or 21.6.2 (Compensation on Termination for Breach of the Refinancing Provisions), the sole remedy of the Authority in respect of a failure to provide the Services in accordance with this Contract shall be the operation of Schedule [ ] (Payment Mechanism).
(b) Nothing in this Clause 7.8 (Payment Mechanism: No Double Remedy) shall prevent or restrict the right of the Authority to seek injunctive relief or a decree of specific performance or other discretionary remedies of the court.
7.8.3 Contractor Default is discussed in Section 21.2 (Termination on Contractor Default). The Authority must ensure that adequate termination rights exist, for example, in terms of the levels of unavailability or Service failure which constitute a termination event, or in terms of alternative definitions where the payment mechanism is not availability-based.
7.8.4 The calibration of payment mechanisms is discussed in Section 7.5. The thresholds for Contractor Default and potential precursors thereto should be determined as part of the overall calibration process. Such precursors typically include:
• warning notices to the Contractor;
• increased monitoring of performance, normally at the Contractor's expense;
• a requirement for the Contractor to produce a remedial plan;
• replacement of the sub-contractor; and
• Contractor Default (noting that termination remains at the Authority's discretion).
7.8.5 There is no need to use all of these steps or to be limited to them. Authorities should choose a route to potential termination which will provide a meaningful framework for discussions about how to address the poor performance. These steps can be linked to a given level of payment deduction, for example, a deduction greater than x% of the Unitary Charge in some/each of y successive months or a series of short and longer-term thresholds, or to a system of "termination points" which might be linked to the other elements of the payment mechanism or might run in parallel.141
7.8.6 Authorities should primarily consider what constitutes an unacceptable level of performance to themselves when setting the Contractor Default threshold and related thresholds. As a secondary matter, they may also consider the impact which the threshold level of deductions has on the financial position of the Contractor (and even where thresholds are not expressed in simple financial terms it should be possible to consider the relationship between the levels of performance leading to Contractor Default and the level of deductions likely to accompany that performance).142
7.8.7 A different approach might be required for non-availability-based payment mechanisms; a low level of usage and hence of payment does not necessarily mean that the Contractor is failing, although it may do.
7.8.8 Sub-Contracts will typically have termination arrangements which are linked to the wider arrangements for Contractor Default (see Sections 9.3 (Replacement of Sub - Contractors) and 9.4 (Monitoring of Sub-Contractors). When calibrating its remedies, the Authority should also bear in mind that the Senior Lenders will similarly be calibrating their own remedies (of step-in, replacement, default etc). The Authority should understand how these relate to the Authority's position and ensure that the overall structure appropriately incentivises the Senior Lenders to exercise their remedies in advance of the Authority exercising its remedies.
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140 See further Section 24.6 (Damages Claims).
141 So, for example, deductions in a single month of greater than 25% or deductions in each of three successive months of greater than 20% each could earn the Contractor a 'termination point' the accumulation of which leads to Contractor Default. In terms of actual drafting, projects can involve a range of different triggers, and some projects have different thresholds for deductions relating to unavailability and deductions relating to poor performance of services.
142 If a Contractor is suffering deductions which are sufficient to entirely erode profit margins and allowances for contingency throughout the supply chain, including the risk premium element of the equity return, its position may prove unsustainable. The level at which all contingency and profit margin is eroded might be in the region of a 15-20% deduction from the Unitary Charge over a period of several months, however this can vary in accordance with the overall structure of the payment mechanism.