21.2.2.1 The Contract should specify the events of Contractor Default which may lead to termination. As far as practicable, these should be objective, clear and provide for reasonable tolerances,299 bearing in mind the undesirable consequences of a termination.
Required drafting is as follows:
means one of the following events:
(a) a breach by the Contractor of any of its obligations under this Contract which materially and adversely affects the performance of the Service;
(b) a Persistent Breach occurs;300
(c) a court makes an order that the Contractor [or Holdco] be wound up or a resolution for a voluntary winding-up of the Contractor [or Holdco] is passed;
(d) any receiver or manager in respect of the Contractor [or Holdco] is appointed or possession is taken by or on behalf of any creditor of any property that is the subject of a charge;
(e) any voluntary arrangement is made for a composition of debts or a scheme of arrangement is approved under the Insolvency (Northern Ireland) Order 1989 in respect of the Contractor [or Holdco];
(f) an administration order is made or an administrator is appointed in respect of the Contractor [or Holdco] or any process or event similar or analogous to the event in (c) to (f) above in any jurisdiction outside Northern Ireland;
(g) a breach of Clause 16 (Equality Legislation Sub-Contracting, Employees and Documentary Changes)301 occurs;
(h) [a breach by the Contractor of its obligations in Clause [17] (Assignment) occurs;]302
(i) [a breach of Clause 18 (Change of Ownership) occurs;303]
(j) the abandonment of the Contract by the Contractor;304
(k) a failure to achieve the Service Commencement Date by [date];305
(I) a failure to provide [ ] Available [places/areas] [availability for use] for [x] period;
(m) the accumulation of [ ] or more [performance points] in any [Quarter/Year];306
(n) failure to provide [ ] Available [places/areas] for [ ] period [and accumulation of [ ] [performance points] in respect of the same period; or
(o) a breach by the Contractor of its obligation to take out and maintain Required Insurances.307
21.2.2.2 Other events of default may be included on a project-specific basis. If the Authority places restrictions on assignment, change in ownership or replacement of Sub-Contractors , then it may be appropriate to include a corresponding event of default for breach of such restrictions (see Sections 16 (Equality Legislation Sub-Contractors , Employees and Documentary Changes), 17 (Assignment) and 18 (Change of Ownership)). Similarly, if the Project is in a security-sensitive sector, breach of specific security requirements might be included. Generally, it is not necessary to include non-payment of sums by the Contractor as a Contractor Default as the Contractor's payment obligations are limited and the Authority should have the ability to set off certain amounts (see Section 12 (Payments and Set-off), although particular projects may require this (e.g. where the Project has significant third party income). In addition, depending on the nature of the Project, it may also be appropriate to include an additional event of Contractor Default dealing with failure by the Contractor, following the occurrence of a terrorist act, to diligently make a claim under the Compensation Order or its own commercial insurance (if applicable). Please see Annex 1 (Criminal Damage).
21.2.2.3 Generally, insolvency events of default should not be extended to include Sub-Contractor's or the Contractor's shareholders. This is because the Contractor will in any event be incentivised to replace the Sub-Contractor concerned to ensure performance of the Contract. An exception to this would be where the contractual structures concerned make it necessary that such parties owe unusually significant financial or contractual obligations to the Contractor (or the Authority) and no replacement can be found who would match such obligations.
21.2.2.4 Termination should be subject to any rectification procedures (see Section 21.2.4 (Rectification)) and the rights of the Senior Lenders under the Direct Agreement (see Section 31 (Direct Agreement)). Accrued performance points should not generally be altered on appointment of a replacement Sub-Contractor (see Section 9.3 (Replacement of Sub-Contractors)).
21.2.2.5 These events are not mutually exclusive, since breaches covered under certain events (e.g. performance point limit) can still be caught under other default events.
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299 For example with performance points triggering termination.
300 See Section 21.2.3 (Termination for Persistent Breach by the Contractor) as to whether this is appropriate.
301 This catches non-permitted replacement of Sub-Contractors . See Section 16 (Equality Legislation Sub-Contracting, Employees and Documentary Changes) as to whether (and if so what) restrictions should be imposed.
302 This catches non-permitted assignment by the Contractor of its rights and obligations under this Contract. See Section 17 (Assignment) as to whether (and if so what) restrictions should be imposed.
303 This catches non-permitted transfers of shares in the Contractor. See Section 18 (Change of Ownership) and in particular Section 18.6 (Ownership Default) to whether such restrictions are appropriate.
304 This is likely to be the only circumstance in which Contractor Default during the construction phase can occur. The existence of early termination milestones are unlikely in most projects to be of any practical benefit (see Section 3.2.5). Authorities may provide a more specific definition of "abandonment".
305 A sufficiently distant date will normally be necessary to render such a provision bankable. See Sections 2 (Duration of Contract) and 4.5 (Long-Stop Date) which allow the Long Stop Date to be based on the Planned Service Commencement Date (and therefore be self-adjusting). If this is done however, no allowance should be made for the possible occurrence of Relief Events, Compensation Events or force majeure when setting the base line long stop period (prior to any adjustment).
306 Financial advisers may advise on suitable calibration. See further Section 9 (Performance Requirements).
307 Not all failures to insure should lead to a termination event occurring. Only the Required Insurances should be caught. This approach goes hand in hand with the treatment of the issues relating to non-availability of certain insurances (see Section 25 (Insurance and Criminal Damage) and, in particular, Section 25.10 (Risks that Become Uninsurable).