21.2.3.1 The Contract should incentivise the Contractor in some way in respect of any breach by the Contractor, however minor. There are various means to deal with the persistent occurrence of minor defaults. The recommended approach is to impose performance points in respect of all types of minor defaults. This is a particularly effective means of incentivising the Contractor when coupled with a right to terminate the Contract if the total number of performance points accrued exceeds a certain level (see above).
21.2.3.2 It may not be feasible in every case to negotiate an all-encompassing performance points regime. This could leave the Authority exposed to a situation in which minor breaches are occurring persistently or being left unremedied, but as they have no effect on the Unitary Charge, the Authority will have little ability to influence the Contractor to perform. If such circumstances are likely to exist, the Authority should retain a right to terminate the Contract for Persistent Breach.308 The Contractor and its financiers will be anxious to avoid a "hair trigger" default and will wish to ensure the mechanics relating to this default are as objective as possible.
21.2.3.3 The Contract should therefore include a warning procedure which provides that the Contractor is served a formal preliminary notice that a certain type of breach has been persistently occurring. The Contractor should in any case be aware of such breaches already. If such breach continues to occur persistently in, say, the 12 months following such notice (allowing a short rectification period), a final notice is served warning the Contractor that any further single occurrence of such breach in, say, the following 6 months will entitle the Authority to terminate the contract. This then gives the Contractor the opportunity to remedy. The Authority should consider whether it requires a persistent breach remedy during the construction period as well as the operational period. The concerns of the Authority in the construction period are likely to be greater when the Authority shares the site during that period.
To the extent such provisions are needed, the following shall be used as required drafting:
means a breach for which a final warning notice (referred to in paragraph (b) of Clause 21.2.3 (Persistent Breach)) has been issued, which has continued for more than [ ] days or recurred in [ ] or more months within the [six] month period after the date on which such final warning notice is served on the Contractor;309
21.2.3 Persistent Breach
(a) If a particular breach other than any breach for which performance point deductions could have been awarded and/or availability deductions could have been made, has continued for more than [ ] days or occurred more than [ ] times in any [ ] month period then the Authority may serve a notice on the Contractor:
(i) specifying that it is a formal warning notice;
(ii) giving reasonable details of the breach; and
(iii) stating that such breach is a breach which, if it recurs frequently or continues, may result in a termination of this Contract.
(b) If, following service of such a warning notice, the breach specified has continued beyond 30 days or recurred in [ ] or more310 months within the [ ] month period after the date of service, then the Authority may serve another notice on the Contractor:
(i) specifying that it is a final warning notice;
(ii) stating that the breach specified has been the subject of a warning notice served within the [twelve] month311 period prior to the date of service of the final warning notice; and
(iii) stating that if such breach continues for more than [ ] days or recurs in [ ] or more months within the [six] month312 period after the date of service of the final warning notice, the Contract may be terminated.
(c) A warning notice may not be served in respect of any breach which has previously been counted in the making of a separate warning notice.
21.2.3.4 Once a termination notice is served for a Persistent Breach, the Contractor should not be entitled to any further rectification period, although the provisions of the Direct Agreement will still apply (see Section 31 (Direct Agreement and Senior Lenders)).
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308 A Persistent Breach default should complement, and not be a substitute for, a fully effective payment mechanism.
309 This event of default addresses "Persistent Breaches" of the same type where each single breach may in itself not constitute a material breach but the persistent nature renders the contractual relationship untenable. This type of default should be used where the performance regime is not able to cover all types of breaches and the Authority would otherwise be left with no sanction for persistent failure by the Contractor to perform. This does not address the Persistent Breaches of different types (since persistent service failures covered by the performance regime are excluded by the definition). This does not mean that Persistent Breach Clause should itself include wording to the effect that the relationship between the Authority and the Contractor has become untenable, which is in itself highly subjective. The mechanism in Clause 21.2.3 relating to warning notices and final warning notices, leading to termination, in itself demonstrates that the relationship between the parties has become untenable. Neither should the Clause be amended to the effect that the Authority, in terminating the Contract for Persistent Breach, is acting in a "reasonable and proportionate manner". Again, the detailed mechanism in Clause 21.2.3 is itself sufficient in ensuring that the right to terminate is only exercised for repeated failures following service of a series of warning, and final warning notices, to the Contractor.
310 This will depend on the particular breach concerned, but a certain number of recurrences should be specified. In paragraph (b) (but not in (a)) it is provided that the persistent breach should occur across a number of months in order for it to accrue towards possible termination.
311 The time periods should be fixed by reference to the nature of the Project.
312 See footnote 310 above.