21.2.6.1 The required approach follows the principle set out in Section 21.2.5.4. It facilitates the Senior Lenders' rights to step in, manage and rescue or sell the Project if the Contractor defaults, but, if they fail to do so, offers compensation on termination based on the market value of the unexpired term of the Contract.
21.2.6.2 The approach:
• does not require the Senior Lenders to make attempts to take responsibility and seek to transfer the Project if there is no liquid market for similar PFI projects;
• does not penalise Senior Lenders for stepping in if, subsequently, they choose to step-out (see Section 31 (Direct Agreement and Senior Lenders));
• increases the incentives for Senior Lenders to work with the Authority and the Contractor to achieve a long term solution rather than terminate a Project that encounters difficulties;
• ensures that the Authority is no worse off as a result of the termination where Senior Lenders elect not to step-in;
• does not give the Authority a windfall gain on termination; and
• does not discriminate against different classes of finance or against bidders who are prepared to finance the Project through their own balance sheets.
21.2.6.3 If the Authority issues a Termination Notice to the Contractor, the Senior Lenders will require an opportunity to put together a remedial plan and accordingly, the right to attempt to rectify breaches or transfer the Contract. The Senior Lenders are given this opportunity under the terms of the Direct Agreement.318 In such circumstances, the Senior Lenders are incentivised to take control of the Project because any failure to do so will lead to termination of the Contract and allow the Authority to elect to retender the Contract (see Section 21.2.7 (Retendering Election and Liquid Market) below). Senior Lenders accept that they should take the risk of the Contractor's performance and take responsibility for the Project if the Authority elects to terminate the Contract for poor performance. The Senior Lenders will not, however, agree to any requirement to take reasonable steps to transfer the Contract to a third party at the time of the issuance of the Termination Notice if there is no liquid market for similar types of PFI projects. The required approach is therefore that if at the time the Authority issues the Termination Notice the parties agree that there is no liquid market (or it is determined in accordance with the Dispute Resolution Procedure), the procedure set out in Clause 21.2.9 (No Retendering) should be used to determine the compensation payable to the Contractor.319
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318 See Section 31 (Direct Agreement and Senior Lenders).
319 See Clause 4 (No Liquid Market) of the Direct Agreement set out at Section 31 (Direct Agreement and Senior Lenders).