35.5.1 If a project is experiencing Contractor distress there are a number of practical measures that Authorities may adopt to help manage and resolve issues. Such measures include:
- Advice - It is important that Authorities promptly contact SIB, which has direct experience of dealing with issues arisinf from Contractor distress. Authorities should also obtain appropriately experienced technical, legal and/or financial advice at an early stage.
- Information Flows - It is important to establish clear lines of communication with Shareholders, the Contractor, the Senior Lenders and the users of the Service.
- Records of Project Documentation - Contract distress scenarios may involve dispute resolution and litigation. To assist in these procedures it is important at all times and in particular throughout a Contractor distress situation to keep up-to-date records of all contractual documentation, records of agreements amending the Contract and records of works undertaken.
- Scenario Planning - The Authority together with the Contractor, Shareholders and the Senior Lenders should set out clear plans for the resolution of difficulties arising from Contractor distress. Such plans should also cover scenarios where the Contractor or the relevant Sub-Contractor enters into a formal insolvency procedure.
- Joined-up Approach - A contractual counterparty that is experiencing Contractor distress may be involved in a number of PFI projects and in such instances it will be beneficial for the different Authorities to adopt a joined-up approach. A collective position on common issues will further strengthen the public sector negotiating position.
35.5.2 Furthermore, specific contractual issues may arise in circumstances of Contractor distress, including:
- Consideration of Waivers - The private sector may request the Authority to waive its rights under the Contract - for example where a termination right has arisen. Such a request may arise in the context of a standstill arrangement (which is an arrangement whereby parties, such as the Senior Lenders, who may exercise rights arising from an event of default occurring under the Financing Agreements, agree to a conditional suspension of those rights while a plan for resolving difficulties in the Project is implemented). An Authority should consider carefully whether the waiver of any of its rights would be appropriate, and whether this would have any legal effect on the Contract (obtaining legal advice where necessary). In circumstances where it does consider it appropriate, any waiver granted should be specific and time limited. The Authority should also consider whether it is appropriate to place other conditions on the grant of the waiver, which may relate to more general issues concerning the Project.
- Termination Rights - Where an Authority is considering exercising termination rights, it should consider the consequences of exercising such rights and the plans that will need to be implemented in order to ensure that works/services are continued. It should consider whether the Senior Lenders are preparing, pursuant to their rights under the Direct Agreement, to step-in following the termination notice. The Direct Agreement will also provide for a period of time during which the Senior Lenders may consider stepping-in. The Authority should ensure that the Senior Lenders have in place plans to protect the site during such period; the financial incentive will be on the Senior Lenders to do so. Senior Lenders will generally seek to avoid a termination notice being issued under the Contract, because of the reduced recoveries that actual termination might bring as compared to rescuing the Project outside the formal termination process.