Historically the early termination of a PFI/PPP contract has been a rare event. However the potential for termination is relatively high in the waste sector due to the potential for planning failure and the technology risk involved in residual waste treatment. It is therefore important for the Contract Manager to be aware of the contractual provisions relating to early termination.
A decision to terminate the Contract should never be taken lightly by the Authority. The decision to terminate the Contract is as significant as the original decision to enter into the Contract and should be taken by the same decision making body. These procedural points should be addressed in the Contract Management Manual. Termination can lead to the payment of compensation to the Contractor by the Authority. The calculation of such a sum is usually complex. The Authority is likely to require external advice to ensure its contractual position is properly protected. Therefore, the Contract Manager should ensure appropriate procedures are in place to involve colleagues from the Finance Department and to access external financial advice.
The WIDP Contract provides for formal procedures to be followed prior to any early termination. Termination notices must be issued in accordance with the Contract to be valid and this is another area where the Contract Manager should seek specialist legal advice.
The Contract will have detailed provisions applying to all scenarios where compensation is payable. These may cover issues such as:
a) gross up for any tax payable by the Contractor;
b) set off of any amounts owed by the Contractor to the Authority;
c) exclusivity of remedy;
d) payment by instalments; and
e) interest on amounts owing.
There may also be particular rules relating to the assessment of Third Party Income and Off Take Contracts. Under the WIDP Contract these are dealt with in Clause 50 (Third Party Income) and Clause 51.1 (Off Take Contracts).
When considering the issue of payment by instalments the Authority should compare the interest rate payable with that it would pay if it were to borrow the amount to pay all the compensation upfront.