16.6.1 Costs arising from Discriminatory and Specific Changes in Law which were not foreseeable at the time of the signing of the Contract, and whether involving Capital Expenditure or not, should be borne by the Authority during both the construction and the operating phases of the Contract.
16.6.2 General Change in Law may affect the Project in a variety of ways. For example:
• the change may require alterations to the structure of a building or its fixtures (with an impact both on Capital Expenditure and, potentially, timetable); and
• the change may necessitate a change in the way a Service is delivered (e.g. the number of people required to deliver it or the rights of employees may change).
16.6.3 Costs arising from changes in non-discriminatory/non-specific legislation (i.e. General Changes in Law) should, during the construction phase, be a Contractor risk, whether or not the Contractor was or should have been aware of the Change in Law at the time of the signing of the Contract.
16.6.4 General Changes in Law which come into effect during the Service Period and which were not foreseeable at the date of the Contract should be an Authority risk if they involve Capital Expenditure and a Contractor risk if they do not.
16.6.5 The Authority should generally pay Capital Expenditure in accordance with the principles set out in Section 11.3.7 (Funding and Payment) where it is responsible for the costs. Any consequent operating cost increases are borne by the Contractor although these costs will be mitigated by the effects of indexation (see Section 19.11 (Indexation)). The points made in Section 15.2.3 (Calculation of Compensation) are similarly relevant here.
16.6.6 For projects which have unusually long construction periods, transferring the risk of General Changes in Law for the entire construction period may in fact be poor value for money and is likely to be difficult to achieve in practice (see in particular Department for Environment, Food and Rural Affairs' guidance for Waste PFI projects),6
16.6.8 If a General Change of Law requires changes to the Works or Service then either party should be entitled to require a variation to the project specifications to comply with a Change in Law and no breach of contract should arise while this is being done7
Required drafting is as follows:
means:
(a) a Discriminatory Change in Law;
(b) a Specific Change in Law; and/or
(c) a General Change in Law which comes into effect during the Service Period and which involves Capital Expenditure,
which was not foreseeable at the date of this Contract.9
(a) If a Qualifying Change in Law occurs or is shortly to occur, then either party may write to the other to express an opinion on its likely effects, giving details of its opinion of:
(i) any necessary change in Service;10
(ii) whether any changes are required to the terms of this Contract to deal with the Qualifying Change in Law;
(iii) whether relief from compliance with obligations is required, including the obligation of the Contractor to achieve the Planned Handover Date and/or Planned Service Commencement Date and/or meet the [performance regime] during the implementation of any relevant Qualifying Change in Law;
(iv) any loss of revenue that will result from the relevant Qualifying Change in Law;11
(v) any Estimated Change in Project Costs that directly result from the Qualifying Change in Law; and
(vi) any Capital Expenditure that is required or no longer required as a result of a Qualifying Change in Law taking effect during the Service Period,12
in each case giving in full detail the procedure for implementing the change in Service. Responsibility for the costs of implementation (and any resulting variation to the Unitary Charge) shall be dealt with in accordance with paragraphs (b) to (f) below.
(b) As soon as practicable after receipt of any notice from either party under paragraph (a) above, the parties shall discuss and agree the issues referred to in paragraph (a) above and any ways in which the Contractor can mitigate the effect of the Qualifying Change of Law, including:
(i) providing evidence that the Contractor has used reasonable endeavours (including (where practicable) the use of competitive quotes) to oblige its sub-contractors to minimise any increase in costs and maximise any reduction in costs;
(ii) demonstrating how any Capital Expenditure to be incurred or avoided is being measured in a cost effective manner, including showing that when such expenditure is incurred or would have been incurred, foreseeable Changes in Law at that time have been taken into account by the Contractor;
(iii) giving evidence as to how the Qualifying Change in Law has affected prices charged by any similar businesses to the Project, including similar businesses in which the Shareholders or their Affiliates carry on business; and
(iv) demonstrating that any expenditure that has been avoided, which was anticipated to be incurred to replace or maintain Assets that have been affected by the Qualifying Change in Law concerned, has been taken into account in the amount which in its opinion has resulted or is required under sub-clause (a) (v) and/or (vi) above.
(c) If the parties agree or it is determined under Clause 34 (Dispute Resolution) that the Contractor is required to incur additional Capital Expenditure due to a Qualifying Change in Law, then the Contractor shall use its reasonable endeavours to obtain funding for such Capital Expenditure on terms reasonably satisfactory to it and the Senior Lenders.
(d) If the Contractor has used reasonable endeavours to obtain funding for Capital Expenditure referred to in sub-clause (c), but has been unable to do so within [60] days of the date that the agreement or determination in paragraph (c) occurred, then the Authority shall pay to the Contractor an amount equal to that Capital Expenditure on or before the date falling 30 days after the Capital Expenditure has been incurred.
(e) Any compensation payable under this Clause by means of an adjustment to or reduction in the Unitary Charge shall be determined and made in accordance with Clause 15.2 see Section 15.2.3 (Calculation of Compensation).
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6 See Department for Environment, Food and Rural Affairs website at www.defra.gov.uk.
7 The required drafting that follows may be incorporated into a Change Protocol as described in Section 11 (Change in Service and Works).
8 It may be that there is a particular uncertainty attaching to a particular change in law (even if foreseeable) such as where, for example, its effects can vary by a significant factor. If this is so, then risk sharing can be agreed where the value for money impact is extremely difficult to assess. This is an approach adopted in the waste sector where a list of expected legislation which cannot be accurately costed is normal. See Section 5 of DEFRA guidance entitled Standardisation of waste management PFI contracts: guidance on SoPC derogations, May 2006.
9 If any greater clarity can apply to this in a particular Project (such as concerns over particular envisaged changes in law) then this should be expanded upon.
10 For example, the contractual, financial, operational and/or construction implications of the change in Service. Any change in Service should be agreed and implemented in accordance with the Change Protocol described in Section 11 (Flexibility and Change), with the costs of the change being borne as recommended in this Section 16.
11 Where third party income is of particular importance in the Contract (as in Waste projects) additional drafting may be needed to ensure that the Contractor is not over-compensated.
12 There will only be an adjustment to the Unitary Charge in respect of increased capital costs if the Authority does not make a lump sum payment to the Contractor (see Clause 16.6(e) above). Increased operational costs resulting from any General Change in Law are borne by the Contractor and will not result in an adjustment to or reduction in the Unitary Charge (see Section 16.6.5 above).