23.2.2.1 The Contract should specify the events of Contractor Default which may lead to termination. As far as practicable, these should be objective, clear and provide for reasonable tolerances,16 bearing in mind the undesirable consequences of a termination.
Required drafting is as follows:
means one of the following events:
(a) a breach by the Contractor of any of its obligations under this Contract which materially and adversely affects the performance of the Service;17
(b) a Persistent Breach occurs;18
(c) a court makes an order that the Contractor [or Holdco] be wound up or a resolution for a voluntary winding-up of the Contractor [or Holdco] is passed;
(d) any receiver or manager in respect of the Contractor [or Holdco] is appointed or possession is taken by or on behalf of any creditor of any property of the Contractor [or Holdco] that is the subject of a charge;
(e) any voluntary arrangement is made for a composition of debts or a scheme of arrangement is approved under the Insolvency Act 1986 or the Companies Act 2006 in respect of the Contractor [or Holdco];
(f) an administration order is made, or an administrator is appointed in respect of the Contractor [or Holdco];
(g) a breach by the Contractor of Clause 7.26 (Replacement of Sub-Contractors) 19 occurs;
(h) a breach by the Contractor of its obligations in Clause 32 (Assignment) occurs;20
(i) a breach of Clause 6 (Change in Ownership) occurs;21
(j) the Contractor Abandons the Works at any time;22
(k) a failure to achieve the Service Commencement Date by the Longstop Date;23
(l) a failure to provide [ ] Available [places/areas] [availability for use] for [x] period;
(m) the accumulation of [ ] or more [performance points] in any [Quarter/Year];24
(n) failure to provide [ ] Available [places/areas] for [ ] period [and accumulation of [ ] [performance points] in respect of the same period]; or
(o) subject to clause 17.9 (Risks that become uninsurable), a breach by the Contractor of its obligation to take out and maintain Required Insurances.25
"Abandon''
means, not to carry out any Works contemplated by the [Construction Programme] at the Site for twenty (20) consecutive Business Days or during sixty (60) Business Days (whether consecutive or not) in any twelve (12) month period.
23.2.2.2 Other events of default may be included on a project-specific basis.26 If the Authority places restrictions on assignment, change in ownership or replacement of Sub-Contractors, then it may be appropriate to include a corresponding event of default for breach of such restrictions (see Sections 7 Services and Service Commencement), 32 (Assignment) and 6 (Change in Ownership)). Similarly, if the Project is in a security-sensitive sector, breach of specific security requirements might be included. Generally, it is not necessary to include non-payment of sums by the Contractor as a Contractor Default as the Contractor's payment obligations are limited and the Authority should have the ability to set off certain amounts (see Section 22 (Set-off and VAT)), although particular projects may require this (e.g. where the Project has significant third party income). Certain projects (e.g. schools and hospitals) may also want to provide a default for material health and safety failures.
23.2.2.3 Generally, insolvency events of default should not be extended to include Sub-Contractor's or the Contractor's shareholders. This is because the Contractor will in any event be incentivised to replace the Sub-Contractor concerned to ensure performance of the Contract. An exception to this would be where the contractual structures concerned make it necessary that such parties owe unusually significant financial or contractual obligations to the Contractor (or the Authority) and no replacement can be found who would match such obligations.
23.2.2.4 Termination should be subject to any rectification procedures (see Section 23.2.4 (Rectification)) and the rights of the Senior Lenders under the Direct Agreement (see Section 26 (Funders' Direct Agreement). Accrued performance points should not generally be altered on appointment of a replacement Sub-Contractor (see Section 7.26 (Replacement of Sub-Contractors)).
23.2.2.5 These events are not mutually exclusive, since breaches covered under certain events (e.g. performance point limit) can still be caught under other default events.
23.2.2.6 Where health and safety is a particular concern (e.g. in school, hospital, or waste contracts), a specific health and safety default should be considered. An opportunity should be given however for the Authority to replace any sub-contractor which has suffered any Health and Safety conviction. Suitable drafting is as follows:
"The Contractor committing a material breach of its obligations under this Agreement (other than as a consequence of a breach by the Authority of its obligations under this Agreement) which results in the criminal investigation, prosecution and conviction of the Contractor or any Contractor Related Party or the Authority under the Health and Safety Regime (an "H&S Conviction") provided that an H&S Conviction of a Contractor Related Party or the Authority shall not constitute a Contractor Default if, within ninety (90) Business Days from the date of the H&S Conviction (whether or not the H&S Conviction is subject to an appeal or any further judicial process), the involvement in the Project of each relevant Contractor Related Party (which in the case of an individual director, officer or employee shall be deemed to include the Contractor Related Party of which that person is a director, officer or employee) is terminated and a replacement is appointed by the Contractor in accordance with Clause 32.2 (Restrictions on the Contractor) provided always that in determining whether to exercise any right of termination or right to require the termination of the engagement of a Contractor Related Party under this Clause 23.2.2.6 (Health and Safety), the Authority shall:
(a) act in a reasonable and proportionate manner having regard to such matters as the gravity of any offence and the identity of the person committing it; and
(b) give all due consideration, where appropriate, to action other than termination of this Agreement;
means
(a) an officer, servant or agent of the contractor, or any Affiliate of the Contractor and any officer, servant or agent of such a person;
(b) any Sub-Contractor or sub-contractor of the Contractor of any tier and any of their officers, servants or agents; and
(c) any person on or at the Site at the express or implied invitation of the Contractor (other than an Authority Related Party);
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16 For example with performance points triggering termination.
17 As an alternative here, the Authority may specify the primary purpose or function for which the Authority needs the Service or Facility, e.g: on a School project, reference could be made to Educational Services at the School.
18 See Section 23.2.3 (Termination for Persistent Breach by the Contractor) as to whether this is appropriate.
19 This catches non-permitted replacement of Sub-Contractors. See Section 7 (Services and Service Commencement) as to whether (and if so what) restrictions should be imposed
20 This catches non-permitted assignment by the Contractor of its rights and obligations under this Contract. See Section 32 (Assignment) as to whether (and if so what) restrictions should be imposed.
21 This catches non-permitted transfers of shares in the Contractor. See Section 6 (Change in Ownership) and in particular Section 6.6 (Ownership Default) to whether such restrictions are appropriate.
22 This is likely to be the only circumstance in which Contractor Default during the construction phase can occur. The existence of early termination milestones are unlikely in most projects to be of any practical benefit (see Section 7.2.5 (Services and Service Commencement)]. Where there may be some delay to starting on site or where there is a grouped project with multi-sites, Authorities may wish to provide a default for failure to start work on site by a specified date. This would then be subject to extension of time for supervening events see Priority School Building Program contract at Section 16.
23 A sufficiently distant date will normally be necessary to render such a provision bankable. See Sections 3 (Duration) and 8.5 (Long-Stop Date) which allow the long stop date to be based on the Planned Service Commencement Date (and therefore be self-adjusting). If this is done however, no allowance should be made for the possible occurrence of Relief Events, Compensation Events or force majeure when setting the base line long stop period (prior to any adjustment).
24 Financial advisers may advise on suitable calibration. See further Section 20 (Payment mechanism and Monitoring).
25 Not all failures to insure should lead to a termination event occurring. Only the Required Insurances should be caught. This approach goes hand in hand with the treatment of the issues relating to non-availability of certain insurances (see Section 17 (Insurance) and, in particular, Section 17.9 (Risks that become uninsurable).
26 For example, the NHS requires a right to terminate if the Contractor prevents the Authority from carrying out its retained activities.