24.4.1 The Authority should be fully entitled to set off any outstanding liabilities of the Contractor against the amounts it pays in compensation on a Contractor Default, but for the reasons set out in Section 24.4.2 this will in all likelihood not affect the termination payment concerned. There should be no ring-fencing of Senior Debt under these circumstances. In circumstances other than Contractor Default, however, it is acceptable for a limit on set-off to be introduced. To minimise the possible effects of not having the right to set off in other circumstances, the Authority should ensure that minimum amounts are outstanding from the Contractor.
Required drafting is as follows:
24.4 Set-off on Termination6
Except where expressly stated otherwise, the Authority is not entitled to set off any amount against any payment of termination compensation (whether payable as a lump sum or in instalments) under Clauses 23.1.3 (Compensation on Authority Default), 23.3.2 (Compensation on Termination for Force Majeure), 23.4.3 (Compensation on Termination for Corrupt Gifts and Fraud), 23.5.2 (Compensation on Voluntary Termination), 23.5.4 (Compensation on Termination on an Authority Break Point Date) and 23.6.2 (Compensation on Termination for Breach of the Refinancing Provisions), save to the extent that after such an amount has been set off, the termination payment made would be in an amount greater than or equal to the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount, as the case may be, at that time.
24.4.2 Claims against the Contractor by the Authority should be fully reflected in the "market value" based termination payment to the Contractor since bidders will discount the value of any claims (depending on the likelihood of their success) from the amount they are prepared to pay for a Project retendered on the same terms (that is, subject to any outstanding claims which the Authority would set off against the future Unitary Charge if the outgoing Contractor did not meet them). This is the case, therefore, with the second valuation options for Authority Default and Voluntary Termination and also for termination for Contractor Default. There should be no double counting in these circumstances, so the Authority must make it clear to potential replacement contractors what claims they should take into account in their bids.
24.4.3 Where termination has occurred for reasons other than Contractor Default, the Authority should be entitled to set off outstanding liabilities of the Contractor against all amounts it pays in compensation, except amounts paid to compensate Senior Debt (see above).
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6 Clause 22.3 (Set-Off and VAT)] contains the right to set off amounts.