(a) Without prejudice to Clause 3 (Notice of Termination and Existing Liabilities), but subject to paragraph (b) below, the Authority shall not terminate the Contract during the Step-In Period on grounds:
(i) that the Agent has taken any action referred to in Clause 5 (Representative) or enforced any Security Document(s); or
(ii) arising prior to the Step-In Date28 of which the Authority is aware (having made reasonable enquiry and whether or not continuing at the Step-In Date); or
(iii) arising solely in relation to the Contractor,29
unless,in the case of paragraph (ii) above:
(A) the grounds arose during the [construction phase],30,and construction is not completed on or before the date falling [12]31 months after the date on which the Authority would have been entitled to terminate the Contract for non-completion;32 or
(B) the grounds arose during the [operation phase], and neither the Appointed Representative nor the Contractor is using all reasonable endeavours (including implementation of any remedial programme)33 to remedy any breach of the Contract that:
(1) arose prior to the Step-In Date; and
(2) is continuing (and capable of remedy); and
(3) would have entitled the Authority to terminate the Contract.
(b) The Authority shall be entitled to terminate the Contract by written notice to the Contractor and the Appointed Representative:
(i) if permitted by Clause 6(a)
(ii) if any amount referred to in Clause 3(b)(i) above has not been paid to the Authority on or before the Step-In Date;
(iii) if any amount referred to in Clause 3(b)(ii) has not been paid on or before the last day of the Required Period;
(iv) if amounts, of which the Authority was not aware (having made reasonable enquiry) at the time of the Termination Notice or the Event of Default, subsequently become payable and are not discharged on or before the later of:
(A) the date falling [30] days after the date on which the liability for these amounts is notified to the Agent;
(B) the date falling twenty [30] days after the date on which the liability for these amounts falls due; and
(C) the last day of the Required Period; or
(v) on grounds arising after the Step-In Date in accordance with the terms of the Contract provided that, subject to Clause 8 (Step-Out), for the purposes of termination under the Contract, (and without prejudice to the rights of the Authority to make deductions pursuant to the payment mechanism):
(A) [warning notices, deductions, unavailability or accrued unavailability34 and/or penalty points] that arose prior to the Step-In Date shall not be taken into account during the Step-In Period but shall be taken into account after the Step-Out Date.
(B) ratchets subsisting at the Step-In Date shall be suspended during the Step-In Period but shall be re-applied with effect from the Step-Out Date.
(c) The Authority shall deal with the Appointed Representative and not the Contractor during the Step-In Period.
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28 To the extent a right to terminate would otherwise arise, a right to terminate should arise for a 'latent defect' (i.e. one that could not reasonably be expected to have been discovered) becoming an 'actual defect'. That is, notwithstanding the discovery of a latent defect that existed prior to the Step-In Date, it should be treated as arising after that date. Latent defects are likely to be dealt with in the Contract (see Section 13.5 (Latent Defects Risk)) and are project specific.
29 For example, insolvency of the Contractor.
30 It is acknowledged that in the provision of the Service it is not always clear when the construction phase ends as the construction of an asset will be to facilitate the provision of the Service and without the ancillary support (for example, in a prison the regime being set up and approved) the Service will not be ready to start. Similarly in a phased development, the two phases will usually overlap. The key determinant will, of course, be the extent to which failure to complete construction of either phase will lead to termination (thereby preventing Service Commencement), in which case paragraph (A) will apply. If the failure is in the delivery of the Service from a completed facility then paragraph (B) will apply.
31 Time periods will depend on a number of issues, including the nature of the Project and the length of the construction phase. If there is no critical need for the project to commence by a certain date or parties believe the financial incentives are sufficiently strong, then (B) can also apply to terminations in the construction phase.
32 See footnote [30] above.
33 Prior to any step-in by the Senior Lenders, it is likely that the Authority will be asked to approve a remedial programme in respect of rectification works that the Senior Lenders are proposing in an attempt to rescue the Project. Such an approach is only acceptable provided that the Authority does not assume any additional risk by virtue of giving such approval, i.e. the purpose of the remedial programme should be purely to assist the Senior Lenders in a defence of a claim by the Authority that the Senior Lenders are in breach of Clause 6(a)(iii)(B) of the Funders' Direct Agreement as they are not using reasonable endeavours to rectify the relevant breach of the Contract.
34 Any terms in this sub-clause (A) and (B) should be consistent with payment mechanism terminology