27.3.1 The Authority should review the Contractor's sub-contractual arrangements prior to Financial Close to ensure that the Contractor is providing a solution to the Authority that is reasonably likely to meet the performance requirements set out in the Contract and that the price set out in the financial model is that set out in the relevant Sub-Contract. As discussed above, the Contractor should be permitted to manage his delivery of the Service but best practice is for the Authority not to sign the Contract until the Sub-Contracts are agreed and ready for execution. In particular, the Authority should review the terms of the Sub-Contracts for the following:
• Term of Contract - if the term of the relevant Sub-Contract does not reflect the period that the Service is required to be provided for under the Contract, the Authority should consider the level of protection it has in the Contract relating to controlling the identity of any Sub Contractors5
• Liquidated Damages - if the Contract requires the Contractor to pay liquidated damages to the Authority for late delivery of the Service, the Authority should ensure that the Contractor is sufficiently financially robust so as to meet such obligations, taking account of terms of Sub-Contracts and claims of the Senior Lenders. This is essential because if the terms of the Contract and the Sub-Contracts are materially different, the Authority could be exposed (i.e. if the Contractor is unable to claim from the Sub-Contractor then the Contractor may be unable to pay the Authority).
• Collateral Warranties - if the Authority has the benefit of collateral warranties from Sub Contractors then it will need to ensure that it is comfortable with the terms of the relevant Sub-Contract. To the extent that the Authority is able to pursue the Sub-Contractor under the collateral warranty for failure to perform the Sub-Contract, the Authority will, by definition, only be able to pursue the Sub-Contractor for non-performance of the Sub-Contract, and not non-performance of the Contract by the Contractor. Accordingly, the Authority should consider the extent of any risks which are not passed to a Sub-Contractor by the Contractor and ensure that the Contractor is sufficiently financially robust so as to meet any liabilities that may occur if such risks occur.
• Breakage Costs - The Authority should review carefully any break costs payable on early termination of the Sub-Contract since it is potentially liable for these in various termination scenarios. If it is not satisfied with these, then its exposure to them under the Contract should be capped. See further Section 23.1.3.7 (Compensation on Termination on Authority Default), the definition of Sub-Contractor Breakage Costs in Clause 23.1.3 and the limit on termination payments at Section 24.3 (Certainty of Compensation Payments Amounts and Changes to Financing Agreements).
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