The Private Partner is likely to incur certain other costs as a result of early termination of the PPP Contract, including employee redundancy costs, as well as other costs payable to its sub-contractors in accordance with the terms of the relevant Project Agreements. The general principle is that the Private Partner and its sub-contractors should be no worse nor better off as a result of the early termination. While market practice is for these costs to be included in the compensation payment for this category of termination, the scope may vary depending on the jurisdiction. Key points for the Contracting Authority to bear in mind include:
• Reviewing the Project Agreements - as with the financing agreements, before PPP Contract signature the Contracting Authority and its advisers should review the Project Agreements to assess any early termination provisions which may give rise to third party cost compensation. In particular, the Contracting Authority will want to ensure there are no excessive termination payments included in contracts with parties who hold shares in the Private Partner and are sub-contracted to it.
• Defining and capping liabilities - as far as possible the PPP Contract should set out the precise scope of compensation for third party costs. As third party costs can be significant and fluctuate over time, the Contracting Authority may wish to seek to cap its liability in this respect, although typically this is achieved by defining the eligible items as opposed to setting a monetary cap. The Contracting Authority should also oblige the Private Partner to mitigate costs. Both liability caps and mitigation obligations should be reflected in the Project Agreements themselves.
• Compensating for loss of profit - one of the key commercial issues the Contracting Authority will also need to address is the extent to which compensation should cover the loss of future profits for the sub-contractors - this may be achieved by limiting the number of years.
• Redundancy costs - careful consideration needs to be given to compensation for redundancy of staff employed by the Private Partner and/or its sub-contractors. Such compensation will likely depend on applicable law and the ability to redeploy affected staff.
See Section 4.7, Sample Drafting 4, Schedule, Clauses (1)(b) and (c).