7. Default and termination
Early termination refers to the termination of a PPP contract prior to the scheduled end of its contract duration. A PPP contract and the applicable laws will set out the circumstances which could trigger such a termination. An early termination event can typically be triggered by a serious breach of the provisions of a PPP contract by either the Project Company or the Procuring Authority.
An early termination event can be triggered by a serious breach of a PPP contract’s provisions by either the Project Company or the Procuring Authority. An early termination event has the potential to trigger substantial compensation payments by the Procuring Authority to the Project Company. Such an event may leave a government with a half-completed asset, an asset that has no operator, or a reduction in the level of service being provided to end-users. A default can also indicate a failure in the contract management system.
A termination can also be triggered by the occurrence of an event that is not the fault of either party, such as termination due to a prolonged force majeure event rendering the parties unable to comply with the PPP contract. It is also common for the Procuring Authority to be entitled to terminate voluntarily at its own discretion.
It is important that PPP contracts are managed in such a way that the Procuring Authority is able to identify early indications of potential default and proactively mitigate the risk of termination, although it should be noted that it may not always be possible to prevent a default. Ultimately, the Project Company is responsible for complying with the PPP contract and there will be times, albeit rare, when the best decision the Procuring Authority can make in the circumstances is to terminate the PPP contract and take back the asset or re-tender the project.
The extent to which issues associated with PPP contract termination may be addressed within the legal framework of a particular jurisdiction (and the nature of the approaches commonly used to deal with these issues) will depend on the legal system the jurisdiction has adopted, the existence of specific laws (including specific PPP laws) and the maturity of the PPP market. This chapter aims to address some of those nuances from a practical contract management perspective, rather than a legal perspective and it does not attempt to address specific legal frameworks.
This chapter focuses on serious breaches of contract and defaults. Other less serious breaches are detailed in other chapters and sections of the reference tool. For example, claims are detailed in Section 3.4 (Claims), and the Project Company’s performance is detailed in Section 3.2 (Performance monitoring). Managing defaults and termination may lead to disputes, which are detailed in Chapter 5 (Disputes).
Chapter structure
This chapter provides a background to issues around default and termination of a PPP contract in Section 7.1 (Background) and provides guidance on managing defaults and termination. The key elements to successfully managing defaults and termination are summarised below and detailed in Section 7.2 (Guidance).
B. Monitor potential Project Company defaults to manage termination risk at an early stage
C. Consider termination and the full financial and non-financial implications of termination
D. Seek legal advice before issuing a termination notice
E. When terminating a PPP contract, plan early to ensure service provision is uninterrupted
G. Consider the Project Company’s lenders including their potential step-in rights
H. Consider step-in rights of the Procuring Authority
Section 7.3 (Summary data analysis) provides a summary of data analysis with respect to default and termination in relation to PPP contracts.
Read the short introductory background on managing default and termination in infrastructure public-private partnerships.
Explore the detailed guidance on managing default and termination in infrastructure public-private partnerships.
Examine a summary of the default and termination data analysis in infrastructure public-private partnerships.