Early termination
Some common grounds for early termination include default by the Project Company, default by the Procuring Authority, as well as the occurrence of other specific events. The terminology globally for default and termination is not always consistent. For the purposes of this reference tool, the term ‘default’ refers to a failure to comply with some aspect of the PPP contract which gives the other party the right to terminate the contract prior to its scheduled expiry.
The term ‘breach of contract’ refers to a failure to comply with some aspect of the PPP contract, though this failure may or may not entitle the other party to terminate the contract.
A PPP contract can be very precise in specifying the events that constitute a default and can be a closed, itemised list of events or an open-ended list with (e.g. a catch-all provision for any material breach). More generic default definitions can be more difficult to implement as they require extensive legal interpretation. What constitutes a default may also be governed by the applicable underlying law in addition to, or instead of, the PPP contract.
Project Company defaults may include performance breaches, breach of applicable safety or environmental standards, breach of insurance obligations, cross-breaches under the loan agreements with the Project Company’s lenders (a breach of a term of a loan agreement that triggers a corresponding breach under the PPP contract) or insolvency of the Project Company. Insolvency is detailed in Chapter 6 (Insolvency).
A default will not typically lead to automatic termination. Instead, a default will give the party that is not in breach of the contract a right to terminate, which it may choose to exercise. In several jurisdictions, court intervention is required to make a termination effective.
Termination procedures can include escalation provisions in respect of less serious breaches of contract:
- Persistent minor breaches of contract may lead to a default
- The accumulation of payment deductions above a certain threshold may trigger a default
- The Project Company not completing construction by a certain final extended date for delivery of project that will trigger a Project Company default (notwithstanding the construction was already delayed) (long stop date)
Procuring Authority defaults can include a failure to make a payment when due, or a failure to comply with some other obligation, such as providing access to land. There are several other examples of breaches and defaults which will depend on the type of project asset and the structure of the PPP.
As detailed in Section 7.2 (Guidance) many defaults will also entitle the party in default to a chance to remedy default before termination is available.
PPP contracts often also provide a list of specific events or causes, known as ‘relief events’ for which the Project Company is protected against default if these events, outside of the party’s control, cause it to fail to be able to perform. For example, a force majeure event is typically included as a relief event.
A right to terminate will typically exist however if a force majeure event (or another ‘relief event’) continues for a prolonged period. What constitutes a prolonged period may be set out in the PPP contract. Often both the Procuring Authority and the Project Company will have a right to terminate the PPP contract after a prolonged force majeure event.
It is also common for PPP contracts to include a provision for the Procuring Authority to terminate the contract voluntarily, or for the right to voluntarily terminate to be qualified by a ‘public interest’ test. Similar principles may be addressed in a country’s underlying legal system. In either scenario, the practical application of the termination will depend on the PPP contract and/or the underlying legal framework. The financial implications of voluntarily terminating the PPP contract are likely to be similar to the implications of a Procuring Authority default and so will be very costly for the Procuring Authority.
Termination compensation
When a PPP contract is terminated, compensation may be payable by the Procuring Authority to the Project Company, even where the termination was the result of a Project Company default.
Terminations due to a Procuring Authority default or voluntary termination by the Procuring Authority are typically not favourable for the Procuring Authority, as the financial consequences are substantially worse than in the case of termination due to a Project Company default. Compensation will be based on the principle that the Procuring Authority should not unjustly benefit from the termination when the termination has occurred due to the Procuring Authority failing to comply with its contractual obligations (e.g. by failing to provide the required land access).
This is justified by the fact that the project assets are transferred back to the Procuring Authority upon termination, and the principle that the Procuring Authority should not unjustly benefit from receiving an asset early, given that the private partners will have contributed capital towards the asset. In the case of termination due to the Project Company’s breach of contract, the Project Company’s equity investors will typically receive no compensation. Some compensation is, however, typically available to the Project Company’s lenders where an asset is being handed back to the government.
Several methods can be used to determine the compensation payment, as set out in the EPEC Guide on PPP Terminations [1] and the 2017 version of the World Bank Guidance on PPP Contractual Provisions [2].
This compensation may be provided for in the PPP contract, under the applicable laws or other agreement. In some jurisdictions, the courts will need to intervene to decide on the level of compensation payable.
[1] Available at http://www.eib.org/epec/g2g/iv-project-implementation/41/416/index.htm.
[2] Available at https://ppp.worldbank.org/public-private-partnership/library/guidance-on-ppp-contractual-provisions-2017-edition/.
