The following guidance outlines the key issues that should be considered when managing defaults and termination in relation to a PPP contract.

A. Be aware of the rights of both parties and any agreed pre-termination procedures in the PPP contract and under the applicable laws

The rights of both parties to terminate the PPP contract need to be well understood by the Procuring Authority. Some examples of defaults are detailed in Section 7.1 (Background); ultimately, however, the Procuring Authority should be aware of the specific termination regime set out in the PPP contract or under the applicable laws so that it can adequately mitigate the risk of project termination.

Termination provisions typically include additional safeguards against termination, such as ‘relief events’, default cure procedures and other practical procedures (such as periodic reporting and the right for the Procuring Authority to increase monitoring in certain circumstances). These safeguards should be well understood and utilised.

It is typical to allow the defaulting party a chance to remedy breaches of the PPP contract which are capable of being remedied. Some defaults may not be capable of remedy and so will lead to an immediate right to terminate the PPP contract (e.g. insolvency of the Project Company).

For other breaches, the parties will generally be given an opportunity to rectify a default and continue performance under the PPP contract. For example, in the case of a default, a Project Company may be required to submit a remediation plan for the Procuring Authority to review and approve.

Where a remediation plan is required the focus should be on returning to a scenario where the project is providing the service and value for money forecast at financial close. The parties should consult on relevant issues, such as the likely duration of the default and the action to be taken to mitigate its impact. The Procuring Authority should be clear about its requirements and monitor the implementation of the remediation plan, which is typically done in conjunction with a third-party expert.

If the Procuring Authority is not reasonably satisfied that the steps taken to remedy the default as agreed in the remediation plan are adequate, the default will typically lead to a Procuring Authority termination right. Therefore, this process must be followed with the appropriate gravity. Step-by-step plans and procedures should be agreed to allow for independent and concurrent verification of the phased implementation of remedial measures, which may be large and complex. Any remedial plans will also be scrutinised by the lenders, as termination of the PPP contract has the potential to impact the lenders substantially.

There is no long-term benefit in the Procuring Authority unreasonably penalising the Project Company or frustrating its ability to remedy the breach and continue performance of the PPP contract. In addition, such frustration may increase the risk of claims being made against the Procuring Authority. Claims are detailed in Section 3.5 (Claims).

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

F. Where a substitute Project Company is required, consider all potential effects of the substitution

G. Consider the Project Company’s lenders including their potential step-in rights

H. Consider step-in rights of the Procuring Authority

I. Monitor and ensure compliance with the Procuring Authority’s obligations under the PPP contract and the applicable laws

J. Monitor the performance of key contractors, whose termination can present a significant risk to a project

Questions & Answers

View our list of previous questions and answers or submit a question to our PPP Contract Management team.