On projects using a special purpose vehicle (“SPV”), the SPV is keen to ensure that it does not face claims or obligations that it cannot, in turn, seek from the contracting authority (“Authority”). But what if a sub-contractor makes a claim for payment or other right before the SPV has received the benefit of the same right from the Authority?
Equivalent Project Relief
Take a claim for additional time and money from a building contractor. The SPV must build the asset by a set date and for a fixed price – for which the SPV has no additional working capital to enable it to deviate from. Therefore, the SPV cannot meet the sub-contractor’s claim until the Authority has granted the same benefit to the SPV. Without this provision the SPV runs the risk of becoming insolvent and the project could collapse.
The SPV and funder will seek to protect against this scenario by including Equivalent Project Relief in the sub-contracts. Also known as “EPR” clauses, these provisions ensure that any sub-contractor right (e.g. further payment or relief from termination), which is identical or similar to an SPV right in the project agreement, is conditional upon the SPV being also entitled to this right. Therefore, the entitlement of the sub-contractor is no greater and no less than that of the SPV, helping to preserve the liquidity of the SPV.
In return the SPV will be obliged to enforce the terms of the project agreement preventing the SPV choosing to “do nothing” and prevent any sub-contractor claim. The SPV also cannot, without the sub-contractor’s consent, agree anything with the Authority that weakens the sub-contractor's entitlement.
What about the Housing Grants, Construction and Regeneration Act 1996?
EPR provisions could, in some specific circumstances, be contrary to section 113 of the Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”) which prohibits “pay-when-paid” provisions. As a consequence, EPR clauses are complex including “belt and braces” drafting which may, for example, delay the payment obligation of the SPV in the event that the clause falls foul of the HGCRA.
What about sub-contractors?
The EPR clause provides a procedure for pursuing identical or similar claims. However, funders and SPV’s will be trying to ensure that any sub-contract provisions are able to be passed up the chain to the Authority and that rights are mirrored. Therefore, sub-contractors will need to be aware of this when trying to negotiate any amendments to their contracts.
This article is part of a series which will look at the contractual terms that special purpose vehicles and funders will use to de-risk the construction period of a project and ensure that the project goes on to achieve its projected rate of return.
Writeb by Greg Fearn