Protection from Termination: Termination in Project Finance Models

The ability to terminate is a strongly negotiated issue in project finance deals as the special purpose vehicle (SPV) will want to be able to terminate the contractor easily whilst preventing themselves being terminated to ensure the project can reach practical completion by the target date. 

This is so important as, on most project financed deals, SPV does not start to get paid until after practical completion as the payments will be tied to use of the asset by the authority or third party user. This makes the construction phase a risky period for the SPV and its funder and so, to mitigate against that risk, the SPV and funder will seek several protections relating to termination including: 

  1. The construction cost will be fixed and the rights for extensions of time or money are limited. In any project financed model, the contractor’s rights to claim extra time and money are significantly more limited compared with most design and build contracts. 
  2. The contractor’s right to terminate the building contract is limited. The SPV will usually try to limit the contractor’s right to terminate the building contract to the SPV failing to make a payment within a certain time frame. This differs from an unamended JCT contract where the contractor will have additional grounds for termination. 
  3. The funder will be given a right to “step into” the building contract and rectify any SPV defaults before the contractor can terminate the building contract for SPV default. The importance of this right will depend on the extent of SPV defaults potentially triggering termination.  These 3 protections can be thought of as a group. The construction price is set and the funder will have agreed to provide the SPV with the funds to meet the payments required under the building contract. However, in the unlikely event that the SPV defaults under the building contract, the funder can step-in to prevent termination.
  4. The contractual provisions which give rise to the authority’s termination rights under the project agreement will be replicated in the construction contract but with “headroom”. This headroom ensures that the authority cannot terminate the project agreement with the SPV before the SPV has had a chance to terminate and replace the building contractor. For example, the authority may have the right to terminate the SPV where the project asset has not achieved PC by a “Long Stop Date”. If the Long Stop Date is 12 months after the target date for PC then the SPV will typically require a right to terminate the contractor after 6 months’ delay. 


Building contractors engaging in the project finance space will need to understand the full extent of protections the SPV and its funder will seek to get comfortable with funding an asset “upfront” with no access to income until after the asset has reached PC. This article is part of a series looking at the contractual terms that special purpose vehicles and funders will use to de-risk the construction period of a project financed project. You can read Greg’s previous article on the role of Liquidated Damages in project finance models here.

Written by Greg Fearn


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