Risk allocation is implicit in the revenue regime of the contract and in the scope of the obligations. The private party shall construct in the form and time defined (by the contract or as committed to in its proposal), and it shall provide the service as prescribed in the contract (the performance requirements). These will entitle the private partner to receive the foreseen revenue. Meeting these obligations and performing under these requirements (usually set out in specific target levels of service) is generally at the private partner’s risk and reward.
However, there will be a number of exceptions, described in the contract as relief and compensation events (including force majeure), whose scope is defined by law or by the specific contract, for which relief may be granted for a lack of compliance. This may include time relief (relief events) or compensatory relief (time and money), which may be full or partial (shared events).
In terms of contract incorporation and drafting impact, many of the relief and compensation events will commonly be documented as qualifications on the respective obligation or area of work regulated in the contract. The risk allocation, therefore, will impact the provisions describing design and construction obligations, operations and maintaining obligations, performance requirements, and/or payment mechanism regulations.
Some specific risks will be described in stand-alone provisions, and some of them will also affect the termination clauses (for example, force majeure).
The contract must, with respect to risk allocation, consider and/or include the following:
A clear definition of the risk events that are regarded as entitling the private partner to relief and compensation (or only relief), including the precise definition of materiality or significance thresholds. A clear definition (or reference to a legal definition) of force majeure. A clear description of the procedures to assess the risk occurrence and the conditions to determine the right of access to the relief or compensation benefits. Such relief or compensation should only be available to the extent that the impact could not have been prevented by due care and diligence by the private partner. An “all risk” clause, that is, a clause signifying that any risk that is not specifically described otherwise is a risk allocated to the private party. Force majeure specific regulations, including how to deal with the impact on service as a result of a force majeure event. For example, whether to pay or not, and how much to pay during a force majeure event that impedes performance by the private partner. There should also be a definition of when either party is entitled to trigger early termination by force majeure.
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