Public Monopoly with Management Contract / Legal Aspects / Legal Instruments / Management Contract / Duration

Duration
Most contracts specify that they will end at some predetermined date in the future (with or without the possibility of renewal) and that, in certain circumstances, they may end even earlier.

A management contract is no different than most contracts. It should specify:

Its initial duration.
Whether it can be renewed and, if so, under what conditions.
The grounds upon which the transport authority, the bus operator or both may seek its early termination.
The steps involved in termination, and the consequences (financial or otherwise) of early termination.

The management contract can additionally also provide for:

The obligations of the parties just prior to, at, and subsequent to termination.
Which clauses continue in force beyond the end of the contract and for how long.
The procedure involved in the handover of material assets, records, relevant statistical information, etc. from the management company to the transport authority or to the new management company.

Initial duration of the contract
There are benefits and risks of frequently selecting a new management company.

Benefits: creating competition for the market and of minimizing the risks involved in a poor choice of management company.
Risks: the costs and efforts involved in a new round of competitive bidding and the possible disruptions in the provision of urban bus transport services that may attend the replacement of one management company by another.

There is no duration period which is standard in management contracts. Three to five years is normal depending upon the scale and complexity of the problems faced by the bus transport enterprise.

When the duration of a contract is much longer than three to five years, this is usually because the management company will not commit its skills and resources unless it is assured that it will be a part of the operation for a long period of time. International management companies are especially reluctant to risk their corporate reputation when they feel the time-frame of the contract is too short for them to give the full measure of their skills and resources.

Contract renewal
The public monopoly or the management company may wish to extend the term of the contract beyond its original term. Of course, it’s always possible for both parties to agree to this shortly before the contract expires. However, it’s wiser to anticipate this possibility in the contract itself.

From the point of view of the public monopoly a renewal clause in the contract can act as a powerful incentive for the management company to perform well and to avoid the disadvantages of a short contract duration. The two most common forms of renewal clauses are c renewal and contract rollover.

Automatic renewal
The public monopoly can specify from the outset that it is offering the contract for a specified initial term with the possibility of an automatic extension subject to satisfactory performance. The standards of performance deemed satisfactory in this context should be set higher than the minimum acceptable performance standards which the public monopoly would normally be willing to accept.

Automatic contract renewal is usually allowed once. Its duration is typically the same period as the original contract period.

Contract rollover
The automatic renewal clause is designed for the benefit of the management company. With a contract rollover clause it’s the public monopoly that is entitled to request the management company to continue to provide its services for a specified period after the original term of the contract comes to an end. The main purpose of such a clause is to avoid leaving the public monopoly and the users of the urban bus transport services in a bind in the event of an unsatisfactory round of competitive tendering for the selection of a new management company.

Contract rollover is also usually only allowed once and its duration is limited to a year or two.

Early termination clause
Leaving aside the case where both the public monopoly and the management company agree to terminate the contract early (which is an option always available to them whether or not the contract specifically states so), an early termination clause specifies the grounds upon which the contract can come to an end before the agreed-upon initial term of the contract or its renewed term, as the case may be, has expired.

An early termination clause would allow, for example, the public monopoly to put an end to the contract if the management company:

Fails to meet its obligations under the contract.
Becomes insolvent or bankrupt.
Repeatedly performs poorly. (This should be tied in to clear performance targets in order to evaluate objectively what poor means.)

There is normally less scope for the management company to terminate the contract early. In most instances this would occur only if the public monopoly fails to meet its obligations under the contract, most notably by refusing or being unable to effect the payment of the compensation which is due to the management company.

Non-performance and force majeure
Non-performance giving rise to early termination
It’s a basic principle of contract law that if one party refuses or is unable to perform his core obligations under the contract, the innocent party is entitled to seek early termination of the contract.

The situation becomes more complicated if the defaulting party merely performs its obligations badly or if it fails to perform only minor obligations in the overall scheme of the contact. Can the innocent party automatically terminate the contract or is he or she only entitled to damages from the defaulting party?

An early termination clause should provide the answer to this question, and other similar questions, by explicitly stating which specific failures by one of the parties will be considered important enough to justify the other party asking for the termination of the contract. The issue of what kind of damages are recoverable by the innocent party following an early termination of the contract should also be addressed.

Force Majeure – excuse for non-performance and ground for early termination
Force majeure is a doctrine of contract law that is invoked to excuse non-performance by one of the parties because of circumstances outside its control. Once again this notion is part of general contract. Special reference to it in most commercial contracts occurs because:

In many legal regimes a great deal of uncertainty surrounds the definition of force majeure.
In some countries the notion of force majeure is too narrow to be of much use to the parties, and in some other countries broader than the parties deem acceptable for their particular contract.

Force majeure needs to be defined in the management contract. Most often this is done by listing the specific events that would qualify as a force majeure event, such as:

War or military activity
Strikes
Lockouts or other labor disturbances
Riots or public disorder
Changes in laws, rules or regulations
Severe weather disturbances and other natural disasters
Epidemics and quarantines

Given the consequences attached to the qualification of an event as a force majeure event (that is, the fact that it excuses non-performance on the part of management), a transport authority should always attempt to limit the number of qualifying events. Always deserving special consideration is whether, and to what extent, can force majeure be invoked by management in the event of a strike or other industrial dispute within the labor force.

Force majeure, besides excusing the non-performance of contractual obligations, can also become grounds to terminate the management contract early. It’s customary to provide a period of grace in commercial contracts following which either party can terminate the contract if the force majeure event lasts for more than a few days, without fault attaching to either party.