Area Contract (Gross Cost) / Legal and Regulatory Framework / Gross-Cost Area-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 gross-cost area-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 gross-cost area-contract can 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 bus operator to the transport authority or to the new bus operator.

Initial contract duration
There are benefits to selecting new bus operators frequently. It can create competition for the market and minimize the risks involved in a poor choice of bus operator. But the transport authority must balance the costs and efforts involved in a new round of competitive tendering. There are also possible disruptions in the provision of bus services which may follow replacing one bus operator with another.

The contract duration should be sufficiently long to justify any necessary investment by the bus operator in vehicles or other equipment. The economic life of a bus in urban service is up to 10 years, but an operator would normally expect a pay-back period of approximately five years.

This is reflected in current international practice. The initial term for a gross-cost area-contract is now typically five years, although three years was common for earlier contracts.

Contract renewal
The transport authority or the bus operator may wish to extend the term of the gross-cost area-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 transport authority a renewal clause in the contract can act as a powerful incentive for the bus operator to perform well and to avoid the disadvantages of a short contract duration. The two most common forms of renewal clauses are automatic renewal and contract rollover.

Automatic renewal
The transport authority can specify from the outset that it’s 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 that the transport authority 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 bus operator. A contract rollover clause entitles the authority to request that the bus operator continues managing and operating the bus services for a specified period after the original term of the contract ends. The main purpose of such a clause is to avoid leaving the transport authority and the users of the bus services in a bind in the event of an unsatisfactory round of competitive tendering for the selection of a new bus operator.

Contract renewal through rollover is usually allowed once. Its duration is limited to a year or two.

Early termination clause
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. (Both the transport authority and the bus operator may 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 would allow, for example, the transport authority to put an end to the contract if the bus operator:

Fails to meet his 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 bus operator to terminate the contract early. In most instances this would occur only if the transport authority fails to meet its obligations under the contract, most notably by refusing or being unable to make payments that are due.

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 gross-cost area-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 the bus operator), 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 the bus operator in the event of a strike or other industrial dispute within its labor force.

Force majeure, beside excusing the non-performance of contractual obligations, can also become grounds to terminate the gross-cost area-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.