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SLAUGHTER AND MAY
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. ’ a
FAX TRANSMISSION S
Date 27th May, 1999 - * t Tout wages Cpe
. Our reference JRT/PKYL a : Writer's telephone
from Paul Lam-Po-Tang :
To Kevin Corrigan, Post Office Counters Lrd, Recehing a number
London. .
‘Copy to Mena Rego, Post Office Counters Ltd, London.
Keith Baines, Post Office Counters Ltd, London. -
Dave Miller, Post Office Counters Ltd, London.
Horizo: fermination Options
Further to your fax of yesterday and as discussed this morning, I have’had a quick look
at the provisions in the Related Agreements (as amended by the Letter Agreement of 24th
May, 1999) regarding termination for convenience and set out my comments below.
Summary
1. - Under the Related Agreements, POCL may terminate the Authorities Agreement and
the POCL Agreement on not less than 12 months’ notice. On termination, POCL is
obliged to pay to Pathway an amount although the method of calculation of that _
amount and the extent to which that amount is capped is unclear. Termination by
POCL with a shorter notice period would expose POCL to a damages claim from -
Pathway for the amounts that would have been payable by POCL to’Pathway had 12
.. -~months"-notice been-givens----~- “~~ ~~ > path tern tte,
Authorities Agreement
2. Under Clause 902.6 of the Authorities Agreement, POCL may terminate the Authorities
Agreement on not less than 12. months’ notice. On such termination, POCL is obliged’
to pay to Pathway the Termination Charge as calculated in ‘accordance with Schedule
A9 of the Authorities Agreement. As that schedule has been left blank intentionally .
and the definition of Termination Charge in respect of the Authorities Agreement
refers only to Schedule A9 of that agreement, I do not believe that any amount is
payable in these circumstances.
Allst of the partners and their professional qualifications is available for inspection at the above address.
‘The partners are either solicitors or registered foreign lawyet
IF YOU DO NOT RECEIVE ALL THE PAGES, PLEASE TELEPHONE 4)
Bocoment number CA99LE70.193
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POCL Agreement
3. Under Clause 902.6 of the POCL Agreement, as with the Authorities Agreement, POCL
may terminate the POCL Agreement on-not less than 12 months’ notice. Again, on
such termination, POCL is liable to Pathway for the Termination Charge although this
time, that charge is to be calculated in accordance with Schedule A7 of the POCL
Agreement.
Schedule A7 of the POCL Agreement
4. Iv is not entirely clear to what extent, if any, Schedule A7 of the POCL Agreement
(paragraph 5 attached) has been amended by the Letter Agreement, particularly, i in
light of the payments that are to be made under Schedule 2 of the Letter Agreement.
5. In brief, the Termination Charge equals (i) sunk costs (less amounts recovered under
> the Scorecard) plus (ii) costs flowing from termination plus (iii) 15% of expected
Scorecard based revenues less (iv) 80% of the payment made on the acquisition of the
Project assets.
6. With regard to Pathway’s costs under paragraph 5.1(a) of Schedule A7, on a literal
view, there would be no netting off of costs recovered after.24th May, 1999 as there is
arguably no longer any Scorecard. On the other hand, it would make sense to reduce
those costs by the amounts paid to Pathway pursuant to Schedule 2 of the Letter
Agreement which sets out the new charging arrangements. A wider question is
whether Pathway’s sunk costs should be reduced by the amount written off in ICLs
accounts given that ICL had to bear some of the financial costs as part of the new deal.
hahaind 7=' ~ "With"regards to the’ profit’allowancé under paragraph 5.1(¢) of Schedule AZ, again, a
literal approach would result in the expected profit being nil if there is no Scorecard
anymore. Alternatively, it could be argued that a profit allowance based on the new
deal should be included. However, I am not sure whether simply taking 15% of the
Schedule 2 payments would necessarily reflect the underlying profit assumptions of
that schedule, if that is what the parties wish to do. c
8. The deduction for the asset purchase price at first glance is only 80 pence. It might, -
however, be possible to argue that a proportion of the Schedule 2 payments should be
* apportioned to the asset price. .
9. Although there are caps on the Termination Charge, it is arguable whether they are
still valid in light of the new pricing regime and the method of calculating the
Termination Charge. If the caps were to remain as they are, then based on a
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termination for convenience notice being sent before February 2000, the cap on the
Termination Charge would be £141 million. .
T hope the above is of some assistance. Please feel free to call to discuss.
Regards,
attach. -
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POCL AGREEMENT - SCHEDULE A7 RESTRICTED CONTRACTS
transfer. . of the services shall be separately
reimbursable in: accordance with Clause 904.2.3.
4.5. Expected Transfer Price
The expected values at year end consistent’ with the
formulae set, out in Paragraph 4.4, assuming. that all
assets are transferred, are as follows:
Transfer during Roll-out
Year End Transfer
* Price
€millions
February 1997 - 4.0
February 1996 48.0
February 1999- 84.0
February 2000 62.0
Transfer during Steady State
Year End Transfer
* Price
&millions
February 2000 » 86.0.
February 2001 65.0
February 2002 51.0
February 2003 36.0
February 2004 31.0
February 2005 36.0
5.° I TERMINATION CHARGE
5.1. Where a Termination Charge is payable to the CONTRACTOR,
such payment .shall include:
a)all costs (whether already incurred or committed and
unavoidable) which I have not yet been recovered via’
the Scorecard-based charges; plus
D
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POCL AGREEMENT “SCHEDULE A7 RESTRICTED CONTRACTS
b)all costs associated with the termination or transfer
of the service; including but not limited to the
closure of the CONTRACTOR's facilities and termination
of its. personnel, plus. any termination charges
payable to suppliers and sub-contractors {the
CONTRACTOR being required to mitigate such exposure);
plus. -
c)an allowance for lost profit, equal to 15% of expected
future Scorecard-based revenues assuming the Workload
brief Mid-line business volumes; minus
a) 80% of any Transfer Payment paid.
~All costs shall be determined in accordance with the
CONTRACTOR'’s standard accounting. practice, supported
by proper vouchers and records and verified by the
CONTRACTOR’s auditors.
5.2. Expected Termination Charges-
The Termination Charge calculated :in accordance with
paragraph 5.1 of this Schedule for each year up to the
year end listed below shall not exceed:
Year End em
February 1998 198
February 1999 245
February 2000 20S
February 2001 141
February 2002 A 80
February 2003 36
cee ee ee eee I February~2004- fo ome [liateiee einen —
Termination ‘Charges assume that one year’s notice has
been given prior to the date identified against each
£igure. .
The values exclude any netting allowance for Transfer
Payment. a . 1 7
In the event that any one POCL Service is terminated
the Termination Charge for such POCL Service shall
not exceed an appropriate proportion ‘of the figures
listed above. .
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