Case Study: Ruritania public health project contract provision Background The Ministry of Finance in Ruritania, a tropical country, has allocated the equivalent of  US $100 million to the Ministry of Health (MOH) for the purpose of expanded health  services delivery in the southern part of the country (it is anticipated that necessary  funds would be derived from projected export earnings and that no support from  international institutions would be necessary). The MOH has conducted an  international competition in accordance with its new procurement law and regulation.  It has selected a consortium (OPTIMA) of international and domestic contractors and  suppliers to execute the project. Project scope of work: The principal elements of the project scope of work are the following: 1. Repair and rehabilitation of three (3) existing hospitals, selected by the MOH; 2. Construction of five (5) new health clinics, especially for victims of AIDS, at sites  to be determined by the MOH; and 3. Creation of low-cost facility for the benefit of orphans and other child-centred  activities in Ruritatnia. Contract provisions: On January 1, 2005, the contract was signed between the Ruritania MOH and  OPTIMA. The contract called for OPTIMA to begin on February 1, 2006 and to  complete the project by August 1, 2006. The MOH agreed to pay a fixed sum of US  $95 million, payable at performance milestones as follows: a) Twenty (20) % advance payment (US $19 million) upon signing of the contract  and posting of a satisfactory advance payment bond or guarantee; b) Thirty (30) % progress payment upon satisfactory completion of detailed  engineering plans regarding the repair and rehabilitation of the 3 hospitals and  construction of the three (3) new health clinics; c) Thirty (30) % payment upon substantial completion of the repair and  rehabilitation and construction work outlined above; d) Ten (10) % payment upon establishment and initial operation of the credit  facility; and e) Ten (10) % retention payment upon submission of a satisfactory final report. The contract also provided that there would be a ten (10) % bonus if the contract were  completed by April 1, 2006 and a penalty of 0.05% of the contract price for each day  completion was delayed beyond August 1, 2006. The contract provided that it could  be amended by the parties at any time and it included standard provisions concerning  the termination of the contract for convenience or default. It was agreed that any disputes concerning contract performance would be resolved in accordance with the  Rules of Conciliation and Arbitration of the United Nations Commission on  International Trade Law (UNCITRAL). The contract signing was accompanied by considerable public ceremony and press  coverage and OPTIMA began performance of the contract with much enthusiasm.  OPTIMA immediately posted performance security in the form of commercial letter of  credit, valid for two (2) years from the date of contract signing and payable upon  demand, provided the demand was accompanied by a certificate from the Minister of  Health that OPTIMA had failed to perform. With the initial US $19 million payment received on February 1, 2006, OPTIMA was  able to prepare the engineering designs and to mobilise its equipment for construction.  On July 1, 2006, OPTIMA submitted its engineering plans for review by the MOH and submitted its second invoice for payment of US $19 million. OPTIMA then began to  perform its obligations regarding the credit facility. In August, 2006, however, the Ruritania Ministry of Finance advised the MOH that,  due to failing prices for exports, and adverse weather affecting production levels, the  revenue from export earnings was failing short of expectations. Accordingly, the MOH  would now be allocated only US $30 million in 2007, and US $35 million in 2008. In view of these developments the MOH project manager determined not to make  payment against the second invoice of OPTIMA until a full review of the project status  could be completed. The project manager assembled a team of advisers (engineer,  lawyer, financial analyst) to conduct this review. When the second payment from the MOH was not forthcoming on timely basis,  OPTIMA became concerned about the implementation of the project. The OPTIMA  project manager assembled a team of advisers (engineer, lawyer, financial analyst) to  review the status of the project. Consider these questions: MOH: a) What advice would you give the MOH project manager? b) Should the project manager authorise a partial payment in lieu of the US$19  million due? c) Should the project manager terminate the contract? On what grounds?