Government guidance on public sector contract variation and procurement to tackle crisis

In response to the exceptional demands for urgent procurement by public authorities for vital supplies – and pressures on existing suppliers – the government has provided welcomed clarity and direction, via two recently published Procurement Policy Notes (PPNs).

In the PPNs, the government has:

• Advised that exceptions to the procurement rules are likely to be available as a result of COVID-19. This means existing contracts may be able to be extended and varied, and new contracts may be awarded without a competition where they are required to be put in place on an urgent basis.
• Directed contracting authorities to continue to pay suppliers facing difficulties resulting from COVID-19 until June 2020, subject to various conditions.

Exemptions from procurement rules

Although the Public Contracts Regulations 2015 (PCR) remain in full force and effect, via PPN 01/20 (a Guidance Note) the government has clarified the various exceptions to existing procurement law that are likely to be available as a result of the COVID-19 crisis. These exceptions mean that public authorities can extend existing contracts, and put in place new contracts more swiftly, potentially approaching suppliers directly without advertising and running a competition beforehand.

The limited exceptions from the PCR that public authorities are recommended to consider include:

• 'direct award' due to extreme urgency;
• 'direct award' due to absence of competition or protection of exclusive;
• call off from an existing framework agreement or dynamic purchasing system;
• call for competition using a standard advertised and competed procedure with accelerated timescales; and
• extending or modifying a contract during its term (time-limited until COVID-19 disruption subsides).

The use of these exceptions still requires certain further rules to be complied with: for example, in certain circumstances variations are not to exceed 50% of the value of the original contract. Contracting authorities should take legal advice in applying the exceptions, particularly in relation to high-value or high-profile contracts.

Contracting authorities should also be aware that as the COVID-19 disruption and lockdown continues, the defensibility of exceptions (in the event of challenge to a contracting authority's reliance on them) could decrease, as the emergency measures become the status quo and more 'foreseeable' (as was the case with Brexit). Any approach that a contracting authority adopts to applying the exceptions should be kept under close review.

The government guidance offers suppliers who are informed about the exceptions a window of opportunity to approach contracting authorities, with specific reference to the recommendations in PPN 01/20, to offer to provide much-needed supplies and services more quickly than under the standard timescales required by the PCR. Suppliers wishing to position themselves within the scope of the exceptions (and thereby contract with government more quickly) should take legal advice on wording their approaches or offers to public authorities in line with the newly-clarified government position to ensure their strategy is compliant with PCR and their offers are capable of acceptance.

Continuation of supplier payments

PPN 02/20 is an 'Action Note' for public authorities, requiring them to continue to pay suppliers even where those suppliers are unable to continue to deliver in accordance with current contractual requirements, as a result of COVID-19 related disruption. This applies across all sectors, and remains in effect until June 2020.

Contracting authorities can continue to pay under the current contractual terms, or consider other options such as payment against revised/extended milestones or timescales, interim payments, forward-ordering, payment on order or payment in advance/prepayment. Risks associated with advance or pre-payment should be carefully considered and documented. Public authorities can define who is an at-risk supplier 'according to need'. This is a broader concept of 'at risk' than under pre-COVID-19 government communications (such as the Outsourcing Playbook), reflecting the wide-ranging current disruption.

Alongside PPN 02/20 the Government has published Model Interim Payment Terms, which provides a set of contractual terms to implement PPN02/20 in providing contractual relief to suppliers who have been affected by COVID-­19. This includes setting out the justification for the variation falling within an exemption from the PCR, and preventing a supplier claiming separate relief from another source of Government financial support on COVID-­19, to the effect that the supplier gains an undue advantage by claiming relief twice for the same hardship.

Waiver, variation, force majeure PPN 02/20 addresses the use by public authorities of relief mechanisms in the contracts (such as relief on KPIs or service credits).

It also states that where suppliers invoke force majeure or frustration in order to suspend performance, a public body should 'first work with the supplier to amend or vary the contracts instead', for example 'delivery locations, frequency and timing of delivery, targets and performance indicators, etc.'

Other routes may also be possible, including an extension of time for performance, or waiver by the contracting authority of their rights under the contract. PPN 02/20 is clear that contracting authorities must take 'a pragmatic approach' and maximise any commercial flexibilities, 'including agreeing new measures such as on meeting lead times, waiving or delaying exercising the authority’s rights and/or remedies (e.g. to claim liquidated and ascertained damages, service credits or terminate the contract), revising milestones or delivery dates'.

Any suppliers encountering difficulties in fulfilling obligations to contracting authorities will want to consider referring to the PPN 2/20 recommendations in conversations with their public sector customers.

While it may be possible to invoke force majeure clauses in certain circumstances (see our insight for more detail), it may not be desirable in public contracts given contracting authorities and suppliers may be able to reach a position, in line with PPN 2/20, where the supplier continues to be paid. The approach available will depend on the specific wording of the force majeure clause.

Frustration is another potential option, but the hurdle for claiming frustration of a contract is a high one under English law. Accordingly, PPN 2/20 discourages contracting authorities from entertaining frustration claims, stating that the fact that the contract is more expensive to perform, or has to be performed in a different way 'are highly unlikely to constitute grounds for frustration in itself'.

PPN 2/20 also notes that no payment of profit margin should be made on undelivered goods or services.

Open book requirement

A key condition for suppliers to be able to benefit from continued payment or other relief is to operate on an 'open book' basis with the contracting authority. Open book measures listed include:

• provision of any data, including from ledgers, cash-flow forecasts, balance sheets, and profit and loss accounts, as required and requested to demonstrate the payments made to the supplier under contract have been used in the manner intended; and
• evidence of staff being paid and cash continuing to flow through supply chains.

PPN 2/20 also recommends that contracting authorities should recover payments from suppliers for failures of transparency, which could arise if commitments to share information had been made and then were found to be misrepresentative, for example.

What does this mean for your organisation?

Contracting authorities will now have greater certainty that they can extend existing contracts, or put in place urgent new contracts, without running a full procurement process if the circumstances outlined in PPN 1/20 are met.

It may also be possible for contracting authorities and suppliers to work together directly to secure critical services on a short-term basis, without needing to go through usual procurement procedures, to help meet the exceptional demands resulting from the COVID-19 emergency.

Suppliers that are in difficulty as a result of COVID-19 may have access to relief under their contracts if they agree to operate on an open book basis.
Suppliers and contracting authorities may alternatively seek to vary a supplier's obligations under the relevant contract where the supplier's performance has been affected by COVID-19.

Suppliers and contracting authorities may want to take legal advice on whether the necessary conditions for extension/variation, urgent contracting, or supplier relief are met, to avoid risk of disruption and legal challenge. Osborne Clarke's team of experts would be very happy to discuss any questions you may have.