Important updates to PPN 02/20: Procurement guidance for contracting authorities

We provide an update further to our articles on local authority commercial contracts and procurement in a Covid-19 world on 25 March 2020 discussing two Procurement Policy Notes (PPN 01/20 and PPN 02/20) introduced in light of Covid-19 and related guidance for the public sector entitled 'Fraud Control in Emergency Management' on 27 March.

(1) Updated guidance relating to PPN 02/20:

The Cabinet Office has now published a number of additional materials in relation to PPN 02/20 which provides for steps to help ensure service continuity.

The latest guidance documents will no doubt be welcomed by local authorities and other contracting authorities facing difficulties in applying PPN 02/20 given the perceived heightened risk of suppliers not acting with the required transparency or taking 'undue advantage'. In this context lack of transparency refers to shortcomings in making financial information, staff payment records and other reasonably requested data available to contracting authorities. Undue advantage is not further explained in PPN 02/20 or the new model contract terms described below. It seems designed for more serious cases where support measures are abused. The new guidance documents should be helpful as tools supplementing the 'open book' supply system under PPN 02/20.

The guidance is divided into the following:

• 'Guidance notes on Model Interim Payment Terms – PPN 02/20':[1] These are designed to standardise the contractual framework used by contracting authorities implementing relief for suppliers affected by Covid-19. They take the form of a variation to existing contracts. Key features include preventing a supplier claiming separate relief from other sources of Covid-19 Government financial support and express terms dealing with recovery of payments made to the supplier.
• 'Guidance Notes for Construction Contracts - PPN 02/20":[2] This is valuable guidance to support contracting authorities in how they implement PPN 02/20 under existing works contracts to provide contractual relief to at risk suppliers (and their supply chain) who have been affected by Covid-19. Through model deeds of variation, it provides a set of terms that can be used for NEC3 and JCT standard forms of contracts.
• 'FAQs – PPN 02/20':[3] This document brings together a set of FAQs regarding the scope and application of PPN 02/20. Notable points include treatment of sanctions for fraud by suppliers or other irregularities on their part.
• 'Guidance notes on Payments to Suppliers for Contingent Workers impacted by COVID-19':[4] This guidance deals with the position of freelancers, temporary workers, self-employed contractors and other non-permanent staff involved in supply to contracting authorities. It deals with questions of eligibility, payment caps and administering payments and the relationship with other forms of relief, such as Statutory Sick Pay.

The Model Interim Payment Terms:

Practically, the Model Interim Payment Terms will probably be the most useful formal tool now available to local authorities and other contracting authorities implementing PPN 02/20. But, as the guidance notes make clear, they should be checked for consistency with the contract which they seek to vary, with the benefit of legal advice. The model terms represent a basis for agreeing payments and should assist in providing the full record of the variation.

They supplement previous Cabinet Office guidance entitled 'Fraud Control in Emergency Management',[5] which identified two particular sources of imminent danger:

(1) first party application fraud in light of the roll-out of new support schemes (i.e. the risk that an applicant may misrepresent their circumstances to qualify); and

(2) third party impersonation fraud in accessing government grants and loans (i.e. the risk that a third party may impersonate a business).

The draft variation includes a general obligation to act in good faith and to work together towards the principles set out in PPN 02/20 and an express power to recover any payments made (model clause 7).  This clause is broad in scope, referring to a "reasonable opinion" standard and covering a range of undesirable practices by suppliers including, at clause 7.4, failing "to act transparently and with integrity". The precise scope of this obligation is unclear. Proving a breach will require complete and compelling evidence. The importance of keeping a full contemporaneous record cannot be over-emphasised.  The model clause  is not  specific as to all the methods of recovery ("the Authority may take all action necessary to recover any payments made to the Supplier during the relevant Covid Relief Period, including without limitation retaining or setting-off payment of any amount it owes to the Supplier at any time under this Contract or any other contract").

The specific examples of "retaining or setting-off payment" reflect a pragmatic approach as they allow recovery of past payments from future payments. Contracting authorities may wish to consider adding other methods of recovery, including a right to claw-back past payments by service of written notice payable on demand within a short period.

While such an addition may seem robust at this time of need, it is likely to serve a deterrent effect and safeguard the longer term interests of contracting authorities beyond this crisis.

Guidance Notes for Construction Contracts - PPN 02/20:

This document contains some general guidance, FAQs and model deeds of variation. These model deeds provide a set of terms that can be used for NEC3 and JCT contracts. Again, the need to seek legal advice to ensure that the model deeds are consistent with the contract which they seek to vary is stressed. The model deeds allow a supplier to obtain relief in a specified form, where the contracting authority has identified them as 'at risk' because of Covid-19. The guidance reiterates that contracting authorities should identify "at risk" suppliers and consider various forms of relief available under PPN 02/20.

There is a helpful table setting out 'Options for Relief in Construction Contracts'. Four different types of relief are identified. These are accelerated and advance payment of invoices, certification of interim valuations of work where work has not been undertaken based on previous valuations and amendments to existing payment mechanisms. Matters to be taken into account when deciding what form of relief is to be given, and on implementation, are also set out.

In the model terms for NEC3 and JCT, there is detailed provision for the implementation of these options, including on the scope of the 'open book' approach (see NEC3 model clause Z2.1 and JCT model clause 10.1). There is also fuller provision for recovery of payments than in the Model Interim Payment Terms, including recovery as a contractual debt (see NEC3 model clause Z2.3.3 and JCT model clause 10.3.4). The detailed drafting is welcome.

FAQs – PPN 02/20:

For the most part, these FAQs are general and consolidate what is found in the PPN itself. Points worth highlighting include the warning to suppliers that fraudulent claims under the Coronavirus Job Retention Scheme (or other Covid-19 support schemes) for workers that are being paid under a public sector contract may lead to exclusion from future public contracts under Regulation 57(8)(c) of the PCR 2015 (see Q13). There is also reference to recovering payments from suppliers found not to comply with the terms of the interim contract variation, including through failures to operate on an 'open book' basis (see Q15). However, the mechanism for recovery is left unclear.

(3) Conclusion:

These additional materials should help resolve a number of uncertainties that remain about PPN 02/20: in particular, through model contract terms for variation of existing supply arrangements and standard form construction contracts.

The need for careful but speedy auditing practices, ensuring that changes to supply arrangements are kept within reasonable bounds and time-limited, and adopting safeguards for recovery of payments remain key challenges. While contracting authorities undoubtedly face considerable time and resource constraints, full and contemporaneous records of issues with suppliers, relief requests, variation terms and payments will prove vital down the line.

Authors:

Marion Smith QC

Rose Grogan

Philippe Kuhn

Key links to previous materials:

'Local Authority Commercial Contracts and Procurement in a Covid-19 World' (39 Essex Chambers article) (25.03.2020):

'Fraud Control in Emergency Management: Covid-19 Guidance' (39 Essex Chambers article) (27.03.2020):

'Procurement Policy Note 02/20' (Cabinet Office) (20.03.2020):

'Procurement Policy Note 01/20' (Cabinet Office) (18.03.2020):

[1] See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/877260/PPN02_20_Model_Interim_Payment_Terms_v1.pdf.

[2] See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878338/PPN_02_20._Additional_guidance__FAQS_and_model_terms_for_construction.pdf.

[3] See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/876498/PPN_02_20_FAQs_27_03_20__1_.pdf.

[4] See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/877221/PPN02_20-Contingent-Workers-Impacted-by-Covid-19-2.pdf.

[5] See https://www.gov.uk/government/publications/fraud-control-in-emergency-management-covid-19-uk-government-guide?utm_source=30f87e98-c1e1-40b9-a90a-d49a421420ef&utm_medium=email&utm_campaign=govuk-notifications&utm_content=daily