Local authority commercial contracts and procurement in a Covid-19 world

The Government has provided vital guidance to local authorities on how to comply with procurement rules during the Covid-19 crisis. This is currently in the form of two Procurement Policy Notes ("PPNs") issued by the Cabinet Office last week. Both have immediate effect. They offer important guidelines on the continued operation of procurement legislation, especially the Public Contracts Regulations 2015 ("PCR 2015"), and wider best practice.

PPN 01/20 deals with mechanisms for urgent procurement by central and local government, education institutions, NHS bodies and other contracting authorities. It addresses: (1) direct awards; (2) call-offs; (3) standard procedures with accelerated timescales; and (4) extensions or modifications of existing contracts.

PPN 02/20 concerns special measures that local authorities should take to support their usual service providers, including waivers, variations, extensions and price adjustments. It also encourages normal and prompt payment, even if service delivery is disrupted or temporarily suspended. As a condition, suppliers are expected to act on an 'open book' basis, provide cost information and pay employees and sub-contractors. Local authorities are also encouraged to provide relief against contract terms, rather than accepting force majeure or frustration claims.

This article summarises the effect of the two PPNs and highlights best practice points. It also comments on force majeure clauses and frustration as they apply to local authorities.

(1) Guidance on procurement regime in PPN 01/20:

While Covid-19 is an unprecedented crisis, the procurement regime continues to apply. PPN 01/20 deals with the PCR 2015.

(a) Direct awards:

Regulation 32(2)(c) of the PCR 2015 will be a natural first port of call in many cases. It allows for direct awards due to extreme urgency after a negotiated procedure, without a prior publication in the form of an OJEU notice.

There are four cumulative requirements:

• Genuine reasons for extreme urgency, such as immediate consequences of Covid-19 requiring response on public health or essential services grounds;
• Unforeseeability of the trigger events;
• Impossibility of complying with usual timescales, including accelerated procurement, competitive procedures with negotiation or a call-off; and
• Lack of attributability/fault.

PPN 01/20 makes clear that authorities should limit their requirements to what is "absolutely necessary". Value for money, good commercial judgement and sound record-keeping remain guiding principles.

Direct awards may also be made under regulation 32(2)(b) where goods or services needed at this time can only be supplied by a particular supplier due to either (i) technical reasons for absence of competition (such as special expertise or capacity) or (ii) exclusivity of intellectual property rights. In practice, care must be taken to avoid overly narrow definitions of the available market or procurement category.

The importance of assessing whether, and keeping a written justification to the effect that, the situation is covered by the PCR 2015 is highlighted.

(b) Call-offs:

Call-offs from existing framework agreements or dynamic purchasing systems ("DPS") are a further option. Local authorities need to be mindful of the following key prerequisites:

• Prior identification as a permitted customer;
• Compliance with the original scope of the contract, framework agreement or DPS;
• Procurement was PCR 2015 compliant originally; and
• Adequacy of existing terms, without the need for significant modification.

In practice, it is vital to follow the contractual mechanism. There may also be additional minimum tendering requirements and timescales, such as for a call-off from a DPS.

(c) Standard procedures with accelerated timescales:

These procedures will be more familiar and deal with urgent situations short of direct awards. The PCR 2015 provide different timescales, which must be carefully reviewed. While there is no express unforeseeability or no-fault requirement, a clear justification should be provided in the OJEU notice. There is a helpful example at page 6 of PPN 01/20.

(d) Extending or modifying a contract during its term:

This is addressed in regulation 72. The first question is whether modifications are specifically provided for, not substantial or due to a change of contractor not being possible for economic or technical reasons (regulations 72(1)(a), (e) and (b)). If not, regulation 72(1)(c) provides a further ground for modification, provided three requirements are met:

• Unforeseeability;
• Not altering the overall nature of the contract; and
• A 50% price increase cap from the contract or framework agreement value.

The third requirement is crucial. PPN 01/20 usefully explains that multiple modifications (each capped at 50% of the original contract value) are permissible and that a reasoned OJEU notice should be provided to justify such modifications. These are best kept time-limited and narrow in scope. Again, the need for a written justification of the application of this Regulation is expressly identified.

(2) The effect of PPN 02/20:

PPN 02/20 is less technical in nature and essentially deals with adjustments to local authority practices to help ease the immediate financial pressure on suppliers and the wider supply chain. This guidance is split into three main areas.

(a) Payment to maintain business continuity:

The concept of "at risk suppliers" is central to this PPN and not strictly defined. This allows local authorities the flexibility to identify suppliers and explore options including paying at usual contractual rates, payment against revised milestones or timescales, interim payments, forward ordering, payment on order or (with added risk avoidance steps) pre-payment. On the supplier side, they should be asked to identify in their invoices which elements of the invoiced amount relate to services they are continuing to supply and those which are attributable to the impact of Covid-19.

Importantly, it is a condition of such payment support that suppliers operate on an 'open book' basis. This is widely defined to allow access to "any data … as required and requested to demonstrate the payments made to the supplier … have been used in the manner intended." The importance of keeping records of decisions and agreements made is stressed, as well as ensuring suppliers maintain records. Such procedures and the continued documentation of decision-making are designed to enable future reconciliation (if necessary) and guard against suppliers taking "undue advantage". Suppliers should be made aware that in cases where they are found to be taking undue advantage, or failing in their duty to act transparently and with integrity, contracting authorities will take action to recover payments made.

(b) Other contractual relief:

Local authorities are firmly encouraged by PPN 02/20 to explore alternative measures such as (1) extensions of time for contract performance, (2) waivers or delay in the ability to exercise a right or remedy and (3) variations. This is envisaged as way of avoiding reliance by suppliers on force majeure and other contractual clauses allowing the suspension of performance or the doctrine of frustration. It should also help avoid more lasting supply disruption.

More generally, local authorities are asked to maximise any commercial flexibilities within the contract, such as by agreeing new lead time arrangements. In practice, relief on KPIs and service credits are further options. Adjustments should be time-limited and well-documented.

(c) Accelerating payment of invoices:

All contracting authorities are now expected to further accelerate their payment practices beyond the 30-day requirement found in the PCR 2015. This PPN makes detailed provision as to relevant steps. They include targeting high-value invoices, resolving disputed invoices quickly, more regular invoicing by suppliers and wider use of delegated authority for payment authorisation. In addition, monitoring of payments down the supply chain is an important new feature.

(3) Force majeure and frustration:

In the local authority context, the clear effect of PPN 02/20 is that reliance on force majeure and frustration is to be discouraged, especially on the part of suppliers.

In any event, the ability to rely on force majeure clauses, and their impact on contractual performance is contract-specific. Where necessary, local authorities should review contracts to check whether Covid-19 falls under the contractual force majeure definition. Typically these clauses contain a list of specific events. Health emergencies or pandemics are not always expressly referred to as trigger events. However, Covid-19 may be covered by a "sweeper clause". This PPN points out that the threshold for a contract being declared "frustrated" is high. Overall, PPN 02/20 recommends that legal advice is taken when dealing with a supplier's claim for force majeure or frustration.

(4) Overall best practice and conclusions:

PPN 01/20 seeks to address immediate questions about the procurement regime. The purpose of PPN 02/20 is broader. It reflects a commitment to use public bodies as a vehicle to lessen the socio-economic impact of the Covid-19 crisis. It aims to avoid supply disruptions and mitigate insolvency risks for suppliers, employees and sub-contractors. That said, both PPNs also make clear that local authorities must take adequate steps to guard against wastage of public funds and, in more extreme cases, suppliers taking undue advantage or using illegitimate practices.

Time-limited arrangements, record-keeping and transparency:

The aims of the two PPNs are to be achieved primarily through time-limited arrangements, full record-keeping and a transparent approach, including the 'open book' system. Proper record keeping in relation to every aspect of the transactions envisaged by the PPNs is vital. Local authorities should be wary of committing to longer term arrangements without following the usual procurement mechanisms. Accelerated timescales on a standard procedure or a temporary call-off from or variation of an existing framework agreement are likely to be more appropriate.

Beyond short-term adjustments to payment models and information-sharing, it will generally be prudent to seek legal advice before agreeing to new supply arrangements or varying or terminating existing agreements.

Role of other procurement regimes:

Particular care must also be taken when applying the mechanisms in the PCR 2015 to urgent procurements and existing contracts. While safe havens exist, it is important to make sure that decisions are fully justified with reference to the relevant tests in the Regulations and that decision making is documented. Challenges to the use of these safe havens are likely (especially in strained economic times) and so it is important that local authorities are able to justify their decisions.

Force majeure and frustration:

While the general advice provided in PPN 02/20 is to discourage reliance on force majeure and even more frustration, contracting authorities are also reminded to carefully consider the extent of payments to be made to suppliers who are underperforming and subject to an existing improvement plan. The purpose of PPN 02/20 is not to underwrite failing contractors.