COVID-19 has created a myriad of contracting issues and challenges, with extensive need for managing changes and renegotiations. The public sector has clearly not been immune, yet it faces greater challenges due to the more rigid framework created by public procurement regulations. This brief summary illustrates those challenges, drawing on recent Guidance issued by the UK Government.
UK Cabinet Office response to COVID-19 – a summary
All contracting parties should act “responsibly and fairly” in their responses to issues caused by the virus. This phrase appears multiple times in the Guidance (ten times over only five pages), but the document gives very little detail as to what exactly that would entail.
The Guidance does however encourage the parties to:
- act in a spirit of co-operation;
- aim to achieve practical, just and equitable outcomes;
- aim to ensure the preservation of contractual and economic activity;
- avoid lengthy litigation using negotiation, mediation and other ‘alternative’ dispute resolution procedures.
This seems to implicitly envisage -- if not actively encourage, -- a raft of contractual variations as a result of the virus. But, at the same time, the Guidance is very explicit (not binding) -- it is offered as simply “guidance’” which does not override any binding legal duty or obligation.
The Guidance is a follow up to a Procurement Policy Note PPN 02/202 issued in March of 2020 mandating contracting authorities to continue “payment as normal” even if service delivery is disrupted or temporarily suspended. In some cases, contracting managers are even encouraged to accelerate payment to maintain cash-flows.
The PPN mandate applies until at least the end of June 2020, but makes it very clear, however, that “the contract should return to its original terms as soon as the impact of the COVID-19 outbreak on the relevant contract is over”. At the same time, the Guidance also seems to be encouraging more long-term contract variations if not permanent ones.
PPN 01/203 (also issued in March 2020) deals explicitly with permitted contract variations under the Procurement (‘Public Contract’) Regulations 2015. Regulation 72 (1)4 governs permitted contract variations. It states among other things:
“Contracts … may be modified without a new procurement procedure … (c) where all of the following conditions are fulfilled:
- the need for modification has been brought about by circumstances which a diligent contracting authority could not have foreseen;
- the modification does not alter the overall nature of the contract;
- any increase in price does not exceed 50% of the value of the original contract.” 4
We might therefore conclude:
- Contracting authorities should keep a written record of any decision they take to demonstrate why they believe that the contract variation they implement meets these criteria.
- Details of the modification will probably need to be published via the Official Journal of the European Union (OJEU)5 notice referring to Regulation 72(1)(c).6 Of course, this does beg questions as to whether the need for the modification could have reasonably been foreseen and whether the modification alters the overall nature of the contract.
Strictly speaking, it may be very difficult to bring a modification fully within the parameters of Regulation 72. But, at the same time, very few third parties will spend large sums of money challenging extension decisions reached in good faith – decisions that align with the spirit of the Guidance issued, and if they do, we would assume that contracting authorities will be given the benefit of the doubt -- given the current crisis.
The Cabinet Office has issued further guidance on the Recovery and Transition from Covid-19 (PPN04/20). This emphasises that the guidance in PPN02/20 remains in force but contracting authorities have been advised to work in partnership with their suppliers in developing transition plans to exit from any relief as soon as reasonably possible whilst at the same time moving to a new, sustainable, operating model. There is an express recognition that this may involve contract variations and even, termination of some contracts.
Somewhat unclearly the guidance says that “If a contracting authority views a contract as no longer viable, they should work with the supplier to pursue termination based on the existing contract remedies”. Quite what this means is not exactly clear. PPN/04 is effective from 1 July to 31 October 2020.
In addition, the Cabinet Office have recently issued PPN05/20 which introduces a new version of the so called ‘Outsourcing Playbook’ which describes how contracting authorities should plan and manage outsourcing contracts. It says very little of specific relevance to the current situation, but it does expressly recognise “the joint nature of public service delivery” and sets out how to achieve “constructive and collaborative engagement with suppliers”.
Ultimately, the government wants [contracting authorities] to be seen as “an attractive client to do business with”. That may be put to the test over the coming months.
- Cabinet Office and Infrastructure and Projects Authority, Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency
- Procurement Policy Note 02/20: Supplier relief during COVID-19:
- Procurement Policy Note 01/20: Responding to COVID-19
- Procurement Public Contract Regulation
- OJEU website
- The impact of COVID-19, Public procurement in the UK
- Procurement Policy Note 04/20 Recovery and Transition from Covid-19
- Procurement Policy Note 05/20 The Outsourcing Playbook
- Outsourcing Playbook v2