April 07, 2020

How is the United Kingdom rising to the procurement challenges of COVID-19?


The COVID-19 pandemic is resulting in unprecedented pressure upon the public sector, and public authorities around Europe are unsurprisingly being pulled in multiple directions in terms of their procurement responsibilities. Many authorities are having to procure new and potentially unfamiliar supplies or services on an urgent basis, while at the same time seeking to maintain their key supply chains – all within the bounds of the public procurement rules which continue to apply.

In these exceptional times, the UK Government has provided welcome guidance and clarification (the "UK Guidance") for those potentially affected by the COVID-19 crisis. The UK Guidance is aimed primarily at regulated contracts awarded by the UK public sector, including by central and local government, National Health Service bodies, executive agencies and non-departmental public bodies (together "Contracting Authorities"); however, it also applies to utilities procurement, defence and security contracts and concessions.1 Moreover, although the UK Guidance only technically covers contracts being delivered or to be delivered in the United Kingdom, many of the stated principles and suggested practical measures will likely have wider application to regulated procurements conducted by contracting entities across Europe.

The UK Guidance is formally divided into two procurement policy notes ("PPNs"):

  • PPN 01/202 focuses on how Contracting Authorities might procure emergency works, supplies and/or services whilst mitigating the risk of a procurement challenge; and
  • PPN 02/203 covers the assistance and relief that Contracting Authorities might offer their existing suppliers under their respective contractual arrangements and/or with temporary contractual variations.

Procurement of emergency works, supplies and/or services

The UK Guidance on this issue (PPN 01/20) expressly acknowledges that Contracting Authorities needing to obtain emergency works, supplies and/or services as a result of the COVID-19 crisis might seek, in particular, to avail themselves of the existing "urgency" exemption in the procurement rules. This allows Contracting Authorities to award contracts directly – i.e. without any form of competitive tender process – where (broadly) the direct award is strictly necessary as a result of a genuine and unforeseeable emergency situation rendering it impossible to comply with the ordinary procurement time limits.

Helpfully, the UK Guidance states the existing exemption is "designed to deal with this situation". However, as with all exceptions to the general requirement to open contracts out to competition, the exception must be interpreted narrowly and the extreme urgency must not result from the Contracting Authority's own delay or failure to act. Moreover, the requirement that events be truly unforeseeable requires a dynamic assessment: the longer the COVID-19 crisis persists, the more difficult it will be to argue that events were impossible to predict.

For example, information in the public domain suggests that the recent contracts for the supply of ventilators to the National Health Service may have been awarded under the existing "urgency" exemption, but Contracting Authorities are unlikely to be able to rely upon such grounds indefinitely. Indeed, Contracting Authorities would do well to reflect upon the recent challenge to the UK Department for Transport's direct award of freight capacity contracts: one of the grounds for challenge was that the so-called unforeseen event – a "No Deal Brexit" – was in fact sufficiently foreseeable in order to have allowed ordinary competitive tender procedures to have been followed.

The UK Guidance also sets out other procurement procedures that might be employed: for example, using a standard procurement procedure with accelerated timescales as a result of urgency, which is easier to satisfy given that it does not expressly require the state of urgency to be unforeseeable. In all cases, however, the justification should be clearly recorded internally and (where applicable) set out in the OJEU4 Notice.

As a final point, the UK Guidance notes that Contracting Authorities may also be able to avail themselves of the flexibility in the procurement rules – in particular, in relation to unforeseeable extensions or modifications of existing contracts, where any increase in price is less than 50% of the original contract or framework agreement value and the overall nature of the contract is not altered. There may also be other grounds available, including where the proposed modification has been provided for specifically in the contract (in a variation clause) and/or the modification is not "substantial" from a procurement law perspective.

Again, Contracting Authorities should keep a written justification as to which ground(s) are satisfied and, in particular, how the modification or extension was limited to what was absolutely necessary given the circumstances. If more than one ground is applicable, this is likely to contribute to lowering any associated legal risk.

Supplier relief arising out of the COVID-19 crisis

The UK Guidance on this issue (PPN 02/20) recognises that many suppliers to the public sector will struggle to meet their contractual obligations over the coming months and the COVD-19 crisis will put their respective financial viability, ability to retain staff and supply chains at risk.

As a result, the UK Guidance expressly requires the public sector to act quickly and take immediate steps to pay such "at risk" suppliers as a matter of urgency to support the latter's survival at least until 30 June (though Contracting Authorities should be prepared for an extension to this timeframe). Unfortunately, the UK Guidance does not define suppliers who are to be considered "at risk"; it is for the Contracting Authorities to identify such suppliers in their existing contract portfolios.

Accordingly, it would be prudent for any suppliers who believe that they may be eligible for contractual relief to put themselves forward as soon as possible. Indeed, the UK Guidance states that this responsibility to support suppliers should override any contractual provisions allowing for payments on a decreasing scale due to performance, force majeure or business continuity issues. Whilst any outcome-based payments should be calculated on the basis of the average amounts invoiced over the past three months, payments can be adjusted to remove profit margins for undelivered supplies.

Qualifying suppliers must in turn agree to act on an open book basis (e.g. identifying in invoices amounts attributable to the impact of COVID-19 and setting out costs, cash flow and profits for a subsequent three month period) and provide assurances that staff and subcontractors will be paid as a result. The UK Guidance also cautions suppliers against the use of force majeure clauses and frustration arguments, seeking to ensure that supply chains remain operational.

The UK Guidance is accompanied by model 'Interim Payment Terms'5 to be used by Contracting Authorities and suppliers seeking to fulfil these new policy requirements and avail themselves of the support established by the UK Guidance respectively.

In terms of other contractual relief, the UK Guidance also encourages Contracting Authorities to adopt a pragmatic approach and consider temporary variations to existing supply contracts to ensure business continuity is maintained wherever possible and/or protect essential suppliers from insolvency risk. These may be of particular use in respect of concession-type agreements, where suppliers' income streams may have been severely disrupted as a result of volume risk sitting with such suppliers. Although any such variations are likely to be in the supplier's favour and therefore must be handled carefully – particularly if there is no variation clause in the original contract – as noted above, Contracting Authorities do enjoy a certain amount of additional flexibility under the procurement rules in unforeseen circumstances.

Looking forward

Contracting Authorities will continue to be faced with a complex balancing act in terms of managing urgent requirements for essential goods or services while at the same time mitigating the risk of a procurement challenge. Moreover, as noted above, any direct contract awards are likely to attract a greater risk of challenge from potential suppliers who feel that they may have missed out on an opportunity. In such circumstances, the UK Guidance is a timely reminder of the inherent flexibility in the existing procurement rules and likely to be of help to Contracting Authorities seeking to balance conflicting priorities in these extraordinary times.

In summary, Contracting Authorities seeking to avail themselves of this flexibility might wish to observe the following practical steps to help carry out their responsibilities going forward:

  • Keep accurate and timely internal records of all decisions taken in respect of both new and existing contracts/framework agreements – in particular, justifications for using accelerated timescales and/or procedures;
  • Where relying on the urgency exemption in the procurement rules, keep the "urgency" of the situation under regular review;
  • Review supply chains to identify financially "at risk" suppliers and put in place measures to secure prompt payment; and
  • Ensure that any decision rejecting interim payment requests is well-documented and clearly communicated to the supplier for consideration.

Finally, suppliers should also consider carefully whether to invoke force majeure clauses and/or rely upon frustrating events (as the case may be) to avoid existing contractual obligations, as they may be able to benefit from being considered "at risk" under the UK Guidance. It would also be prudent for any supplier that believes it may be eligible for contractual relief to make itself known to the relevant Contracting Authority as soon as possible.

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