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As the invasion of Ukraine sadly continues, the Cabinet Office has issued a Procurement Policy Note (PPN) requiring in-scope organisations to consider how they can cut ties with companies backed by Russia and Belarus while minimising the impact on taxpayers and the delivery of public services.
The PPN applies to all central government departments, their executive agencies and non-departmental public bodies but all contracting authorities are encouraged to consider the ‘proportionate and risk-based' approach set out in the PPN. We are aware that many contracting authorities are already considering matters along the lines suggested.
The PPN requires in-scope organisations to identify any contracts where the prime contractor is a Russian or Belarusian supplier and consider terminating such contracts lawfully in accordance with their terms. As well as contracts with entities constituted or organised under the law of Russia or Belarus, this will include entities registered in the UK or with substantive business operations in the UK or another country, but controlled by an entity based in Russia or Belarus. At this stage, there is no requirement to ask prime contractors to consider terminating sub-contracts with Russian or Belarusian sub-contractors, although it would be prudent to at least understand the impact of such sub-contractors on supply chains and discuss with prime contractors their links to Russia or Belarus.
Contract termination should only be considered if an alternative supplier can be sourced in line with value for money, affordability and with minimal disruption to public services. Each relevant contract will need to be considered separately, with any decisions to terminate (or, for volume contracts, to reduce the volume to zero) being made within existing legal restrictions, financial allocations and budgets.
The PPN contains some guidance and example methodologies for assessing the business criticality and financial implications of terminating a contract. It highlights the risks that will need to be considered including termination costs, intellectual property, resilience issues and the implications and availability of alternative sources of supply. The legal and commercial issues associated with contract termination may be broader than this however and each contract will need to be scrutinised individually to identify these.
The PPN also raises the possibility of excluding or declining bids from Russian or Belarusian owned entities for new procurements. However, contracting authorities are more restricted here because of the rules in the Global Procurement Agreement that the UK is a signatory to. A bidder should not be excluded automatically if they (or any member of their supply chain they are relying on to deliver the contract) are registered in or have significant business operations in the UK or a country the UK has a relevant international agreement with reciprocal rights of access to public procurement. The general principles of equal treatment and non-discrimination and the remedies available in the Public Contracts Regulations 2015 will be applicable in such cases. Legal advice is likely to be required where the supplier has a complex group/ownership structure.
Section 17 Local Government Act 1988
There has been much concern amongst local authorities about whether they can lawfully terminate contracts or avoid entering into contracts with Russian and Belarusian backed entities. This is because section 17 in the Local Government Act 1988 prohibits them from taking into account in their procurement decisions, ‘non-commercial considerations’ including the location of any country or territory of the business activities or interests of contractors. The PPN reveals that secondary legislation and further guidance are planned to address this urgent issue. We do wonder if the possibility of relaxing the application of section 17 using section 19 of the Local Government Act 1999 has been considered by the Government. This would seem to offer an expedient solution in the circumstances and one that has been used in the past. In the meantime, local authorities can still terminate contracts for commercial reasons, but the terms of the contract will need to be checked carefully.
For more information
We are already advising several of our clients on the issues raised by the PPN. Please get in touch with Steven Brunning if you would like to discuss this further.
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