Hilary Homfray joins Anthony Collins Solicitors after working for Birmingham City Council for 14 years. With more than 60,000 properties, she was kept busy!
What happens to existing contracts with Morrison?
Mears have confirmed to us that they have purchased the shares in MFS, rather than the assets. Since this is a purchase of the shares, MFS continues to exist in its current form. In legal terms, all that has happened here is that the ownership of MFS has changed. Its employees will continue to be employed by the same employer, so there is no TUPE transfer.
Since there is no change to the corporate structure of MFS, contracts entered into with MFS will be unchanged. This contrasts with the position on the recent administrations of several other large contractors. In those cases, it was the business of the contractor that was purchased from its administrator, so clients had to decide whether to agree to novate their contracts to the purchaser.
The structure of the purchase means that contracts with MFS can continue without the need to run a new OJEU procurement.
Change of control clauses
Some contracts contain “change of control” provisions. These allow the client to terminate the contract if ownership of the contractor changes. These clauses are common in PFI contracts and are included in OGC standard form contracts. However, they are not included in most of the standard form maintenance contracts commonly used in the sector (such as JCT Measured Term, NHF Schedule of Rates, TPC and TSC).
If you do have “change of control” provisions in your contract, it may be possible to terminate that contract as a result of the takeover. You may wish to consider this if, for example, you have experienced poor performance which is not quite bad enough to terminate for default.
Housing providers in this situation may be tempted to wait to see if performance improves. If you do so, you should not wait too long. If you do you are at risk of being taken to have “affirmed” the contract (through behaving as though you want it to continue despite the takeover) and will lose the right to end it.
Parent Company Guarantees
The other issue for clients that have signed contracts with MFS to be aware of concerns parent company guarantees (PCGs). It is likely that one of the previous parent companies of MFS (often Morrison plc) will have provided you with a PCG. Under that PCG, the parent company agrees to step into the contract following a default by MFS and either itself properly perform the contract or compensate you for losses caused by the default of MFS. A PCG will still be enforceable against the previous parent company despite the change of ownership of MFS. It is likely that, as part of the transaction, Mears will have given a legal commitment to reimburse Morrison any costs it has to pay out under a PCG.
Novation of Parent Company Guarantee
It is possible that you may be approached to agree to a transfer (“novation”) of the PCG to Mears. This raises some complex issues of EU law to which the case law does not give a clear answer. Housing providers should exercise caution and take specific legal advice before agreeing to any such novation.
A number of clients may be running procurements where both Mears and Morrison have submitted PQQs, are included on the tender list or have submitted tenders.
There is some European case law saying that both a parent and subsidiary can submit tenders in the same procurement. However, Mears and MFS will need to take care in relation to ensuring that they can properly sign the non-collusion certificate. In these circumstances, it is possible that one of them may wish to withdraw from the tender process. If they do, clients will need to consider whether to delay tender returns, to allow the next placed organisation to bid, or whether to continue with one less bidder.
What practical steps should I take?
As explained above, the purchase will not have any major impact on existing contracts with MFS. Those contracts will continue in force despite the change of ownership and without the need to carry out any further OJEU process. No doubt you will want to discuss with Mears practical delivery arrangements in relation to the continuation of your contract with MFS, and you should certainly do this.
If you have a change of control clause, you will need to decide fairly promptly whether or not to exercise it. If you are planning to do so, we recommend that you take legal advice to confirm your entitlement to do so.
You will still be able to enforce any existing PCG given by the previous parent company. You do not need to do anything in relation to the PCG if you do not want to do so. However, you should seek further legal advice before agreeing to novate this to Mears.
If both Mears and Morrison are bidding in your procurement, you should clarify their intentions in relation to this as soon as possible. You can then decide whether you need to make changes to your procurement intentions.
For more information
If you would like to talk through any legal issues concerning a contract with MFS or a procurement process they are participating in, contact Andrew Millross on 0121 212 7473, firstname.lastname@example.org or any member of our Procurement and Construction Team.
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