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New deals for old

Tue 21 Dec 2010

When a supplier to a public authority collapses, the authority has to decide how to continue providing the services involved - and it's a tricky legal area for buyers, warns Richard Tinham, Partner.

Service provider Connaught's recent collapse has prompted discussion on the legal position of public authorities that have to transfer contracts to an alternative provider - or provide services in-house for a limited time. When the administrators announced plans to transfer many of Connaught's contracts to Lovell Partnerships, the sector sighed with relief. However, it seems the announcement failed to fully consider the effects of procurement law.

The transfer of one party's contractual rights and obligations to another is called a "novation". It usually involves parties entering a contract with another supplier, so the arrangement is likely to be considered a new contract for the purposes of the Public Contracts Regulations 2006. Where the value of the arrangement exceeds a certain threshold, an award made other than in accordance with the Public Contracts Regulations 2006 is susceptible to challenge. It will also be vulnerable to the new regime of ineffectiveness even if the original contract was not.

In the short term, an authority whose provider enters administration should think before being drawn into a new contract. A novation requires the purchaser's consent, and you should not be rushed into giving it. Where existing contractual arrangements contain a mechanism permitting assignment of responsibilities, it might be argued that a new supplier can step into the shoes of the old without triggering tender requirements, although this is likely to be the exception rather than the norm.

The long-term, low-risk solution dictates that authorities should award a correctly procured contract to a replacement provider. Strategically, authorities might also consider frameworks with multiple suppliers to 
spread delivery responsibility and permit immediate transfer of responsibilities without any risk of non-compliance. Some authorities may already have an existing framework of alternative providers, or capacity to temporarily take the work in-house. These authorities will probably want to walk away from the failing supplier. Many contracts will contain terms dealing with this eventuality. If the contract does not deal with this issue, it will continue in force and the authority will need to perform its obligations under the contract until it can negotiate an exit or use alternative termination rights.

An authority can use the negotiated procedure for entering novation agreements without publishing a contract notice in cases of "extreme urgency" caused by unforeseeable events beyond its control. It would be prudent for any authority agreeing to such a novation to ensure the new arrangement allows them to exit as soon as a new long-term contract can be awarded. It might also be possible to agree, in a separate document, that the interim provider will indemnify the authority against losses caused by a complaint.

Finally, authorities should not forget their usual good practice. Social landlords should consider the need to consult their tenants on changes to service providers, and authorities in any sector should carry out adequate due diligence before starting a new relationship.

For further information, or to discuss any of the points raised in this article, please Contact Richard Tinham, Partner. Alternatively, please contact a member of our corporate and commercial team.

[This article was first published in Supply Management Magazine, 28 October 2010.]