Cabinet Office Guidance on responsible contractual behaviour
Cabinet Office Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency was published on the 7th May and will be reviewed again before 30th June. It suggests that 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 there is 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 through the use of negotiation, mediation and other ‘alternative’ dispute resolution procedures.
The Guidance, although not express, does seem to implicitly envisage if not actively encourage, a raft of contractual variations as a result of the virus.
The Guidance is very explicit that it is not binding but purely, exactly what it says, ‘guidance’ which does not override any binding legal duty or obligation.
The Guidance is a follow up to a Procurement Policy Note PPN 02/20 issued back in March which mandated contracting authorities to continue ‘payment as normal’ even if service delivery is disrupted or temporarily suspended). In some cases, they are even encouraged to accelerate payment in order to maintain cash-flows. The PPN mandate applies until at least the end of June. The PPN made 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”. The Guidance, on the other hand, seems to be encouraging more long-term if not even permanent variations.
PPN 01/20 also issued in March 2020 deals explicitly with permitted contract variations under the Procurement (‘Public Contract’) Regulations 2015. Regulation 72 (1) governs permitted contract variations. It states (amongst other grounds):-
“Contracts … may be modified without a new procurement procedure … (c) where all of the following conditions are fulfilled:
(i) the need for modification has been brought about by circumstances which a diligent contracting authority could not have foreseen;
(ii) the modification does not alter the overall nature of the contract;
(iii) any increase in price does not exceed 50% of the value of the original contract.
Contracting authorities should keep a written record of any decision taken to demonstrate thinking and why it is believed that the variation meets these criteria. Details of the modification will probably need to be published by way of an OJEU notice referring to Regulation 72(1)(c). 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, it may be very difficult to bring a modification fully within the parameters of the Regulation but, in reality, very few third parties are going to spend large sums of money challenging extension decisions reached in good faith in line with the spirit of the Guidance Note that has been issued and if they do we would anticipate that contracting authorities will be given the benefit of the doubt given the current crisis.
The Cabinet Office has since 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 is 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.