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Public Procurement: What happens if a Supplier gets into financial difficulty?

Public Procurement: What happens if a Supplier gets into financial difficulty?

Carillion, a key supplier to the UK Government, has gone into liquidation. The impact has been felt throughout the public sector where there is uncertainty over what will happen to the works and services carried out by Carillion under public contracts. Many impacted public bodies will be wondering what they can do in terms of public procurement in order to continue provision of key services.

This blog will examine what options are open to public bodies when suppliers of their public contracts encounter financial difficulties.

Replacing the Struggling Supplier

Substituting the current supplier with another might be considered.

Public bodies will need to take care. If the contract is over the EU procurement threshold then a substitution would generally not comply with the procurement rules - as it would be a change to the essential terms of the contract.

However, where:

  1. The new supplier essentially 'succeeds' into the contract from the original supplier (for example as a result of corporate restructuring)
  2. The new supplier can meet the original tender criteria
  3. The contract is not materially altered in any other way

the EU Court has held that a substitution does not breach procurement regulations. This exception may be useful to public bodies where, as a result of financial difficulties, a supplier goes through internal restructuring. Considerable care would need to be taken in order to avoid any breach of the procurement rules.

Award of a New Contract

Carrying out a procurement process and awarding a new contract is also an option.

However, given the timescales in involved in public procurement processes, this may not be viable if the works or services involved are time-sensitive.

The procurement rules do allow for the timescales of procurement processes to be accelerated. However some services or works may be so vital that even the accelerated timescales take too long.

In such situations, a public body can directly award a contract to a supplier with no publicised procurement process if extreme urgency can be shown. In order to do this the following criteria must be met:

  1. The extreme urgency is a result of events unforeseeable to that public body
  2. The urgency is so extreme that the timescales of any procurement procedures (including the accelerated timescales) cannot be complied with
  3. The public body was not the cause of the extreme urgency

The threshold for meeting this criteria is likely to be high so public bodies should be sure that strong justifications exist before making a direct award.

If extreme urgency is shown and a direct award is made it should be kept in mind that the general principles of procurement still apply (i.e. transparency, equal treatment and non-discrimination). Consideration should be given to these principles when making a direct award - for example awarding a short term contract via direct award so the public body has enough time to carry out a full procurement process.

A public body could also consider publishing a Voluntary Ex Ante Transparency (VEAT) Notice if making a direct award. A successful VEAT Notice would offer some protection to any directly awarded contracts from ineffectiveness orders. However, as a VEAT Notice has 10 day standstill period (where no contracts can be entered into) a public body would need to balance their extreme urgency justification against the protection a VEAT Notice would offer.

If you require any advice or assistance with public procurement please contact our team.

Written by : Lauren Little

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