Following events in Ukraine, Russia is finding itself subject to a broad range of new sanctions, internationally. As part of this collective response, the UK Government has implemented a series of financial and investment sanctions in an attempt to dissuade Russia from continuing its advances in Ukraine. The latest Procurement Policy Note (PPN 01/22) (PPN) issued by the Cabinet Office provides guidance on how contracting authorities can further cut ties with companies backed by, or linked to, Russia and Belarus while minimising the impact on taxpayers and public service delivery.
In deciding whether to terminate contracts with Russian/Belarusian suppliers, the PPN underscores the importance of adopting a 'proportionate and risk-based approach' and focusing on major contracts that carry the highest impact. The final decision to terminate a contract rests with the contracting authority with responsibility for the contract.
The PPN applies to all central government departments, executive agencies and non-departmental public bodies (In-Scope Organisations) but other public sector contracting authorities, such as NHS trusts and local authorities, are encouraged to consider the same approach. In-Scope Organisations should take steps to apply the PPN to all contracts (i.e. above and below the Public Contracts Regulations 2015 thresholds) where it is relevant and proportionate to do so.
The Department for Levelling Up, Housing and Communities is currently considering addressing an existing loophole, which might make it harder for some authorities to act in line with the PPN. The loophole is the current requirement on contracting authorities that are subject to section 17 of the Local Government Act 1988 not to take into account non-commercial considerations, such as the location of any country or territory of contractors, in their procurement decisions.
Identifying the contract
Authorities should carry out an audit of their contract portfolio to identify contracts where the prime contractor is a 'Russian or Belarusian supplier', which is defined as:
- an entity constituted or organised under the law of Russia or Belarus; or
- an entity 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 (e.g. a parent company or by 'Persons of Significant Control').
Authorities may also consider, taking a proportionate and risk-based approach, whether any contracts involve the engagement of Russian/Belarusian sub-contractors. Importantly, however, there is no requirement to ask or encourage prime contractors to consider terminating any sub-contracts with those sub-contractors.
Deciding whether to terminate the contract
In line with the proportionate and risk-based approach, the PPN advises that In-Scope Organisations should consider the following steps before deciding whether it is appropriate to terminate a contract:
1. Terms of the contract: review the termination provisions of the relevant contract(s), with a view to identifying any provisions that allow termination not linked to poor performance, along with any early termination costs. You should first consult your legal advisers in relation to any termination provisions in your contract, to make sure any termination is in accordance with the terms of the contract - and therefore valid.
2. Intellectual Property (IP): ascertain whether a prime contractor owns any IP and if a license to use is required, in which case authorities should consider the costs of this.
3. Supply chain resilience: have regard to whether there are any resilience issues as between any Russian/Belarusian sub-contractors and the prime contractor and whether these can be resolved. Where a resolution is not possible, consider substituting those sub-contractors but ensure that a legally compliant process is followed and an alternative supplier can be sourced. This provides value for money and minimises disruption to public services, including impact on energy markets.
4.Alternative suppliers: establish whether an alternative supply is required and whether these sources are available, focusing predominantly on timescales, the cost and complexity of securing alternative supply, whether any alternative supply results in any form of payment to Russian/Belarusian suppliers and whether any decision to terminate a contract puts any other contracts with that supplier at risk.
5. Business criticality: assess how critical the contract is to the business and the associated costs. Where relevant, consider the impact on services to the public. The PPN provides example methodologies for assessing business criticality/cost implications.
Where a decision has been made to terminate a contract, it is advised by the PPN that, where possible, termination provisions that provide for longer notice periods and no additional costs be invoked. Critically, longer notice periods provide an opportunity to secure suitable alternative supply.
It is also important to bear in mind the costs associated with termination and ensure that such costs are quantified in advance, so far as possible, and approved funds are available to meet those costs. Costs can include tendering costs, increased commodity prices, market engagement and legal support.
Finally, the PPN reminds authorities to ensure that they document all aspects of their decision-making and retain a clear audit-trail.
The PPN confirms that bids from suppliers constituted, controlled by, or organised under the law of Russia or Belarus can be declined, but those suppliers that are registered in, or have substantive business operations in, the UK should not be automatically excluded from the procurement process as this would risk breaching the Public Contracts Regulations 2015.
The PPN falls short of mandating that In-Scope Organisations terminate existing contracts and instead requires that each contract and procurement be considered proportionately and on a case-by-case basis. The PPN attempts to strike a balance between creating an effective deterrent and ensuring that any impact on public service delivery and the wider markets is minimised.
If you would like to discuss any questions prompted by the points discussed here, please contact Christopher Brennan in our Public Procurement team.