A guide to what to watch out for when dealing with public sector contracts

Public Sector Contracts – What to watch out for

30th January, 2018 by Miles Barnes

With the demise of Carillion, public sector contracts are back in the headlines. However, while the press has focussed on the implications of such contracts for the Government and the tax payer, little has been said about how such contracts work for the businesses that enter into them.

From a legal perspective, public sector contracts throw up a whole host of issues that most businesses have never had to deal with when dealing with private sector clients. So, to help guide you through the minefield of public sector contracting, here are some of the key issues to be aware of and how to address them.

Confidentiality (or lack of it!)

The Issue – Public bodies are required to be far more transparent than their private sector counterparts. There is a range of legislation in place which requires public bodies to share information with the public, either when it is specifically requested or by publishing it proactively online.

Why is this problem – Businesses entering into public sector contracts are often unaware that almost any information they share with a public body (including confidential and commercially sensitive information) could end up in the hands of their customers, journalists or even their competitors.

Example – In the case of Derry City Council v Information Commissioner the Council was required to disclose details of an agreement it had in place with Ryanair regarding its use of Derry City Airport. One of the reasons for the Court’s decision that the agreement wasn’t commercially sensitive was that Ryanair failed to raise any objection to its disclosure.

What you can do –The legislation on public sector transparency heavily favours disclosure of information wherever possible. However, businesses can still take steps to protect themselves by negotiating as much contractual protection as possible at the outset, by controlling what information is shared with the public body and by responding proactively to any requests for information as and when they come in.

Penalties & Service Credits

The Issue – Long term public sector service contracts often impose penalties on businesses who fail to adhere to agreed service standards.

Why is this a problem – Public sector contracts tend to be for very long terms and are often for the provision of vital public services. This means that it is rarely in a public body’s interests to terminate a contract any time they receive a poor standard of service. Instead such contracts try to deal with service issues by having financial penalties in place for when certain agreed upon service levels are not met. In principle this is entirely reasonable, but problems often arise when the basis for and calculation of these penalties are not fully considered by service providers at the time of entering into the contract.

Example – The case of Compass Group (t/a Medirest) v Mid Essex Hospital Services NHS Trust provides perhaps the best example of penalty clauses gone wrong. In this case, the NHS Trust calculated that Compass should face deductions of over £2.3m, including £46,320 for supplying out-of-date ketchup sachets and £84,540 for a chocolate mousse three days past its use by date.

What you can do – The key to ensuring that you (as a service provider) do not end up on the hook for unexpected penalties is to ensure that any service credit/penalty mechanisms are carefully drafted and that you are fully aware of their consequences. As the Compass case shows, the inclusion of a “Good Faith” clause is a useful failsafe, but nothing can take the place of properly thinking through how a contract will work in practice, before signing on the dotted line.

State Aid

The Issue – It is illegal for a public body to use public resources to selectively benefit a particular private entity, where such benefits will or could distort competition in the market.

Why is this an issue – For most businesses the idea of getting preferential treatment from the state seems like a million miles away! However, state aid can take many forms and can often be something which businesses and public bodies fall foul off without ever knowingly or intentionally trying to do so.

Example – Examples of illegal state aid can include receiving favourable (non-market) contractual terms, guarantees, loans or additional resources (such as seconded employees) at less than market rates.

What you can do – The key thing for service providers is to be aware that the risk of state aid exists and to proceed with extreme caution before accepting anything which could be considered “special treatment” from a public body. If something seems like it’s too good to be true, it probably is and if you’re in any doubt, take some proper professional advice before accepting it.

Summary

Public sector spending currently accounts for around 20% of the total spending in the UK economy. For many businesses, public sector contracts are hugely valuable and worthwhile. However, businesses should proceed with caution and be aware of the additional risks that public contracts can present.

Whatever stage you’re at, whether you are still going through the procurement process, being asked to comment on a Freedom of Information request, negotiating the terms of your contract or trying to resolve a dispute, Howes Percival has the expertise to help.

Public Sector Contracts – What to watch out for

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