COVID-19 – supplier relief under a new Procurement Policy Note

Public bodies should pay close attention to the Procurement Policy Note (PPN 02/20) that has been released by the Government or risk suppliers bringing legal action against them.

On 20 March 2020 the UK Government released PPN 02/20, which sets out information and guidance for public bodies (including local authorities and NHS bodies) about payment of their suppliers to ensure service continuity both during and after the current COVID-19 outbreak. The purpose of the PPN is to encourage public bodies to put in place payment measures to support supplier cash flow so that they can continue to pay employees and flow down funding to their subcontractors. Updates have since been published and you can see the latest documents here.

At the time of writing, PPN 02/20 will have effect until 30 June 2020.

The legal status of PPN 02/20

It is important to be clear that PPN02/20 is guidance. Public bodies do not have an absolute legal obligation which requires them to follow the processes set out in PPN 02/20.

However, public bodies should not simply ignore this guidance. We would recommend that a public body should at least have regard to PPN 02/20 when considering how it should approach its contractual rights and obligations. Failure to do so or a public body misdirecting itself on the operation of PPN 02/20 could potentially result in suppliers bringing a judicial review challenge against the public body.

PPN 02/20 specifically recognises that the public body will need to treat each case on its own particular facts and will need to consider all of its legal duties and legitimate interests before determining whether it is appropriate to grant relief to the supplier in any particular case.

What does the Government want the public sector to do?

The Public Contracts Regulations 2015 (“the PCR“) require public bodies to pay suppliers within 30 days. While a specific obligation to that effect appears in many public sector contracts, those contracts often contain a wide variety of remedies that the public body can use if the supplier fails to meet its contractual obligations. These can include service credits for failing to achieve specified service levels or liquidated damages for late delivery due to the supplier’s default.

PPN 02/20 acknowledges that the current outbreak of COVID-19 is unprecedented and will have a significant impact on businesses of all sizes. The Government anticipates that many suppliers to the public sector will struggle to meet their contractual obligations, putting supply chains at risk.

The Government wants to ensure service continuity and protect jobs during and after the COVID-19 outbreak and, with this in mind, PPN 02/20 recommends that all public bodies should:

• Urgently review their contract portfolio and inform suppliers who they believe are at risk* that they will continue to be paid as normal (even if service delivery is disrupted or temporarily suspended) until at least the end of June 2020.
• Put in place the most appropriate payment measures to support supplier cash flow.
• If the contract involves payment by results then payment should be on the basis of previous invoices, for example the average monthly payment over the previous three months.
• Ensure invoices submitted by suppliers are paid immediately on receipt (reconciliation can take place in slower time) in order to maintain cash flow in the supply chain and protect jobs.

*PPN02/20 does not specifically define what “at risk” means. This is left to the discretion of each public body and it is clear from the FAQ guidance that the threshold is a low one. The FAQ guidance anticipates that the majority of suppliers to the public sector will be “at risk” and expects public bodies to apply this as broadly as possible to ensure service continuity and to protect infrastructure, supply chains and jobs.

PPN 02/20 also contemplates a range of other potential measures:

• Extending the time for the supplier to perform its contractual obligations (eg by revising milestone or delivery dates) and / or the public body delaying or waiving its ability to exercise its contractual rights or remedies (eg to claim liquidated damages or service credits or to terminate the contract).
• The PPN discourages the use of force majeure provisions or arguments around frustration, where these could affect continuity of service when the pandemic subsides.
• Advising the public sector to pay undisputed invoices ‘immediately’ and resolve disputed invoices as a matter of urgency.
• Advising public bodies not to send invoices back for minor administrative errors when the goods / services have been delivered.

PPN 02/20 also recommends that public bodies accelerate their payment practices and that they:

• Set out their invoicing procedures on their website to reduce the number of administrative errors in the invoicing process.
• Ensure there are appropriate contingencies in place, including sufficient numbers of staff with delegated authority to promptly receipt / authorise amount as due for payment in business units as well as finance teams.
• Encourage suppliers to invoice on a more regular basis to help their cash flow.
• Work with suppliers to maintain business continuity wherever possible and ensure that robust business continuity plans are put in place.

One of the key objectives behind the guidance is that suppliers are able to resume normal contract delivery as soon as possible once the impact of the COVID-19 outbreak on the relevant contract is over. This means that any changes to the supplier’s contractual terms need to be considered on a case by case basis, limited to the specific circumstances of each situation and temporary in nature. Those changes to the contract will need to be formalised in writing, using the relevant variation or change control process specified in the contract.

What is expected of the supplier?

In order to qualify for relief, PPN 02/20 recommends that suppliers should agree to act on an open book basis and make cost data available to the public body during this period. They should continue to pay employees and flow down funding to their subcontractors.

PPN 02/20 and the associated FAQ document contain a number of warnings to suppliers to ensure that the supplier relief guidance is not misused, including the following:

• Suppliers should not furlough the staff needed to provide services under public sector contracts. Question 9 in the FAQ document advises suppliers to notify the relevant public body in advance of any proposed staff cuts and redundancies as that may affect the payments to be made to the supplier. However, Question 13 in the FAQ document clarifies that staff involved with other contracts in respect of which relief is not being sought under PPN 02/20 can be furloughed.
• Fraudulent claims under COVID-19 support schemes will be reclaimed and those companies may be excluded from future public contracts.
• Suppliers should not make any profit on elements of a contract that are undelivered. The payments are made so that suppliers have sufficient cash flow to maintain their staff and assets and can pay their supply chain on time.

Suppliers receiving relief under PPN 02/20 are expected to keep records to show that any relief payments they receive have been used for these legitimate purposes. Failure to do so could lead to the public body seeking to recover some or all of those relief payments.

Application of PPN 02/20

At Blake Morgan, we have been asked by a large number of clients for further support on the application of PPN 02/20 and how it reconciles with the client’s contract, procurement rules (where a variation is required) and state aid.

A particular issue of concern is where contrary to the PPN, the relevant contract already provides processes that would provide the operator with relief from its non-performable obligations, and does not point to a termination remedy such as force majeure or to frustration; or where the payment is a surplus payment from the operator to the public sector body rather than a payment due to the operator.

In such circumstances, where the contract has already specified what should happen, the contract should be followed, with any element of discretion being exercised in-line with the guidance provided by PPN 02/20. The contract and contractor performance prior to COVID-19 should be considered. This also calls into question whether a variation is required at all to the contract (and the relevant ground of the PCR), or whether what is actually being created is a record by the parties of how the parties have exercised their contractual rights to give and receive relief.

Such clients have still needed to consider state aid where the public sector entity has exercised its discretion to give aid, such as a loan for the operator’s unavoidable operational costs, necessary to re-start services when permitted.  In all cases the Communication from the Commission Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak 2020/C 91 I/01 has been very welcome and heavily relied upon both by such bodies and their operators.