Juli Lau and Gonzalo Puertas discuss the increased freedom for Local Authorities to cut ties with Russian and Belarusian suppliers.
On 21 June, the House of Commons approved the Local Government (Exclusion of Non-commercial Considerations) (England) Order 2022 (“Order”), amending the constraints of section 17 of the Local Government Act 1988 (“LGA 1988”) such that local authorities described in the LGA 1988 can effectively review public contracts with companies linked to the Russian and Belarusian state regimes following the invasion of Ukraine by Russia, and potentially terminate such contracts and decline bids from those prospective suppliers. The Order is currently waiting for approval by the House of Lords before it is made and comes into force.
Background, scope, and timing
As noted in our blog, the PPN 01/22 – Contracts with suppliers from Russia and Belarus, issued by the Cabinet Office on 28 March 2022 (“PPN”), concerns the termination of such contracts by all central government departments and suggests that other public sector contracting authorities “should consider applying” its approach. However, the PPN noted that contracting authorities subject to section 17 LGA 1988 are prohibited from considering non-commercial reasons in their procurement decisions, or for terminating contracts, and indicated that secondary legislation was being considered to address the issue.
As of the day after the Order is made, the geographical origin of supplies to, or the location of the business activities or interests of, contractors cease to be non-commercial reasons that contracting authorities are prohibited from considering in their procurement decisions, or for terminating contracts, where such origin or location falls within the Russian Federation or the Republic of Belarus. The Order will apply to all parish councils and best value authorities in England, namely local authorities, fire and rescue authorities, waste disposal authorities, integrated transport authorities, combined authorities, among others designated in section 1 LGA 1999 (“local authorities”).
Effect of the Order – While the Order itself is brief and simply amends the scope of “non-commercial matters” under section 17 LGA 1988, its effect is wide-reaching and is intended to mobilise a policy objective. According to Parliament and the Order’s Explanatory Note, the Order “aligns arrangements” for local authorities with those for, and they can now take “comparable action” to, central government departments, as set out in the PPN. The Order does not place any obligation on local authorities but allows them to terminate Russian or Belarusian contracts should they wish to do so.
Exclusion from procurements – Local authorities can also now decline to consider bids from suppliers who are constituted or organised under the law of Russia or Belarus (as neither are party to any procurement agreements with the UK), unless the supplier is registered or has significant business operations in the UK, or in a country the UK has a relevant international agreement with reciprocal rights of access to public procurement. In this case, the non-discrimination, equal treatment, and remedy provisions contained within the Public Contracts Regulations 2015 apply, therefore thorough due diligence is important here.
Assessing risks and legal duties – Decisions to exclude suppliers and terminate contracts must be carried out in observance of legal and contractual obligations, alongside risk assessments of the implications of doing so. We have explored some of these issues in our article on the PPN. In addition, local authorities will need to consider their duty under section 3 LGA 1999 to secure continuous improvement in the exercise of their functions, having regard to economy, efficiency, and effectiveness. This duty will need to be considered on a case-by-case basis where terminating contracts for non-commercial reasons, for example where incurring significant termination charges.
Emerging trend? – The Procurement Bill currently going through Parliament and likely to go live in 2023 aims to ensure that authorities that are subject to section 17 LGA 1988 are not prevented by that section from complying with their obligations under what will be the Procurement Act. Clause 104(2) of the Bill goes a step further by permitting a Minister of the Crown to make regulations disapplying the duty under s17 as it relates, not only to local authorities and the Russian origin of supplies and contractors, but to all (or specified) relevant authorities, functions, contracts and non-commercial matters. The Order therefore may just be the beginning of a more general release of local authority public procurement decision-making from the constraints of s17, although it remains to be seen whether Clause 104(2) will remain as drafted in the final piece of legislation.
Juli Lau is Legal Director and Gonzalo Puertas is an Associate at Sharpe Pritchard LLP.
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