In its first Procurement Policy Note of 2022, the Cabinet Office has issued guidance to public sector organisations to "cut ties with companies backed by the states of Russia and Belarus" as part of the UK Government's "financial and investment sanctions aimed at encouraging Russia to cease actions which destabilise Ukraine".
The conflict in Ukraine continues to have a significant impact on the global energy market and, as the Frequently Asked Questions accompanying PPN 01/22 (the "FAQs") explain, Russian and Belarusian suppliers are most active in the oil and gas sectors. Accordingly, PPN 01/02 follows recent sanctions announced by the Council of the EU including a ban on new investment across the Russian energy sector.
The call to action
From 28 March 2022, PPN 01/22 has advised those operating within In-Scope Organisations to:
- circulate the "PPN within [their] organisation, drawing it to the attention of those with a commercial and procurement role";
- "review their contract portfolio and identify any contracts where the prime contractor is a Russian or Belarusian supplier"; and
- "consider terminating [their agreement(s)] in accordance with the terms of the contract" where a Russian or Belarusian prime contractor is identified.
Under PPN 01/22, a "Russian or Belarusian prime contractor" is:
- "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’)".
For the purposes of PPN 01/22, In-Scope Organisations include all Central Government departments, their executive agencies and non-departmental public bodies though other public sector contracting authorities are encouraged to apply "the approach set out in [the] PPN".
When should a contracting authority consider terminating a contract?
PPN 01/22 makes it clear that In-Scope Organisations should only terminate existing contracts where:
- the contract contains suitable and commercially acceptable termination provisions permitting termination;
- the criticality of the contract and the availability and affordability of alternative suppliers has been assessed; and
- the financial and other potential repercussions arising from termination have been measured and, where relevant, mitigated.
In making a decision to terminate a contract, In-Scope Organisations should also:
- take a "proportionate and…risk-based approach" on a case by case basis;
- act "within existing legal restrictions, financial allocations and budgets";
- "take their own legal advice about what is possible within the terms of the individual contracts to which they are [a] party";
- "only proceed to terminate a contract if an alternative supplier can be sourced in line with value for money, affordability and with minimal disruption to public services"; and
- take special care in terminating existing energy contracts to prevent disruption to services.
Contract termination: Assessing risk
The Cabinet Office has set out the following approach to help In-Scope Organisations evaluate whether or not it is appropriate to terminate a contract:
- review termination provisions and any termination costs;
- confirm that there are no intellectual property issues if a replacement contract is to be put in place;
- assess whether a Russian or Belarusian subcontractor can be legally replaced;
- consider whether an alternative and available source of supply is required, taking into account likely timescales and disruption to services, cost, complexity of replacing suppliers, whether or not "the alternative supply does not result in any form of payment to Russian/Belarusian suppliers" and risk of affecting other contracts; and
- assess the business criticality of the contract and cost implications.
Importantly, the requirements of PPN 01/22 do "not alleviate Accounting Officers from their usual duties to ensure that spending is regular, proper and [achieves] value for more" or the wider obligations on public sector organisations to "conduct appropriate and proportionate due diligence and to act in accordance with [the] contractual" terms of their agreements.
When conducting new procurements, In-Scope Organisations can "decline to consider (or otherwise exclude…) bids from suppliers who are constituted or organised under the law of Russia or Belarus". Alternatively, suppliers whose 'Persons of Significant Control' information indicates their place of residency is within Russia or Belarus, can also be excluded from new procurements, unless the supplier or a member of their supply chain:
- "is registered in the UK or in a country the UK has a relevant international agreement with reciprocal rights of access to public procurement"; 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".
Where either or both of the above circumstances applies, the relevant supplier(s) "should not be automatically excluded from" the procurement process. Instead, each procurement should be considered on its own facts and In-Scope Organisations should conduct adequate verification and due diligence processes and, if appropriate, seek legal advice.
The impact on local authorities
Although "the [UK] Government is supportive of public bodies seeking to divest from Russia", PPN 01/22 reminds local authorities that they are subject to section 17 of the Local Government Act 1988 ("LGA 1988") which prohibits the consideration of "the country or territory of origin of supplies to, or the location…of the business activities or interests of, contractors" in their procurement decisions.
The Cabinet Office recognises that this statutory duty conflicts with the contents of PPN 01/22 but has also indicated that the Department for Levelling Up, Housing and Communities is contemplating a statutory amendment to deal with that conflict. For the time being, the FAQs advise that contracting authorities subject to section 17 of the LGA 1988 may be able to terminate a contract on the basis of a supplier's reduced capacity or financial stability (for example, as a result of delays or sanctions) but this will be specific to each contract and legal advice should be sought prior to contract termination.
The FAQs also state that local authorities should be mindful of their duty to obtain best value under section 3 of the Local Government Act 1999, when contemplating terminating an agreement, especially when the contract will be replaced with a more expensive alternative.
PPN 01/22 will be of interest to public sector organisations looking to divest of links to Russian and Belarusian suppliers. As there are legal limitations on the actions public bodies can currently take, each organisation should carefully examine their statutory duties when reviewing contract termination provisions or when conducting new procurements and obtain specialist legal advice where appropriate. Russia is a key player in the global energy market and public sector bodies should therefore closely consider the implications of terminating oil and gas contracts with Russian state-backed entities including, in particular, the effect on energy security for homes and businesses in the UK.
If you are a public sector body wondering how PPN 01/22 affects you, please get in touch with our national Public Sector team to discuss how we can support you across all stages of contract review and the procurement process.