Changing Contractors Is Easier Than You Think

Sparked by the recent Carillion collapse, John Baldwin, partner at solicitors Winckworth Sherwood, discusses what happens when work is handed on to another contractor.

The sudden collapse of a major contractor is always disruptive and costly to everyone involved in the supply chain, with customers and sub-contractors alike often scrabbling to keep projects on track and avoid breaks in service. The situation is even more difficult for public-sector customers who, in addition to everything else, must have an eye on procurement law to avoid adding more risk to an already difficult situation.

The current situation with Carillion has echoes of the collapse of Connaught plc in 2010. Connaught was a major supplier to the social housing sector and, although their social housing arm was quickly sold by the administrators, many housing associations were concerned about the procurement risks of simply switching their contracts over to the new provider. In principle, a change of contractor would naturally be considered a very major change to a contract, requiring a new competition, and the law at that time was unclear as to whether insolvency might be an exception.

Fortunately, procurement law has moved on since then. The Public Contracts Regulations 2015 now deal with this matter expressly, in regulation 72(1)(d)(ii). This provides that contractors may change “as a consequence of universal or partial succession into the position of the initial contractor, following corporate restructuring, including takeover, merger, acquisition or insolvency”.

What does this mean? It means that, where part of a business is transferred to another business (such as following a sale by a liquidator or administrator), authorities can continue to do business with that new business. The two conditions set out in the regulations are that (1) the new business must meet the qualification requirements in the original tender and (2) no other substantial changes are made to the contract at the same time.

This makes sense, because the ultimate purpose of procurement law is to restrict the free choice of authorities when they make purchasing decisions, in order to avoid nationalistic favouritism. But, in the above situation, the authority isn’t making a choice. Instead, other market operators are stepping in and making their own decisions to salvage parts of the collapsed business. The involvement of the authority is limited to checking that the new business still meets its basic qualification requirements.

The above route is useful when a sale takes place relatively quickly, which is becoming increasingly more common with the rise of so-called ‘pre-pack administrations’, where a buyer is identified prior to the insolvency being announced. Where there is a delay before the situation becomes clear, authorities will need to consider putting in place emergency interim arrangements. These will always require authorities to balance procurement risk alongside other commercial risks, but possible strategies might include discrete short-term contracts which are below threshold, or the use of regulation 32(2)(c) in cases of extreme urgency.

In some cases, the most obvious solution would be to maintain links with the team of sub-contractors, especially in complex contracts where many of the operational requirements of the contract are outsourced by the primary contractor. Authorities can plan for this by taking advantage of regulation 71(1)(d)(i), which allows changes of contractor where a clear right to make such a change is included in the original contract. This would allow authorities to include a right to ‘step in’ and deal directly with sub-contractors in the event of the insolvency of the primary contractor. For high-value contracts, this can be supplemented with collateral warranties and project bank account arrangements, which can help to reduce the dependence on the primary contractor when things go wrong.

If you would like further advice, John can be contacted at 

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