The Defence & Security Public Contracts Regulations 2011 Sub-Contracting and Offset Arrangements...

The Defence & Security Public Contracts Regulations 2011

Sub-Contracting and Offset Arrangements

Katherine Calder

8 June 201116938863.1

www.blplaw.com © Berwin Leighton Paisner

Sub-Contract Provisions - Summary

• Defence specific measures to allow Contracting Authorities to require successful tenderers to sub-contract elements of the main contract and put out to competition.

• Sets basic rules for the fair and transparent award of these sub-contracts

• Why in the defence and security sector?

• defence industrial base consists mainly of SME’s in many Member States

• to open up markets and inject competition into the supply chain

• Reaction to offset arrangements prevalent in the sector.


Offset Arrangements

• Obligations placed on foreign contractors to ‘buy local’ e.g. produce the equipment locally; procure indirect supplies locally or benefit national economy in some way. “Compensation” for contracting with foreign companies.

• Directive cannot ‘allow, tolerate or regulate’ them. Discrimatory and go against basic treaty principles.

• Security of supply and sub-contracting provisions offered as “non-discriminatory alternatives”

• Article 346 TFEU offers the only justification for offset arrangements for “exceptional and clearly defined purposes”. Burden of proof on Member State


Potential consequences of Offset Arrangements

• Code of Conduct on Offsets administered by European Defence Agency (EDA) come into effect• voluntary and non-binding• sets out overriding principles and guidelines• 25 State and Norway signed

• Breach of EU law

• Effect? UK companies operating outside of Europe will be subject to offsets without the comfort that their own government is operating the same rules


The New Rules

• If a Contracting Authority requires minimum sub-contracting, the sub-contract must be awarded in accordance with the rules in Part 7.

• Where competitive bidding is required, it must be on an EU level and in a fair & transparent way

• Prime contractors free to select all other sub-contractors but cannot be required to discriminate on grounds of nationality.

• Does not impact upon pre-formed consortiums – only 3rd party contractors (Reg 36)

• CA can reject a sub-contractor at award stage or during the life of the main contract (Reg 36 (3)). But sub-contracting provision likely to be contract obligations.

• Provisions are without prejudice to primary bidder liability


Formalities for CAs

• Requirements (if any) must be in the OJEU Notice

• Including:• what information bidders will be asked to

give regarding sub-contractors; and• whether the CA reserves the right to reject

sub-contractors.


Principles for award of Subcontracts

• Article 57 (Regulation 40)• “act transparently and treat all potential sub-

contractors in an equal and non-discrimatory way”

• Sub-contract OJEU Notices for sub-contracts over threshold

• Ability to use Framework Agreements

• Regulation 42 Exemptions


Principles for award of Subcontracts

• Criteria for qualitative selection• “objective, non-discriminatory and consistent

with criteria for main contract. Capability required directly related to the subject of the sub-contract and levels of ability required must be commensurate with it”

• Ability to terminate sub-procurements if no suppliers are capable of meeting the requirements and this could result in a breach of the main agreement….but then what?


Rejection of Sub-Contractors

• Once selected the Contracting Authority will verify suitability with Article 21(5) using criteria based on that for main contract

• If CA rejects it must inform tenderer as soon as possible with a written justification setting out why it does not meet criteria (but may withhold information if grounds under Reg 32)


Remedies

• Review procedure in Articles 55-64 do not apply to sub-procurements

• Breach of statutory duty claims in tort against prime contractors?

• Contract law as it relates to private/private procurements may apply to sub-contractor/prime contractor claims

• If prime contractor fails to comply it is in breach of contract towards Contracting Authority. So Contracting Authority may seek damages or terminate.

• Prime contractors may challenge Contracting Authority if e.g. improper rejection of a sub-contractor


Issues – The Private Sectors Perspective:

• “Public” procurement rules on the private sector by back door

• Less work for prime contractors

• Obliged to take financial and performance risk of SME’s

• Onerous/time consuming/little public procurement experience

• Costly

• May make some bids unattractive

• Damaging to UK SME’s which have relied on offset arrangements


Issues – Public Sector Issues

• Will add cost to procurements as contractors ‘price’ for running competitions and price for SME risk

• When should it require sub-contract competitions to happen?• pre Financial Close• post Financial Close

• who takes delay risk?

• Compensation if Contracting Authority rejects?

• Litigation Risk?• Robust sub-contracting?


Likely Outcomes

• Sub-contracting provisions not obligatory. So when would the MoD use?!

• Integrator model already facet of modern PPPs• MFTS• FSTA• BSF

• Significant issues of existing experiences with this – mainly cost and delay risk and lack of familiarity with OJEU procurements.

Katherine [email protected]

This document provides a general summary only and is not intended to be comprehensive. Specific legal advice should always be sought in relation to the particular facts of a given situation.

The Defence & Security Public Contracts Regulations 2011 Sub-Contracting and Offset Arrangements...

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