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The Defence & Security Public Contracts Regulations 2011
Sub-Contracting and Offset Arrangements
Katherine Calder
8 June 201116938863.1
www.blplaw.com Page 2 © 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.
www.blplaw.com Page 3 © Berwin Leighton Paisner
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
www.blplaw.com Page 4 © Berwin Leighton Paisner
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
www.blplaw.com Page 5 © Berwin Leighton Paisner
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
www.blplaw.com Page 6 © Berwin Leighton Paisner
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.
www.blplaw.com Page 7 © Berwin Leighton Paisner
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
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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?
www.blplaw.com Page 9 © Berwin Leighton Paisner
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)
www.blplaw.com Page 10 © Berwin Leighton Paisner
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
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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
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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?
www.blplaw.com Page 13 © Berwin Leighton Paisner
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.