Procurement Blog – Direct Awards Under the Procurement Act 2023

INTRODUCTION

In this, our latest blog on key provisions of the Procurement Act 2023 (Procurement Act), we consider the limited range of scenarios when a contracting authority may award a public contract directly to a particular supplier, without any requirement to run a competitive procurement process.

 

BACKGROUND AND POSITION UNDER THE PCR 2015

The current regime for direct awards is based on a specific set of circumstances contained within regulation 32 of the Public Contracts Regulations 2015 (PCR 2015), equivalent provisions in other procurement regulations (see, e.g. regulation 64 of the Utilities Contracts Regulations 2016), and the accompanying body of well-established case law (both EU and UK based) that interprets how those regulations are to be applied.

As a general rule, the scenarios under regulation 32 of the PCR 2015 are considered to be very prescriptive and have been very narrowly interpreted by the courts. It is very much intended that these grounds for direct award are limited and should be considered to be an exception rather than the rule, with a general presumption that a competitive procurement process should be run unless there are exceptional grounds to justify a direct award. This is highlighted by the specific wording used in some of the regulation 32 grounds; see for example wording such as “insofar as is strictly necessary” and “reasons of extreme urgency” in regulation 32(2)(c).

The regime under regulation 32 has often been used when contracting authorities have been faced with difficult circumstances as a justification to enter into a contract urgently and without a prior competition. As has been well-publicised, the direct award regime was relied on heavily during the Covid-19 pandemic and has been subject to significant criticism and legal challenges concerning a general lack of transparency and use of VIP lanes for certain suppliers.

 

OVERVIEW OF THE NEW DIRECT AWARD REGIME UNDER THE PROCUREMENT ACT

The new regime is based on largely familiar grounds, though the issue of direct awards is likely to remain a contentious area as, fundamentally, a contract is being awarded to a supplier without affording other suppliers the opportunity to compete for that contract.

The Procurement Act introduces four key sections:

• section 41 – direct award in special cases – this section provides that a direct agreement can be made where it is based on one of the justifications set out in schedule 5 of the Procurement Act. These justifications, for the most part, reflect the existing grounds from regulation 32 of the PCR 2015, covering familiar territory such as “an absence of competition for technical reasons”; extension to existing supplies where a change in supplier would result in a “difference or incompatibility” and “disproportionate technical difficulties”; advantageous terms in an insolvency; and “strictly necessary for reasons of extreme and unavoidable urgency”.
  It also sets out the parameters for when there may be an overriding public interest in awarding a public contract such that a direct award may be made to an otherwise excluded supplier (i.e. one which is subject to a mandatory exclusion ground). In summary, this relates to maintenance of critical national infrastructure, defence and security of the United Kingdom and effective operation of the armed forces or intelligence services. This section also makes clear that the contracting authority may carry out down-selection prior to making a direct award;
• section 42 – direct award to protect life, etc., we consider this new provision in further detail below, as it is one of the key changes to direct award of public contracts under the Procurement Act;
• section 43 – switching to direct award – permits the use of a direct award where there are no suitable tenders/responses in a competitive tendering procedure, and it is not considered possible to award following a competitive process as a result (this is equivalent to the existing ground where there are no tenders/suitable tenders); and
• section 44 – transparency notices – this provision now requires that a transparency notice is required for a direct award. Again, we consider this in greater detail below as it is another of the key changes made under the Procurement Act.

Schedule 2 to the Procurement Act also sets out those contracts that are exempt from the controls on direct awards (on the basis that these are not “public contracts” caught by the provisions of the Procurement Act). The list is similar to, and builds on, regulations 10 to 14 of the PCR 2015, covering contracts exempted due to the counterparties e.g. Teckal arrangements, and contracts exempted due to the subject matter e.g. legal services in contemplation of judicial proceedings, land acquisition contracts, financial services contracts, employment contracts.

So, if much of the above remains the same or similar to existing provisions, what has changed? In short, not much.

As noted above, the grounds on which a direct award can be made remain largely aligned to those set out in the PCR 2015. We consider the two most notable changes with respect to sections 42 and 44 below.

 

SECTION 42 - DIRECT AWARDS TO PROTECT HUMAN, ANIMAL OR PLANT LIFE OR HEALTH; OR PROTECT PUBLIC ORDER OR SAFETY

It is relatively clear to understand the rationale for introducing this section in the wake of the Covid-19 pandemic and the resultant urgent need for medical services, supplies and equipment. The wording of this section is, however, widely drafted and provides a potentially wide discretion for a Minister of the Crown to provide for direct awards in circumstances where he/she "considers it necessary", with necessary then defined by reference to:

1. protection of human, animal or plant life or health, or
2. protection of public order or safety.

As a result, a Minister of the Crown may permit certain contracts to be let by way of a direct award, whether that be by reference to class of contract, purpose, subject matter or even a particular contracting authority, and that Minister may include other conditions or limitations on such contracts being direct awarded or confer a discretion as to how they are to be awarded.

Notably, the section further provides that the Minister must then keep those regulations it makes under review and must revoke them if they are no longer required. It will be interesting to see how this develops in practice and the extent to which it is used / enforced (particularly with respect to the ability to keep the regulations conferred by this section in force without a presumption they should be removed).

Given the significant public criticism and widespread legal challenge of direct award decisions taken during the Covid-pandemic, with accusations of contracts for friends and arbitrary use of VIP lanes, this feels like an area that will be ripe for dispute in the future and a discretion that will need to be exercised very carefully if the UK Government is to avoid similar accusations of cronyism.

 

SECTION 44 - TRANSPARENCY NOTICES

Under the existing regime, it has been possible for contracting authorities to utilise the direct award regime without being compelled to notify the market that such direct award is being made. Whilst voluntary ex ante transparency notices (VEAT notices) are regularly used to notify the market of direct awards to trigger limitation periods on claims and as a means of mitigating against risk of ineffectiveness claims (by issuing the notice and then waiting for a 10 day standstill period to pass before entering into the contract), their use is not currently mandated and the counterpoint to their use would be that they could alert the market to direct awards that may not have justifiable grounds behind them.

Under the Procurement Act, this is all about to change. Section 44 of the Procurement Act provides that contracting authorities must publish a 'transparency notice' before directly awarding a public contract under either section 41 or 43. The transparency notice must set out:

• that a contracting authority intends to award a contract directly; and
• any other information that is specified in the regulations under section 95 – this will be the information as set out in regulation 26 (Transparency notices) of the draft Procurement Regulations 2024 (currently laid before Parliament) and which includes basic information regarding the contract in question and the justification/ground for the direct award.

This is as much detail as the Procurement Act provides. There will not, therefore, be any mandatory standstill period following such a notice (the act simply requires that the notice is published 'before' the direct award).

Therefore, while this transparency mechanism seems as though it could be a helpful tool to market participants (given that it could flush out a raft of potentially 'illegal' direct awards), without any mandated standstill period or similar mechanism to mitigate ineffectiveness claims, its main practical use will be as the relevant trigger for a clock to start on limitation periods for damages claims. As such, we may see contracting authorities still publishing well in advance of the notice deadline to mitigate procurement challenge risk.

 

CONCLUSION

As the grounds on which a direct award can be made remain largely aligned to those set out in the PCR 2015, we can expect the use of direct awards to continue to be the exception rather than the rule, such that the general presumption that a competitive procurement process should be run will continue (unless there are exceptional grounds to justify a direct award).

The two key changes with respect to the direct award regime set out in the Procurement Act, namely pursuant to section 42 (direct awards to protect life etc.) and section 44 (transparency notices), are unlikely to move the dial much with the former seeking to address issues arising from the Covid-19 pandemic (and similar types of issues) and the latter intended to mandate what was a voluntary regime through the provision of notices to the market where a direct award will be made. While section 44 appears to be helpful to the market, it is perhaps of more use to a contracting authority as the trigger for the clock to start on limitation periods for damages claims.