UK Defence Procurement: Navigating the impact of the Procurement Act

The count-down is on.

The go-live date of the Procurement Act 2023 (the Act) is fast approaching.

In this blog, we consider the provisions of the Act relating to exclusions, debarment, termination and national security.

 

National Security Exemption

A public procurement process may be exempted from the scope of the Act on the basis of national security.

The exemption in paragraph 25 of schedule 2 of the Act represents a broadening of a contracting authority's power to take contracts outside the scope of the Act where it “determines [that the procurement process] should not, in the interests of national security be subject to this Act or a part of this Act.”  This simplification of the drafting compared with the Defence and Security Public Contracts Regulations 2011 (DSPCRs) and represents a broadening of the position.

National security is not defined in the Act, in order to ensure that it is sufficiently flexible to protect the UK’s national security interests, but must be properly justified. This acknowledges that national security interests extend beyond strictly defence and security-related matters to potentially capture elements such as economic and environmental security, counter terrorism, organised crime, cyber security, foreign relations, energy security, and maintenance of public order. Contracting authorities must keep records to evidence how reliance on the national security exemption has been “properly justified”.

Certain authorities are excluded from the scope of the Act altogether, including the Security Service, the Secret Intelligence Service, and GCHQ, such that these authorities are not required to comply with the Act.

Even where the national security exemption from the Act applies, wider public procurement principles and public law will continue to apply.

 

Exclusions and National Security

The Act provides a range of:

• Mandatory exclusion grounds, and
• Discretionary exclusion grounds.

Many of these grounds are similar to the current regime.

The inclusion of mandatory and discretionary grounds relating to national security are notable and represent an expansion of the circumstances in which suppliers may be excluded or become excludable from public procurement processes when compared with the current regime.

Mandatory grounds for exclusion are contained at Schedule 6 of the Act and include bribery, terrorism and tax evasion offences; with discretionary grounds covering issues such as labour misconduct, environmental impact and previous poor performance contained at Schedule 7 of the Act.  

A mandatory exclusion ground relating to national security applies to a supplier where it has been concluded by an appropriate authority that the supplier or a connected person poses a threat to national security and would pose such threat in relation to public contracts of that description. However, a contracting authority cannot exclude a supplier on this ground unless the supplier has been added to the debarment list with reference to this mandatory exclusion ground (see the following section for further detail on debarment).

A discretionary ground for exclusion will apply where it has been determined that the supplier or a connected person poses a threat to the national security of the United Kingdom.

Because there is no prescribed meaning of “national security” in the Act, wide discretion is afforded to contracting authorities to exclude a supplier in this context. However, process points are in place to avoid inconsistent decision-making in respect of national security exclusions on a discretionary basis. If any non-central government contracting authority proposes to exclude a supplier on a discretionary national security basis, it must first follow a process requiring the approval of a Minister of the Crown.

Importantly, a supplier may be excluded from a procurement process in the event it proposes to sub-contract the entire or parts of the public contract to a sub-contractor subject to a mandatory or discretionary exclusion ground and thus suppliers will need to carefully examine/consider their supply-chain and contractual partners.

 

Debarment and National Security

Another new feature of the Act is the debarment list, which will be a centrally managed list of suppliers maintained by the Government who are debarred from participating in public procurement processes for up to five years. Due to the significant impact of a debarment decision, a separate and thorough investigation process by the appropriate authority will be undertaken prior to a debarment decision, including providing the supplier with opportunity to make representations before a supplier is added to the debarment list.

Understandably debarment will be a key concern for a number of potential suppliers due to the wide ramifications both in terms of access to public procurement processes and reputational issues. Debarred suppliers will therefore have a right to challenge their inclusion on the debarment list within 30 days of notice of their inclusion.

In the event that a supplier is debarred on national security grounds, this will be following an investigation to determine whether the supplier fulfils the criteria relating to the mandatory exclusion ground (see above section for further detail). Importantly, the debarment list will specify the types of contracts from which the supplier is mandatorily debarred and so it may be possible that a supplier could bid for contracts of a different nature.  

 

National Security Termination

Additionally, the Act sets out a new mechanism allowing a contracting authority to terminate a contract during its term on the basis of an implied right to terminate where there is a change in circumstances with reference to the mandatory or discretionary exclusion ground relating to a threat to national security.

Where this is sought with reference to the discretionary exclusion ground, termination will be subject to notification of the Minister of the Crown and to the Minister confirming that the supplier or sub-contractor is an excludable supplier with reference to the discretionary exclusion ground.

Where this is sought with reference to the mandatory exclusion ground, a relevant contracting authority may not terminate a contract unless it has notified a Minister of the Crown.

This will have a potentially broad impact for defence procurement and contracting. It will be necessary for contracting authorities and suppliers to consider this potential termination ground during the public procurement process, and to consider consequential contractual provisions, for example, compensation on termination provisions and transitional provisions. The introduction of this implied term also evidences that the Act extends beyond the award of the public contract through the term of such public contract up to termination/expiry.

 

Conclusion: What does this mean for you?

The Act’s infancy promises twists and turns.

In particular: 

Contracting authorities - contracting authorities need to consider when and how they can and should use their powers granted by the Act to exempt procurement processes from the Act, exclude and potentially debar suppliers from public procurement processes, and whether to terminate public contracts on national security grounds. Although contracting authorities will have greater flexibility, this comes with the corresponding additional responsibility to ensure that such powers are exercised responsibly, legitimately, and in compliance with the Act.

Suppliers – in the short term, suppliers should consider whether any of their historic or current actions may result in exclusion (and potentially debarment) under the Act, or termination of a public contract on national security grounds. In the longer term and looking forward, suppliers will need to ensure they preserve good governance and corporate behaviours, particularly where certain actions may have implications from a national security perspective. National security will continue to be relevant throughout the procurement lifecycle, and therefore suppliers will need to keep abreast of evolving issues and will need to be adaptable to the potentially changing demands of contracting authorities.

 

Further information

Please contact the authors if you have any questions, or if it would be useful to discuss anything further.

This publication is intended to be a general overview and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept not responsibility for any actions taken or not taken on the basis of this publication.