Fujitsu, grounds for exclusion and the Scottish perspective

The headlines over the course of the last two weeks have been filled with details emerging from the Post Office Horizon IT Inquiry.

The inquiry is looking into the circumstances which led to more than 900 sub-postmasters and postmistresses being prosecuted for theft and false accounting between 1999 and 2015, based on evidence from Horizon, the Post Office’s IT system. Fujitsu developed the Horizon software which was later found to be defective, erroneously making it look like money was missing.

On 18 January, speaking in the House of Commons, Alex Burghart MP, the Parliamentary Secretary for the Cabinet Office, explained that he had received a letter from Fujitsu “voluntarily undertaking not to bid for Government contracts while the inquiry is ongoing, unless of course the Government asked it to do so” but also noted that, in any event, “there are clearly defined circumstances in which the Government can exclude companies from bidding for contracts”.

Procurement Act 2023 – exclusion for poor contractual performance

Those following the Procurement Act 2023 (the “Act”) will know that, from October this year, the procurement regime in England, Wales and Northern Ireland will introduce new rules for excluding suppliers from procurements, as well as the introduction of a centralised debarment list.

As the government minister explained, contracting authorities already have the discretion to exclude bidders from participating in a procurement in certain circumstances. These circumstances include “significant or persistent deficiencies in the performance of a substantive requirement” where this “led to early termination of that prior contract, damages or other comparable sanctions”.

So, will – and in what way will - the Act change things?

First, it seems to us that the new regime lowers the threshold for poor performance, as well as introducing new criteria for its application, giving contracting authorities more flexibility to determine what counts as a ground for exclusion, including:

• not performing to the authority’s satisfaction, being given the opportunity to improve performance and failing to do so;
• sufficiently serious breaches of a contract (which is defined as leading to termination, damages or a settlement);
• a court judgment confirming a sufficiently serious breach; or
• a notice being published relating to breach or poor performance.

The first of these grounds, in particular, lowers the bar quite significantly: no actual contractual breach seems to be required where that particular authority has experienced poor performance from that particular supplier, much less one that is significant or persistent, as is currently required.

Second, a dispute about a supplier’s performance, were it to occur today, would generally be addressed between the parties without (usually) attracting the attention of the wider market. This will not be the case from October. Under the Act’s transparency requirements, contracting authorities are obliged to publish a notice with details of unsatisfactory performance or contractual breach. Other contracting authorities – and, indeed, competitors – will have visibility of these matters going forward.

This visibility will no doubt travel north of the border, which begs the question: how will Scottish contracting authorities use this information in their procurements?

Scottish focus

By way of a reminder, the Scottish Government has opted not to join the Act and so we will retain the current procurement regulations in respect of devolved Scottish authorities, continuing to mirror the approach taken in the EU, Scotland having transposed the EU Directives into its own statute book.

It will remain the case that for devolved Scottish authorities, there is discretion to exclude a supplier from a procurement where it “has shown significant or persistent deficiencies in the performance of a substantive requirement under a prior public contract, a prior contract with a contracting entity or a prior concession contract which led to early termination of that prior contract, damages or other comparable sanctions”.

Knowledge of a dispute as to performance between a supplier and a contracting authority in the rest of the UK is very likely to play a part in the application of this ground, as it does under the existing regime. If a supplier has performed poorly and the contract with a  contracting authority elsewhere in the UK is terminated or damages are awarded, it is open to a Scottish authority to exercise its discretion to exclude.

What is not clear to us, however, is whether a notice published under the Act relating to poor performance, but where the matter has not led to termination of the contract or an award of damages, is likely to fall within the meaning of “other comparable sanction”.

It also remains to be seen how the new power for the UK Government to add a supplier to the debarment list will impact on procurements conducted by devolved Scottish authorities.

Under the Act, by adding a supplier to the debarment list, Government is able to either:

• exclude a particular supplier from all future procurements automatically for a specified period of time (where a supplier is added to the debarment list on a mandatory exclusion ground); or
• mandate that authorities should be exercising their discretion as to whether to exclude a particular supplier in all future procurements (where a supplier is added to the debarment list on a discretionary exclusion ground).

Since devolved Scottish authorities are carved out of the application of the Act, they cannot be mandated to exercise their discretion; but will they anyway? It would seem eminently sensible to do so, but devolved Scottish authorities will be mindful of the requirement to permit suppliers to provide evidence to the effect that they have taken sufficient measures to demonstrate their reliability, despite the existence of a relevant ground for exclusion. They will also be mindful of their duty to act in accordance with the principle of proportionality (a principle which, under the Act, will no longer apply to contracting authorities in the rest of the UK).

Devolved Scottish authorities will need to strike a careful balance in taking account of the implementation by UK contracting authorities of the Act’s exclusion regime and suppliers will want to keep in mind that, in Scotland, different rules will apply. As ever, our procurement team would be delighted to assist with queries, particularly as contracting authorities and suppliers prepare for the Act, and the divergence of our regimes, over the coming months.