Contracting with the public sector can be very attractive for commercial operators. The relative security of contracting with local authorities, health boards and other public sector bodies compares very favourably (even in a financially challenging climate) with all but the most well-established of potential customers in the open market.
Yet public authorities should bear in mind that the unique factors which prevail in the public sector may be double-dutch to service providers, suppliers and contractors in the wider market place. While private operators should ensure that they receive robust legal advice and that their contractual arrangements accommodate these factors, public authorities can pro-actively head-off potential pinch-points by raising issues early in contract negotiations and helping to educate their suppliers along the way.
In the course of advising on many transactions with a public sector focus over the years, the Government & Public Sector team at Dundas & Wilson has dealt with most of these issues. Here are our top five points which Scottish public authorities should be prepared to answer questions on.
Vires
We don’t like using Latin. However in this case we make an exception because officers of a public sector body are more likely to be familiar with the word vires than its translation (literally, “powers”). Private persons generally have full legal capacity to contract as they please. In contrast, public authorities and officials can only operate within the framework of legal rules that bring them into being and define their purpose: a statutory body has no power to do anything which it is not authorised to do by statute. This is known as the ultra vires principle.
Where a public body acts ultra vires (outside its powers) its actions are open to legal challenge and could potentially be set aside. Where any service is being outsourced to a private contractor, the duty of the authority to provide the service in compliance with regulations still remains and so any outsourcing arrangement is liable to an ultra vires challenge. If this context is properly understood by the relevant third party provider this should provide a solid foundation on which to build a contract that mitigates the risk of a successful ultra vires challenge.
Public Procurement Regulations
When dealing with a public authority, the first time a supplier will be aware that something is different will usually be at the procurement stage. All public authorities in Scotland must adhere to very particular rules around the procurement of goods and services. These rules come ultimately from the procurement directives of the EU, brought into force via the Public Contracts (Scotland) Regulations 2006 and the Utilities Contracts (Scotland) Regulations 2006. The purpose of these rules is to ensure fairness and transparency in the procurement of goods and services by public bodies, so that only the cheapest or the most economically advantageous tenders are successful.
The burden of complying with procurement regulations is an immediate concern for any contracting authority. However it makes good practical sense for public authorities to ensure that potential contractors are prepared for the time and resource investment required to comply with procurement procedures.
State Aid Restrictions
The common market policy of the EU militates against any financial aid by member state governments (and other publicly-funded bodies) that favours selected businesses and has the potential to distort competition and affect trade between EU member states. This policy (expressed in Articles 107 to 109 of the Treaty on the Functioning of the European Union) prohibits not only direct state grants, bail-outs and rescue packages, but may also apply to less obvious types of financial assistance, including the sale of land at less than market value or the granting of loans at preferential interest rates.
The rules around state aid are complex: to qualify as state aid the transaction has to distort competition and affect trade between EU member states. The rules have also been interpreted to allow for exemptions in particular cases - the most high profile recent examples being the government bail-outs of struggling financial institutions at the height of the credit crunch. However where there is any indication that a contract with a public sector body contains subsidies, concessions or is on terms which are particularly favourable to the supplier, state aid issues must always be considered. The European Commission actively monitors and enforces the prohibition against state aid and can ultimately recover aid granted in breach of the state aid rules.
Again, this is an area of regulation which private contractors will not have encountered unless they are experienced in dealing with public authorities. Authorities can again ensure that obstacles are avoided by educating their contractors as to the regulatory framework and the likely impact (if any) on the contract in question.
Employment & Equal Opportunities
In a tender for the supply of goods or services, a public body will commonly require a clause in the contract providing that the supplier will not unlawfully discriminate within the meaning and scope of any law, enactment, order, or regulation. This is because public authorities have a positive duty to promote equality under the Equality Act 2010, which includes taking steps to ensure that their suppliers do not operate discriminatory practices. Often third party suppliers will be asked to demonstrate that they have an equality and diversity policy that complies with the requirements of the Equality Act, or to provide information on the number of people from minority groups that they employ. Again, this may not be information which tenderers are in the habit of providing to potential customers and so it helps to be able to explain the rationale for these requirements. Note however that not all public authorities will be subject to the equality requirements - Schedule 19 of the Equality Act 2010 lists the public bodies to which the Act applies.
Freedom of Information
It is almost a decade since the Freedom of Information (Scotland) Act 2002 (FOISA) became part of the Scottish legal landscape. While a significant culture change has been required in almost all public sector organisations to ensure compliance with their access to information obligations, the concept will still be an alien one to many commercial operators.
The key point that suppliers need to be made aware of is that although only public bodies are bound to comply with freedom of information requests (under both FOISA and the Environmental Information (Scotland) Regulations 2004), the information requested may relate directly to its private third party contractors. This issue is most acute when a request for information involves matters which a supplier considers confidential or commercially sensitive. Whilst the freedom of information legislation contains exemptions which cover such information, the public authority will ultimately have to make the judgment call on whether such exemptions should be applied. Authorities should be ready to explain to third party suppliers why they will be required to sign up to obligations requiring them to hand over potentially confidential or commercially sensitive information on request from the contracting authority.
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