Managing contracts and underperforming suppliers


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More and more frequently we are being asked to advise on how to manage underperforming suppliers contracted under framework agreements. This is becoming a key problem for many of our clients. 

Understanding the mechanisms available to contracting authorities (usually our housing association or local authority clients), is crucial to ensuring that public contracts are carried out effectively and efficiently.

The High Court case of BT Cornwall Limited v Cornwall Council and others highlighted the importance of ensuring that the contractual mechanisms for termination are clear and succinct. The reasoning in the case of Sutton Housing Partnership v Rydon Maintenance also suggests that where a contract is unclear common sense shall be taken into account when considering interpretation of contractual provisions.

In BT Cornwall, BT had contracted with Cornwall Council, Cornwall Partnership NHS Foundation Trust and Peninsula Community Health CIC by entering into a Service Delivery Agreement worth approximately £160 million relating to the provision of health, transport, communications and public safety throughout Cornwall. BT sought an injunction to prevent termination of the contract by the Council due to its failure to meet a number of KPIs under the contract. Ultimately the High Court found that the Council had been entitled to terminate the contract because BT had not provided the service to the required standard set out in the contract.

A number of key lessons can be taken from this case, particularly in respect of a Contracting Authority's rights in relation to underperforming suppliers. Firstly, the willingness of a Contracting Authority to co-operate with a contractor to resolve performance issues does not necessarily amount to a waiver of the KPIs under the contract. In the BT Cornwall case, BT acknowledged that there were significant problems with their service provision however tried to argue that the Council had waived their right to termination as they had affirmed the breaches.

Under the contract, the Council had an express right to waive KPI scores caused by performance failures 'at their sole discretion' if they were satisfied that a suitable remedial plan to prevent future failures had been put in place. In this instance, the Court did not accept that the Council's conduct in working to resolve the issues amounted to such a waiver.

To the extent that the contract does not say otherwise, Contracting Authorities can therefore be reassured that in acting co- operatively to resolve performance issues and ensuring efficiency of the contract, they may not be taken to have impliedly waived any rights to terminate in the future. Clear and precise drafting of KPI management clauses is therefore essential to protect the ability to terminate a contract should it become necessary thereafter.

Further, care should be taken to ensure that any variation to the Framework Agreement, Call-off Contract or any other contractual documentation is in writing. In BT Cornwall, BT had argued that the agreement had been varied by an implied KPI Backlog Agreement to relax the enforcement of KPIs whilst BT was attempting to resolve the performance issues. The Court found that no amendment to the agreement or creation of a new agreement had occurred. There was no written evidence to support such a position and one of the parties to the contract was not present at the relevant meeting.

Importantly then, if any amendments are agreed between the parties these should be fully recorded in writing to avoid any ambiguity. One of the benefits of using Framework Agreements is the certainty and continuous improvement which can be achieved through long-term relationships. Contracting Authorities should therefore not be afraid to amend the contract or service levels to achieve these benefits, provided that such variations are clearly recorded. 

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