As the dust settles following the implementation of the Procurement Act 2023 (the Act) in February of this year, contracting authorities are getting to grips with some subtle changes to the laws governing frameworks.
A key question is whether local authorities are now prohibited from requiring suppliers to have specified insurance levels upon entry into a framework agreement.
Why is this important?
Framework agreements are commonly used in public procurement to pre-approve suppliers for future work. However, being appointed to a framework does not guarantee any work. It simply gives suppliers the opportunity to bid for contracts (call-offs) made under that framework without undergoing the full competitive tendering process that would be required without the framework agreement.
Requiring suppliers to hold expensive insurance from the outset, before any work is guaranteed or revenues earned, can be a barrier to participation, especially for small and medium-sized enterprises (SMEs). This is something that the Act aimed to reduce.
What does the law say?
The following two sections of the Act are key to this issue:
- Section 22(3)(b) provides that contracting authorities must not require insurance relating to contract performance as a condition of participating in the competitive tender (i.e. as a condition of bidding for a contract or for admission to a framework).
- Section 46(3)(b) similarly applies the section 22(3)(b) rule to competitive selection procedures used to award call-off contracts under frameworks.
When these sections are read together, they suggest that insurance requirements should only apply at the point the supplier is awarded a call off contract under the framework, not before.
Consequences for non-compliance
While the Act lacks an express provision on the intended treatment of insurance relating to the performance of the framework agreement itself, our view is that insurance should not be a condition of participation until the supplier enters into its first call-off contract under the relevant framework. Mandating insurance at the framework level, especially if the levels are high, could be challenged on several grounds:
- In the first instance, mandating insurance levels before award of the contract, whether as part of a framework or otherwise, will likely be a breach of sections 22 or 46 of the Act.
- It could be seen as disproportionate. Section 22(1) of the Act requires participation conditions to be a proportionate means of ensuring suppliers have the legal, financial, or technical capacity to perform, with Government Explanatory Notes emphasising conditions must be "essential" and "not unnecessarily onerous." Suppliers under framework agreements have minimal obligations under the framework itself, creating very low liability risk. Risks that are covered by insurance are more associated with activities carried out in fulfilment of call-off contracts. Requiring insurance as a condition on simply being on a framework appears disproportionate to the actual risks involved.
- It may discourage SMEs from participating, which contradicts the Act’s goal of opening up public procurement and the requirement to "consider" under Section 12 of the Act whether barriers to participation exist.
Even if a legal challenge doesn’t succeed, there are commercial risks. Suppliers may continuously seek clarification or drop out altogether when they see that mandatory insurance levels are a condition of participation in the procurement.
Compliance going forward
While it was common practice under the previous procurement regime to require suppliers to hold specific insurance levels from the moment they join a framework, doing so under the Act carries legal and commercial risks. The better approach is to require insurance only when a supplier is awarded its first call-off contract under the relevant framework, where the actual delivery of goods, works or services (and therefore the risk) begins.
This approach helps ensure compliance with the Act, supports SME participation, and aligns with emerging best practice in the procurement sector.
For more information on Frameworks under the Act, contact Louis Sebastian or Rebecca Rees.
