1. The Defence & Security Public Contracts Regulations 2011 Sub-Contracting and Offset Arrangements Katherine Calder 8 June 2011 16938863.1

2. www.blplaw.com Page 2 © Berwin Leighton Paisner Sub-Contract Provisions - Summary Defence specific measures to allow Contracting Authorities to require successful tenderers to sub-contract elements of the main contract and put out to competition. Sets basic rules for the fair and transparent award of these sub- contracts Why in the defence and security sector? defence industrial base consists mainly of SME’s in many Member States to open up markets and inject competition into the supply chain Reaction to offset arrangements prevalent in the sector.

3. www.blplaw.com Page 3 © Berwin Leighton Paisner Offset Arrangements Obligations placed on foreign contractors to ‘buy local’ e.g. produce the equipment locally; procure indirect supplies locally or benefit national economy in some way. “Compensation” for contracting with foreign companies. Directive cannot ‘allow, tolerate or regulate’ them. Discrimatory and go against basic treaty principles. Security of supply and sub-contracting provisions offered as “non-discriminatory alternatives” Article 346 TFEU offers the only justification for offset arrangements for “exceptional and clearly defined purposes”. Burden of proof on Member State

4. www.blplaw.com Page 4 © Berwin Leighton Paisner Potential consequences of Offset Arrangements Code of Conduct on Offsets administered by European Defence Agency (EDA) come into effect voluntary and non-binding sets out overriding principles and guidelines 25 State and Norway signed Breach of EU law Effect? UK companies operating outside of Europe will be subject to offsets without the comfort that their own government is operating the same rules

5. www.blplaw.com Page 5 © Berwin Leighton Paisner The New Rules If a Contracting Authority requires minimum sub-contracting, the sub-contract must be awarded in accordance with the rules in Part 7. Where competitive bidding is required, it must be on an EU level and in a fair & transparent way Prime contractors free to select all other sub-contractors but cannot be required to discriminate on grounds of nationality. Does not impact upon pre-formed consortiums – only 3 rd party contractors (Reg 36) CA can reject a sub-contractor at award stage or during the life of the main contract (Reg 36 (3)). But sub-contracting provision likely to be contract obligations. Provisions are without prejudice to primary bidder liability

6. www.blplaw.com Page 6 © Berwin Leighton Paisner Formalities for CAs Requirements (if any) must be in the OJEU Notice Including: what information bidders will be asked to give regarding sub-contractors; and whether the CA reserves the right to reject sub- contractors.

7. www.blplaw.com Page 7 © Berwin Leighton Paisner Principles for award of Subcontracts Article 57 (Regulation 40) “act transparently and treat all potential sub-contractors in an equal and non-discrimatory way” Sub-contract OJEU Notices for sub-contracts over threshold Ability to use Framework Agreements Regulation 42 Exemptions

8. www.blplaw.com Page 8 © Berwin Leighton Paisner Principles for award of Subcontracts Criteria for qualitative selection “objective, non-discriminatory and consistent with criteria for main contract. Capability required directly related to the subject of the sub-contract and levels of ability required must be commensurate with it” Ability to terminate sub-procurements if no suppliers are capable of meeting the requirements and this could result in a breach of the main agreement….but then what?

9. www.blplaw.com Page 9 © Berwin Leighton Paisner Rejection of Sub-Contractors Once selected the Contracting Authority will verify suitability with Article 21(5) using criteria based on that for main contract If CA rejects it must inform tenderer as soon as possible with a written justification setting out why it does not meet criteria (but may withhold information if grounds under Reg 32)

10. www.blplaw.com Page 10 © Berwin Leighton Paisner Remedies Review procedure in Articles 55-64 do not apply to sub- procurements Breach of statutory duty claims in tort against prime contractors? Contract law as it relates to private/private procurements may apply to sub-contractor/prime contractor claims If prime contractor fails to comply it is in breach of contract towards Contracting Authority. So Contracting Authority may seek damages or terminate. Prime contractors may challenge Contracting Authority if e.g. improper rejection of a sub-contractor

11. www.blplaw.com Page 11 © Berwin Leighton Paisner Issues – The Private Sectors Perspective: “Public” procurement rules on the private sector by back door Less work for prime contractors Obliged to take financial and performance risk of SME’s Onerous/time consuming/little public procurement experience Costly May make some bids unattractive Damaging to UK SME’s which have relied on offset arrangements

12. www.blplaw.com Page 12 © Berwin Leighton Paisner Issues – Public Sector Issues Will add cost to procurements as contractors ‘price’ for running competitions and price for SME risk When should it require sub-contract competitions to happen? pre Financial Close post Financial Close who takes delay risk? Compensation if Contracting Authority rejects? Litigation Risk? Robust sub-contracting?

13. www.blplaw.com Page 13 © Berwin Leighton Paisner Likely Outcomes Sub-contracting provisions not obligatory. So when would the MoD use?! Integrator model already facet of modern PPPs MFTS FSTA BSF Significant issues of existing experiences with this – mainly cost and delay risk and lack of familiarity with OJEU procurements.

14. Katherine Calder katherinecalder@blplaw.com This document provides a general summary only and is not intended to be comprehensive. Specific legal advice should always be sought in relation to the particular facts of a given situation.