Suppliers will be looking to limit these liabilities to particular types of loss, and to impose a cap on the financial impact
The Post Office’s wrongful prosecutions of hundreds of sub-postmasters for alleged fraud has put the government’s relationship with private contractors firmly under the spotlight. Questions have been raised about how companies could be held more accountable in future.
Our Corporate and Commercial Partner, Rory O’Hare spoke to Compliance Week and highlighted the potential ramifications the case may have for other companies that have government contracts:
Will companies shy away from future government contracts?
“Whilst the Post Office and Horizon scandal may cause suppliers to be more cautious, in my opinion, it is unlikely to deter suppliers from bidding for public sector contracts. This is a market that was worth £222b in FY22/23 alonei and suppliers who have the right contractual agreements in place can still capitalise on this market opportunity.”
What contractual measures will suppliers need to take to ensure they’re protected?
“In light of the Government’s announcement to try to hold Fujitsu partly to account, I suspect this will trigger a rise in suppliers looking more closely at their obligations, how their services will be used, and their overall liabilities under the contract.
“Suppliers will be looking to limit these liabilities to particular types of loss, and to impose a cap on the financial impact. Examples of the type of cap could be the total lifetime value of the contract, or in long term agreements could be the fees paid in any one year. This is standard practice in commercial agreements, and often one of the key negotiating points.”
Could the government terminate all contracts with Fujitsu in the wake of the Horizon failings?
“The Government is currently facing pressure from customers to potentially terminate all agreements with Fujitsu following the failures of Horizon. Major suppliers like Fujitsu are likely to be party to several Government contracts with several different Government Departments.
“However, it is unlikely that a failure under one of those agreements will have any impact on the other agreements already underway (unless there are express written clauses stating as such), and any attempt to cancel those agreements for reasons other than performance under those agreements could expose the UK Government to significant damages claims.
“So, whilst it is possible that Fujitsu is supplying other government departments, it is unlikely that the government will be able to terminate all agreements with the supplier on the basis of the failings of Horizon.”
What losses would suppliers be exposed to?
“Losses are also usually limited to losses that arise as a direct result of any contract breach, or losses that were reasonably contemplated by the parties at the time they enter the contract.
It is difficult to speculate (and is probably very unlikely) that Fujitsu would have contemplated when entering the agreement that the Post Office would continue to pursue Postmasters through the courts even after it was aware the system they were relying on [Horizon] had known errors and bugs.”
What action is the Government taking? Why is this difficult?
“Government procurement is governed by strict rules, and private companies have ample opportunity to use those rules and challenge government departments where they feel as though they have been treated unfairly in the procurement process. Fujitsu challenged the Department of Transport in 2014 for an alleged breach by the DfT of the Public Contract Reg. in relation to a contract award to IBM.
“The UK Government wants past performance to be a factor in determining future contract awards, and sees the freedom granted post Brexit to break away from EU procurement rules. Previously, only very serious contractual breaches or criminality would have had the effect of preventing future contracts. Even poor performance would not prevent a future contract award, if the supplier could show how any such failure won’t recur in future projects.
“Also, because of the nature of major projects, it is often very hard to identify the supplier as being wholly at fault for the failure of the project. Therefore it makes it very hard to terminate an ongoing contract without fear of the supplier seeking damages for wrongful termination.”