UK Central Government decides to exclude tenderers who do not pay their supply chain on time

The UK Central Government has just published the Procurement Policy Note 04/19 on supplier's approach to payment in the procurement of major contracts. Effectively from September onwards, in procurement processes tendered by Central Government, all tenderers for large contracts subject to the Public Contracts Regulations 2015 and over £5M/annum will be subject to an additional exclusion ground based on their supply chain payment terms. This applies to procedures as well as appointments to framework agreements/DPS and call-offs inside these.

The compliance with this exclusion ground is to be assessed on a pass/fail basis regarding payments made to the supply chain of the tenderer in the two immediately preceding 6 month periods ('reporting periods'). If in at least one of them >95% of payments were done in 60 days or less, the tenderer passes. Between 75% and 95% it will be asked to explain its performance and demonstrates it has a plan of action to improve its performance. Below 75% it fails and is to be excluded from the procurement process.

Contracting authorities are under the obligation to check the compliance of tenderers before awarding the contract, similarly to the obligation imposed by Article 18(2) of Directive 2014/24/EU.

Legal issues

The Government is positing this as a 'selection criterion' instead of an exclusion condition for good measure. EU Member States have a degree of discretion in determining selection criteria but not in setting up additional exclusion grounds. And here in lies the main problem with this approach.

A criterion which is applicable to a multitude of contracts (all above £5M) irrespective of the subject nature of the same is in essence an exclusion ground and not a criterion for the selection of a bidder.

Although selection criteria can refer to general conditions of the organisation, they need to be connected with the contract being tendered, that is relevant for the performance of the forthcoming contract. They cannot be generic in nature, with the exception of legal obligations like, say health and safety or insurance. In this particular instance, ensuring payment of invoices in 60 days is not a general rule established by law so the Government is not asking for a measure of legal compliance but compliance with a policy objective instead.

In my view this is simply an illegal exclusion ground 'disguised' as a selection criterion. But this is not the end of its legal problems.

Proportionality is a key principle of EU law and it also applies to national measures which clash with it (as is the case). Therefore, this measure needs to be assessed in the context of it being adequate, necessary and proportional in a narrow sense.

Assuming the Government wants to ensure prompt payment of suppliers, then yes this measure is adequate to achieve its end.

As for necessity, is this the minimum intervention possible to obtain the objective desired and the answer there is "probably not". The Government could have adopted a "name and shame" approach instead or created a dispute resolution mechanism specifically for those situations where late payments exist (say, for works for example).

But the proportionality in the narrow sense is the most problematic vector in this measure. There is no indication the Government took in consideration other competing principles or objectives such as the freedom to contract in this decision.

Therefore, I do not see this approach as passing muster in the context of EU law, but all this may be a moot point come November.

As for the overall logic of this approach, it is another example of the compliance creep that has been taking over public procurement rules over the last 15 years or so. That is not to say that SME/supply chain payment terms are not an issue tackling but that goes beyond just the context of public procurement.