‘Novation’ not a simple answer for public sector

27 September 2010

27 September 2010 | Natalia Da Silva

Public sector organisations transferring the contracts of companies in administration face a number of legal challenges, according to procurement lawyers.

The administration of social housing maintenance company Connaught Partnerships has caused local authorities to novate a number of key contracts to alternative providers. The legal process of novation allows one supplier to be replaced with another, while the existing contract continues.

Competitors, including Morgan Sindall and Mears, have picked up social housing contracts from Connaught in recent weeks.

Jonathan Parker, a barrister at Quigg Golden, said: “If a contract is simply novated from a successful tender to another company it can be seen that the other company did not win the competition. Treated in accordance with procurement law as an award without notice it can, in most cases, be unlawful.”

KPMG, the administrators for Connaught, has confirmed that the business will trade in a short term with a view of selling and novating contracts.

If the rules are broken, contracts may be declared ineffective and fines could be imposed, Parker said. “The numerous suppliers are more likely than ever to raise legal challenges in an attempt to recover losses arising from the situation, so it is imperative that strategies employed by housing associations are robust to insulate against onerous legal and financial consequences.”

Mark Clough, a partner at Addleshaw Goddard, said local authorities could enter contracts for a short period term to cover their needs, provided they start a public procurement process to award a new contract. “If the contracting authorities have not started a new public procurement process it will be open to a legal challenge and a declaration of ineffectiveness under the new remedies regulation.”

Suppliers to Connaught face £40 million in unpaid invoices. Following Connaught’s failure to secure funds earlier this month, KPMG said it could not yet decide how much suppliers would be reimbursed.

A spokeswoman for KPMG said details would emerge when the administrator publishes its creditors’ report due in October.

One supplier warned that if Connaught invoices went unpaid, it could put other subcontractors in jeopardy during the fragile economic recovery.

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