Learning lessons from Wolf Hall

In the historical novel Wolf Hall, Hilary Mantel writes of Thomas Cromwell: ' He would not allow, for example, a careless ambiguity in a lease, but instinct tells him that sometimes a contract need not be drawn too tight. Leases, writs, statutes, all are written to be read, and each person reads them by the light of self-interest.'

Cromwell, at this point in the story, is on the rise. By such pragmatism, understanding, and wit, he has positioned himself for patronage from Cardinal Wolsey and is on the verge of achieving influence and wealth through the king. His approach to contracts and laws, though, would not work today.

The Public Contracts Regulations 2015 (PCR 2015) came into force on 26 February 2015. Like the laws that Cromwell circumnavigated to achieve the dissolution of Henry VIII's first marriage, these laws come from a great European power to which England is subject. They implement Directive 2014/24 on public procurement and replace the Public Contracts Regulations 2006 ( PCR 2006), at least in respect of 'public' contracts made after 26 February 2015.

They apply to all 'contracting authorities', which catches all bodies that spend public money - in order to avoid, particularly, local preferential treatment and to encourage EU-wide competition. Thus they catch, expressly, government departments and bodies, local authorities, police and fire authorities, and NHS trusts, as well as other 'bodies governed by public law'.

Late payments

In Wolf Hall, Henry VIII attributes the failure to arrange his marriage to Catherine of Aragon to late payments, as his father, Henry VII, is unable to agree with Catherine's father over a dowry.

The PCR seek to avoid such circumstances. Regulation 113 requires the vast majority of public contractors (though not, notably, in respect of NHS health care services, academies, or maintained schools contracts):

• To pay contractors' invoices no later than 30 days after they are regarded as valid and undisputed;

• To consider and verify any invoices for payment submitted by the contractor in a timely fashion; and

• To ensure sub-contractors' invoices are treated in the same way.

The government's policy is that the public sector should set a strong example by paying promptly. Each year contracting authorities are required to publish online the proportion of invoices paid on time to their principal contractors, with further information about the amount of interest paid to suppliers due to late payment as well as the amount of interest actually due (whether paid or not).

Separately, on 9 March 2015 the Department for Business, Innovation and Skills (BIS) closed a consultation allowing representative bodies to deal with late payment terms and practices. Again, this comes from Europe under the Late Payment Directive (2011/7/EU). The regulations, due shortly, will allow 'representative bodies' to challenge late payment terms and practices which are 'grossly unfair' by reference to a list of indicative criteria. Perhaps this is a better example of a contract which 'need not be drawn too tight', and it is true that each person will read them 'by the light of self-interest'.

  

Misconduct in Winchester

As Cardinal Wolsey lies dying, rejected by the king, he is depicted by the law students of Gray's Inn offering his diocese of Winchester in return for help.

Nothing quite so criminal has happened recently to that seat of some Tudor interest (some of the BBC's Wolf Hall was filmed there, the bishop and statesman Stephen Gardiner is buried there, Mary Tudor married Philip of Spain there), but Winchester City Council has been found unlawful in relation to its management of public contracts, and two of its leaders have fallen, Wolsey-like, from grace in Gottliebv Winchester City Council [2015] EWHC 231 (Admin).

The High Court ruled that Winchester had not followed procurement laws under the PCR 2006 in relation to the controversial Silver Hill development. In 2014, Winchester varied an agreement made with a developer in December 2004 - without holding a new procurement exercise. The court noted in passing that the original agreement had been made in violation of the then-relevant laws. The 2014 variations reduced the cost of the development and increased the developer's revenues from the site in terms of rent and further services to the development.

The key question to consider was whether or not the variations to the development agreement were so substantial as to require a new procurement procedure.

Following Case C-454/06 Pressetext v Austria, the test is whether the variations to the contract are materially different in character from the original contract and, therefore, have the effect of demonstrating an intention to renegotiate the essential terms of that contract.

The claimant also has to satisfy, on the balance of probabilities, the requirement that a realistic hypothetical bidder would have applied for the varied contract, had it been advertised.

The court rejected the council's argument that no useful purpose would be served by the application because the claimant (a member of the 'Winchester Deserves Better' campaign) had no interest in the observance of the public procurement regime.

It noted a variety of factors but, in particular, that the claimant, being a resident, council tax payer, and city councillor, had a legitimate interest in seeking to ensure that the elected authority of which he is a member complied with the law, spent public funds wisely, and secured through open competition the most appropriate development scheme for the city of Winchester.

Ultimately, the court found that the test in Pressetext was satisfied and that a realistic hypothetical bidder would have applied for the contract.

Variation under PCR 2015

What should Winchester have done? The PCR 2015 are now the guide for the modification of contracts, at least those made after 26 February 2015. They allow such contracts to be modified without a new procurement procedure only in limited circumstances. These, principally, are where the modification:

• Follows clear, precise, and unequivocal review clauses;

• Is for additional works, services, or supplies that have become necessary and were not included in the initial procurement (provided any increase in price does not exceed 50 per cent of the value of the original contract);

• Arises from circumstances which a diligent contracting authority could not have foreseen (again subject to a cap on any increase in price at 50 per cent of the original value); and

• Is not substantial.

The lesson from the Winchester case is that contracting parties must know which laws apply to each contract and follow rigorously the knot garden of rules relating to tenders and terms.

Undoing contracts

The biggest concern for all parties is that the remedies under the PCR 2015 include (in addition to orders setting aside decisions of the contracting authority and awards of damages) a remedy of ineffectiveness of the contract. Breaches are 'actionable by any economic operator which, in consequence, suffers or risks suffering loss or damage'. This probably means that only other tenderers affected by the breach will have standing under the PCR 2015. Such ineffectiveness will only be ordered following quite specific failures and adherence by the claimant to strict limitation periods.

If only contracts could be undone, claimants might wonder, as easily as Cromwell undoes Harry Percy's alleged contract of marriage with Anne Boleyn.

Perhaps, though, given that tilt, it is better that the PCR 2015 are 'drawn too tight' and that they cannot be read 'in the light of self-interest' of people like that particular Master of the Rolls. SJ

Mark Lucas is a partner at Barlow Robbins

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