APPENDIX 3
Supplementary memorandum submitted by
Tony Purton MCIPS, a former MoD Director of Contracts
COMMENTS ON ORAL EVIDENCE GIVEN TO THE COMMITTEE
ON 17 JANUARY 2001 BY SIR ROBERT WALMSLEY, CHIEF OF DEFENCE PROCUREMENT
In response to questions from the Committee
about the problem of getting contractors to deliver on time in
accordance with the agreed contractual delivery date, Sir Robert
made a number of statements implying that:
(a) some terms of MoD contracts are punitive;
(b) MoD contracts cannot be enforced, even
by the courts; and
(c) MoD's contractors have to be incentivised
to fulfil their contractual obligations.
The purpose of this memorandum is to examine
these statements, put them into context, and draw to the attention
of the Committee the range of legal and commercial remedies available
to the MoD, as to any buyer, in the face of a contractor's breach
of contract. References are made in the text to MoD's official
handbook of Legal Awareness (LA page X etc)—see footnote.
A. PUNITIVE CONTRACTS
Sir Robert said more than once in his evidence
that one could not have "punitive" contracts.
None of MoD's contracts is punitive, because
no contract can be made under duress. MoD contracts are mutual
agreements based on offer and acceptance of proposals willingly
made by the contractor, competitively or non-competitively (LA
page 49 "Offer and Acceptance"). Any unfair term of
contract can be challenged in the courts under the Unfair Terms
of Contract Act 1977.
B. CONTRACT ENFORCEMENT
Sir Robert told the Committee that MoD could
only obtain compensation "to put it in the same position
it would have been in if the contract had never been placed".
This is a reference to the legal doctrine of
Specific Performance that can only be ordered by the courts (LA
page 61 "Specific Performance"). The courts will only
order performance of a contract by an unwilling contractor in
exceptional circumstances. It is true, therefore, that MoD cannot
force a contractor to perform the contract, but this is an extreme
situation that has little to do with MoD's routine management
of its contracts.
C. INCENTIVES TO
PERFORM
Sir Robert told Mr Steinburg that it was necessary
to encourage contractors with incentives, not just "sticks".
He instanced Eurofighter production where part of the 20 per cent
retention of the price contractually due on final delivery is
being brought forward to encourage the contractor to keep to his
manufacturing milestones.
The size of the final contractual payment on
Eurofighter will have been set at 20 per cent originally to incentivise
the contractor to meet the agreed final delivery date, in line
with MoD's commercial policy outlined to the Committee by Sir
Robert in June 1998 (HC101 98/99, pages 14 & 15 Q.75, 77,
78). Under this policy, interim payments are related to performance
milestones rather than to expenditure, and a significant (up to
30 per cent) element of the price is retained to be paid only
on satisfactory final delivery. Any alteration to these arrangements
weakens the intended contractual incentive and effectively rewards
or excuses the contractor for his failure to perform (LA page
33 "Incentives").
REMEDIES FOR
BREACH OF
CONTRACT
If a contractor is in breach of contract by
not delivering at the agreed date (LA page 3 "Breach of Contract"),
or repudiates the contract by declaring in advance that he cannot
or will not deliver by that date (LA page 61 "Repudiation"),
the MoD has the following legal rights:
(a.a) grant the contractor an extension of
time alone, without any increase in price or VOP terms, and claim
from the contractor the cost to MoD of the delay in delivery in
the form of damages or recover pre-agreed liquidated damages due
against delays in the contractual delivery date (LA page 44 "Liquidated
Damages"). The MoD's only legal duty is to mitigate the damages
it suffers to the best of its ability in the absence of a pre-agreed
(liquidated) sum of damages (LA page 46 "Mitigation").
(a.b.) terminate the contract in default,
recover any interim payments made, buy the contract goods/services
from another source, and claim from the defaulting contractor
the extra cost of doing so (LA page 39 "Late Delivery").
If the contractor is granted more time and fails
to meet the new delivery dates, the same remedies are again available
to MoD in relation to the new dates.
These rights, if exercised by MoD, provide the
contractor with a powerful and very natural incentive to meet,
if not beat, his contractual promises and obligations. Sir Robert
himself told the Committee in February 2000 "If you put in
contractual remedies which you do not then enforce, people start
getting used to that". (HC247 99/00 page 18 Q139).
The following extract from MoD's Defence Contracts
Handbook chapter on breach of contract, extant 1974-93, puts the
matter into perspective:
"The argument runs that it is the supplier's
own fault that he has run the risk of heaving to perform an impossible
task for he could have taken steps to protect himself from this
eventuality in the terms of the contract—into which he was
not in any case obliged to enter."
Tony Purton
26 January 2001
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