Danger, criticism, threat, a sacking. A recent news story about a government minister’s conduct in a previous role has all the scandalous elements of a good drama. But most importantly of all, it has a link to public procurement regulations!

Politico has reported on how Lord Peter Hendy, now a minister at the Department for Transport, used his former job as chair of Network Rail to “get an engineer sacked for raising safety concerns”. You can read the full story here but in short:

• In September 2023 the Office of Rail and Road issued an improvement notice to Network Rail warning about safety risks of overcrowding at Euston Station.
• According to Network Rail, these concerns were “addressed and put to bed in December 2023”.
• In April 2024, Gareth Dennis gave a quote to the Independent for an article which was heavily critical of “hell on earth”, Euston Station.
• The trouble being that Dennis worked for SYSTRA, who consider Network Rail to be a key client of theirs.
• Lord Hendy then wrote to SYSTRA stating that “finding a potential supplier criticising a possible client reflects adversely on your likelihood of doing business with us or our supply chain.” and ultimately leading to Dennis’ dismissal.

“Likelihood of doing business with us”

While our employment law colleagues may disagree (as may our health and safety colleagues and our defamation colleagues), for us the most interesting part of this story is Lord Hendy’s threat regarding SYSTRA’s prospects of working with Network Rail in the future. Network Rail is a public body, and a contracting authority for procurement purposes, so its supply chain cannot be closed off from SYSTRA in this way. The whole purpose of the procurement regulations is that contracts are advertised openly, and that all potential suppliers are treated equally.

Contracting authorities reading this may be concerned. It’s generally not considered good business practice to criticise your key clients in the national press, so didn’t Network Rail have a right to respond? What do you do with a supplier who is bringing you into disrepute?

The regulations do provide a means for excluding economic operators from participating in procurement procedures, but there’s a process to follow. Jumping to an angry email with a thinly veiled threat is not it. So, how do you exclude a supplier?

How to exclude a supplier

The rules around exclusion are set out in Regulation 58 of the Public Contracts (Scotland) Regulations 2015 (the regulations for the rest of the UK, which currently apply to English contracting authorities like Network Rail, have identical provisions; and the Procurement Act 2023 which will come into force on 28 October 2024 has similar provisions, but we’re going to focus on the Scottish regulations for now).

The grounds

Regulation 58 provides a list of mandatory exclusion grounds (where the contracting authority must exclude the supplier) and a list of discretionary exclusion grounds (where the contracting authority has a choice). We don’t know all the facts, but it doesn’t seem that any of these grounds would have applied in the Network Rail/SYSTRA example. The only possible grounds which seem relevant are:

• Regulation 58(8)(c), “where the contracting authority can demonstrate by appropriate means that the economic operator is guilty of grave professional misconduct, which renders its integrity questionable”; and
• Regulation 58(8)(f), “the economic operator has shown significant or persistent deficiencies in the performance of a substantive requirement under a prior public contract, a prior contract with a contracting entity or a prior concession contract which led to early termination of that prior contract, damages or other comparable sanctions”.

Bad-mouthing a customer in the press may well be professional misconduct, though possibly not grave professional misconduct. Assessing the severity of the conduct will inevitably be fact-specific, going into the detail of what was said, the effect it had on Network Rail, and so on. The requirement that this renders the economic operator’s integrity questionable implies that this would have to say something about the honesty or ethical standards of SYSTRA as a supplier to Network Rail. It’s not clear that that was the case in this instance.

It seems very likely that what Dennis said could have been a breach of existing contracts between Network Rail and SYSTRA. It is almost certainly not a persistent deficiency as, as far as we know, this was a one-off incident. We must also consider whether commentary offered by a member of the supplier’s staff could be characterised as being “in the performance of a substantive requirement”. In any case, the regulations do not allow the contracting authority to jump straight to future procurement processes as a retort to a breach of contract. There must be “early termination, damages or other comparable sanctions” under the prior contract first. In other words, Lord Hendy should have looked to Network Rail’s existing contracts and the mechanisms they provided for dealing with reputational issues. If, and only if, Network Rail then sanctioned SYSTRA under those contracts, would exclusion from future procurements then be an option.

As an aside, this is one provision which will be different under the Procurement Act 2023, which does not require sanctions to have been applied for sufficiently serious a breach of an existing contract to be grounds for exclusion. We wrote about this in a previous article.

The process

Even if an exclusion ground does apply, that does not mean that a supplier can immediately be cut out of the supply chain. The regulations then provide economic operators the opportunity for “self cleaning”.

• Regulation 58(13) says that the economic operator “may provide evidence to the effect that measures taken by the economic operator are sufficient to demonstrate its reliability despite the existence of a relevant ground for exclusion.”
• In this evidence, the economic operator will seek to prove that it has (per Regulation 58(15)): (a) paid or undertaken to pay compensation in respect of any damage caused by the criminal offence or misconduct; (b) clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities; and (c) taken concrete technical, organisational and personnel measures that are appropriate to prevent further criminal offences or misconduct.”
• Per Regulation 58(14), if the contracting authority is satisfied that this has been proven, and the measures taken are sufficient to demonstrate reliability, “the authority must not exclude the economic operator from the procurement procedure”.

In practice this means that, before a potential supplier is excluded, the contracting authority has to write to them, set out which exclusion grounds are considered to apply, and give a right of reply, an opportunity for the potential supplier to demonstrate its reliability. This is a long way from the position Lord Hendy put SYSTRA in.

Exclusions, or even potential exclusions, are always fraught. Much like the Network Rail/SYSTRA story, there are accusations, reputations and consternation to navigate. Contracting authorities often feel that they have been wronged, and want to protect themselves from the same happening in the future. Potential suppliers want to protect their reputations, especially as other contracting authorities they seek to supply to will ask as part of a procurement process whether they have ever been excluded. All the while, the risk of a legal challenge hangs in the air.

If you’re a contracting authority or a supplier to the public sector looking for advice on managing these difficult circumstances, please get in touch, we would be happy to hear from you.

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