CLS Launches Public Sector Procurement Insurance for Companies

CLS Risk Solutions, a leading MGA for legal indemnity and transactional property risk solutions, has launched its Public Procurement Insurance for the broker market.  The policy has been developed after a ten-fold rise in enquiries to CLS following the Court of Appeal ruling in Faraday Development Ltd v West Berkshire Council.  The ruling has emphasised the risk of public contract award cancellations, presenting a new market opportunity for brokers.

Entirely unique to the market, Public Procurement Indemnity Insurance protects developers against the consequences and losses arising from a successful challenge to the award of a public contract.  Since the Faraday ruling developers are warned that successful challenges to public contract awards are more likely and should be insured.

Procurement law requires public bodies (such as government departments, schools, and NHS Trusts) to follow strict procedures when awarding qualifying contracts.  In certain circumstances, a public body’s award of a contract may entitle a third party to challenge the award and seek a ‘declaration of ineffectiveness’, which effectively cancels the contract.  The procurement legislation does contain steps that can be taken to mitigate the risk of a declaration of ineffectiveness, including publication of a valid voluntary transparency notice (VTN) and contract award notice (CAN).

Until the decision in Faraday, no English court had ever awarded a declaration of ineffectiveness.  Successful bidders and their advisers took some comfort from this and their ability to mitigate the risk of a declaration.  The decision in Faraday, has knocked that confidence not only by declaring the contract awarded by West Berkshire Council ineffective, but also finding that the Voluntary Transparency Notice published by the Council was insufficiently clear and not detailed enough. 

In the judgement, the Court signalled the need for greater scrutiny of public bodies’ justifications for departing from procurement legislation.

Developers also now assess the period they might be at risk to be the 6 month time-frame for a challenge to be brought as opposed to the shorter standstill period that follows publication of a VTN or CAN.  This 6 month ‘at-risk’ period could put successful bidders in danger of facing abortive costs and becoming liable for contractual penalties.  These losses could be greatly increased in the event that a declaration is granted, and a contract made ineffective.

Chris Gwynn, Lead Underwriter for Public Law Risks at CLS Risk Solutions, comments: “The Faraday case has set a precedent for the award of declarations of ineffectiveness in England and Wales and created much uncertainty for all those parties involved in awards and carrying out of public contracts.   This is prompting a cautious approach from contractors, funders, and their advisers, which is stalling contractual negotiation and jeopardising projects.

“All of this is resulting in a much greater demand for Public Procurement Indemnity Insurance and presents a new market opportunity for brokers. CLS is a leader in the market for creating bespoke solutions for legal risks affecting property.  Public Procurement Indemnity Insurance is typically arranged via brokers or lawyers, who now have a significant opportunity to support developers, and provide the necessary comfort for stakeholders to allow a development to proceed.”

Insurance Edge Comment;

Any company entering a bidding process with a public sector body, quango or charity, probably needs to be prepared for a long drawn-out game of political chess, bluff and perplexing U-turns. The total lack of accountability within the public sector when it comes to wasting colossal sums of money, mean that the risk and responsibility is entirely borne by the bidder – and, more often, their sub-contractors – not the vendors of the contract.

Until there is radical reform and senior managers within the public sector suffer real financial penalties, and are banned from holding senior office eleswhere within the public sector – just as company Directors are banned – bidders would be wise to take out insurance for all possible outcomes.

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