In a series of blogs, Andrew Little of Hill Dickinson LLP looks at some practical guidance to avoid issues with rogue suppliers, bad contracting practices and fraud aimed at public sector bodies (PSBs). Andrew presented on this topic at the NDPB Lawyers’ Group training day in June 2015. In the first in the series, Andrew looks at cold call contracts.
In recent years I have seen an increase in the number of disadvantageous contracts entered into between suppliers and PSBs. Many of these contracts end up in the courts, but identifying the problems early could save PSBs significant time and money.
For suppliers looking for “low hanging fruit”, the public sector can be perceived to be a fertile hunting ground. Whilst public procurement legislation closely regulates larger contracts, contracts below the set thresholds (or contracts that are wrongly assessed as being so) leave public bodies exposed to expensive contractual mistakes.
Because of the generous employee indemnity enjoyed by public sector employees, contracts that are entered into by junior staff members often end up binding public bodies, when private companies may have more rigorous contracting procedures or sanctions in place.
Not only are public bodies a more attractive target in the first place, but where litigation does seem the most likely way to deal with a dispute, the supplier is likely to be emboldened by the fact that it knows it will not face the enforcement and liquidity problems that it could face when suing many private companies. A win/win situation for the supplier.
Cold call contracts
If we look at a fictional example of what can be termed a “cold call contract”.
A salesman enters PSB premises to deliver a freestanding magazine stand. Essentially it is a magazine rack that will carry certain advertisements, most likely for solicitors or claims management companies.
The stand is provided free of charge and the latest magazines will be provided on a regular basis. Perhaps the PSB will even receive a small fee for hosting the stand or a share of the advertising income.
Now let’s look at the contract to supply the magazine stand. Perhaps the contract has been properly reviewed and discussed internally and approved, but more likely it has been executed by someone from the PSB’s front of house team: a receptionist or office manager. Perhaps it was presented as an order confirmation or even a delivery note and signed, unwittingly, by a receptionist or post room employee.
Either way, a valid contract for the supply of the magazine stand is now in place. Now that it is signed, let’s have a look at some of the key terms. It is for an initial five year term, with a unilateral five year extension option in favour of the supplier. It guarantees total exclusivity for the supplier for all third party advertising in the entire PSB premises. It also places a burden on the PSB to keep the stand in exactly the same place where it was initially installed.
Over time, things change, furniture is moved about. The stand was removed by maintenance staff or the reception where the stand was originally located has been moved or a poster advertising a competing product has been put up on the other side of the room…
What happens next? A letter arrives from a large firm of solicitors. It turns out that the supplier who kindly installed the stand free of charge claims to earn £25,000 per stand, per year. With a ten year term and no ability to terminate earlier, that’s a £250,000 per stand damages claim and the (now long-departed) receptionist apparently signed the PSB up for four stands around the premises!
This scenario may seem fanciful but in the case of Pro-Vision Systems (UK) Ltd v United Lincolnshire Hospital NHS Trust Claim (21 February 2014) (Westlaw subscription required), Pro-Vision, a company that installs advertising funded television screens, was successful in the High Court against the NHS Trust in a breach of contract claim with a total quantum of over £600,000. The Trust had sought to withdraw from an eight year screen supply contract that it considered was unenforceable. It alleged that it had been misrepresented as to the terms of the contract, that the contract lacked any consideration from Pro-Vision and had been signed by a member of staff with insufficient authority to bind it. Judge Waksman QC rejected the Trust’s arguments and found in the supplier’s favour.
The fictional scenario outlined above no longer seems so far-fetched and could realistically happen.
We can be pretty confident that if an eight year contract containing provisions heavily in favour of the supplier came across the desk of most PSB employees trained to deal with contracts, it would not be (unknowingly) approved. But what about other operational and junior colleagues? It makes sense that all staff should receive instructions on how to deal appropriately with contractual documents, how contracts can unwittingly be entered into and the effect of a contract (including temporary staff and very junior staff, who are the most likely to be targeted).
Nearly all PSBs will utilise the relevant contracting protocols that set out the level of approval needed in order for the organisation to be bound. However, difficulties can arise when junior staff are unaware of, or regularly disregard, such protocols. If the staff member who signs a contract holds him or herself out as having ostensible authority to bind the organisation, then the PSB will usually be bound by that contract, unless it can demonstrate that the supplier knew or ought to have known, that they had no such authority. A more difficult argument for the PSB to run.
What can be done? One practical step that can prevent these situations is not just having a set of contacting protocols in place, but actually sending them out each and every time negotiations commence. There is a real benefit to be had by sending such protocols out when you receive enquiries even if you have no intention of contracting with that party. Taking this protective step can stop a sharp operator from relying on the signature of a junior employee further down the line.
Protecting PSBs from bad contracts begins long before a contract is even proposed. There is never going to be any reduction in the number of unscrupulous suppliers, but robust processes and training can reduce the number of bad contracts.
Andrew Little is a member of Hill Dickinson LLP’s Commercial Litigation team. He regularly acts for public bodies.