(This guidance was updated on 21st March 2022)
LLG are aware that many local authorities are reported to be reviewing any contracts held with Russian suppliers linked to the Putin regime. The presence of such suppliers may be particularly likely in certain sectors (for example in the energy sector).
In considering termination a local authority may wish to consider the following points, in order to mitigate risk to your council:
- Local authorities will need to carefully consider the duties imposed on them under the Local Government Act 1988. This legislation requires local authorities, in deciding whether to terminate an existing contract, to disregard any ‘non-commercial matters’. Subsection 5 provides that examples of such matters includes both:
(e) the country or territory of origin of supplies to, or the location in any country or territory of the business activities or interests of, contractors;
(f) any political, industrial or sectarian affiliations or interests of contractors or their directors, partners or employees;
Speaking in the Commons recently Kwasi Kwarteng, Secretary of State for Business, Energy and Industrial Strategy, took the view that the UK company is separate from the Russian Gazprom entity. However, the duty here does also apply in the context of ‘associated bodies’ (as defined in the Act). There is a potential argument then as to whether some of the above prohibitions would be invoked in this case. It is the UK company’s links to Russia, and in particular the Russian government (who part own Gazprom), that would be the cause of termination in this context.
- Where an authority does consider these provisions are engaged, they may wish to consider whether some actions might fall outwith the scope of what the Act refers to as ‘termination’ (for example not taking up a renewal option).
- The termination/exit rights will also depend on the specific contract terms in place. By their nature these may be long-term supply contracts (and perhaps originally concluded in hard copy rather than modern e-signature methods). We would encourage our members to ensure that the Council’s stance is based on the precise contract terms in place, including any variations over the years, as ultimately this will inform the Council’s exit options.
- It remains important to ensure that stakeholders are aware of any risks associated with the proposed termination of any contract/s. Where a party terminates a contract without a right to do so, it leaves itself open to a claim of wrongful termination from the other party (including the prospect of a damages claim).
- It still remains important to consider compliance with the Council’s internal standing orders/constitution as these may prescribe certain formalities around deciding to terminate a contract. It is possible that such a decision could fall within the scope of a key decision (dependent upon how the Council’s rules are structured).
- Councils will need to consider not only the termination of their existing contracts, but also the future provision of the necessary supplies. As such, where Councils do terminate their existing contracts they will need to act promptly and carefully to ensure that any replacement provider is appointed in a manner which is compliant with both:
(i) The Council’s internal standing orders/contract procedure rules
(ii) Applicable procurement law obligations more generally
Councils would be advised to weigh up the above factors carefully prior to taking any termination action. LLG hope that this briefing provides some useful pointers for local authorities and their lawyers who find themselves in this position. Where the ability to terminate is not clear and/or the contract is high value LLG would encourage our members to consider taking a second opinion from external lawyers with specialism in this particular field.
Please click here to read LLG's Statement on Ukraine.
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