Legal Aspects of Procurement

EPS’s procurement plan is predicated on a course calculated to integrate environmental, economic and social concerns into its purchasing agenda. In doing so, EPS is committed to long-term out comes.  This is reflected in its recent decision to issue a Standard Specification order for the correction of the corrosive potential of valve units from its current supplier Connection Developments.

Connection Developments have taken the position that there was and is a more economical and more rapid means of correcting the corrosive potential of the valve unit.  Moreover, the difficulty with the valve unit was specific to EPS and therefore they ought to bear the cost of taken measures to correct them. Additionally, Connection Developments argued that the new Standard Specification was outside the ambit of the contract binding the parties and represented an unlawful unilateral variation of the contract.The issues arising between the parties are therefore one of procurement management and the legal measures for doing so as well as the integrating of procurement plans in a contract.

  The primary question turns on whether or not EPS is at liberty to issue new terms and conditions on its suppliers with respect to the supply of goods provided for in the original contract and whether those conditions require fresh negotiations and agreement in order to be incorporated into the new contract.Procurement Plan in the Context of the ContractAssuming that EPS and Connection Developments are either UK entities or entities from the European Communities, EPS’s procurement strategy will be regulated by EC law which provides a legal framework for procurement strategies in respect of the supply of utilities.  The Utilities Contracts Regulations 1996 (SI No. 2911) as amended is relevant for EPS’s strategy.  By virtue of Schedule 1, Part G of Utilities Contracts Regulations 1996 (SI No.

2911) a person is engaged in utilities if he or she is a:“...public gas transporter as defined in Section 7(1) of the Gas Act 1986.

”[1]Section 7 of the Gas Act 1986 was amended by Section 5 of the Gas Act 1995 and provides that a public gas transporter is a the “holder of a licence which allows the holder:“(a) to convey gas through pipes to any premises in an authorised area of his, that is to say, so much of any area specified in the licence or an extension of the licence as is not specified in a subsequent licence or extension granted under this section to another person; and(b) to convey gas through pipes either to any pipe-line system operated by another public gas transporter, or to any pipe-line system so operated which is specified in the licence or an extension of the licence.”[2]Since EPS falls within the definition of Section 5 of the Gas Act 1996 its procurement plan is subject to the provisions contained in Utilities Contracts Regulations 1996 (SI No. 2911).  Moreover, Paragraph 9 of Part G, Schedule 1 provides that an entity or persons is a utilities provider if it makes possible:“The provision or operation of a fixed network which provides or will provide a service to the public in connection with the production, transport or distribution of gas.”[3]By virtue of Section 11(1) of Utilities Contracts Regulations 1996 (SI No. 2911), EPS is at liberty to include the Regulations as a part of its agreement with Connection Developments.

[4] However, Section 11(2) provides that should a utility choose to tree an agreement “as a contract under paragraph (1)” they “shall not use the framework agreement to hinder, limit, or distort competition.”[5] Therefore, in implementing its procurement plan, EPS will be required to consider the consequences of insisting on a stricter standard specification which can impair Connection Developments ability to trade freely.Moreover, Section 12 of the Utilities Contracts Regulations 1996 (SI No. 2911) allows for EPS to set “technical specifications”, however such specifications are required to be contained in the relevant contract.[6]  Section 12 permits EPS to change current specifications however, if the current specification strategies are “clearly defined and recorded.

..for changing over to European specifications.”[7] The question now turns on whether or not the changes are necessary for compliance with European specifications and if not whether the procurement strategy is a variation of the existing contract.On the facts of the case, EPS’s strategy for correcting unit valves involves an expensive and timely measure.

  The standard specification contained in the contract appears to be one which Connection Developments are prepared to comply with and claim to have been complying with.   The dispute by and large rests on an onerous and expensive measure that quite possibly will force Connection Developments out of the contract and by doing so can conceivably invoke Section 11(2) of the Utilities Contracts Regulations 1996 (SI No. 2911) which relates to unfair competition.  As a result Connection Developments can lodge a dispute under Section 32 of the Utilities Contracts Regulations 1996 (SI No.

2911) on the grounds that EPS is in breach of their respective obligations under the Regulations.[8] Before commencing with the action Connection Development are required to inform EPS of the breach “or apprehended breach” and “of his intention to bring proceedings under this regulation.”[9] Connection Developments have already informed EPS of the breach but have failed to indicate their intention to take action.  This would not bar an action for unauthorized variation of the contract.Variation of a ContractThe action taken by EPS borders on rescission which provides Connection Developments with an option to pursue a claim under the traditional law of contract for unilateral variation of the original contract which effectively rescinds the original contract.

Variation is required to be in writing and signed by the party charged.[10] In assessing whether or not the intended variation is such that it ought to be treated as a rescission the correct test is put forth by Chitty on Contracts as follows:“A rescission of the contract will also be implied where the parties have effected such an alteration of its terms as to substitute a new contract in its place...

it is necessary to distinguish a rescission of the contract from a variation which merely qualifies the existing rights and obligations.  If a rescission is effected the contract is extinguished; if only a variation it continues in an altered form.  The decision on this point will depend on the intention of the parties to be gathered from an examination of the terms of the subsequent agreement and from all the surrounding circumstances.”[11]The difficulty with applying this assessment is that it presupposes that the variation was mutually agreed between the parties and obviously requires that in order for a variation to exist, it must be agreed.  On the facts of the case for discussion there is no agreement by Connection Developments to substitute the agreed upon standard specification with the new one mandated by EPS.

  In fact Connection Developments outright refuses to comply with the new specification and insists upon the continuation of the old and previously agreed specification.Based on the facts of the case for discussion and the authorities cited what EPS is insisting upon with respect to the new specification amounts to anticipatory breach of the existing contract.  Anticipatory breach occurs when one party to a contract communicates to the other party that he intends to renege on a fundamental term or condition of the contract.[12] By insisting that Connections Development subscribe to an onerous and expensive means of correcting or guarding against corrosion of valve units gives rise to an anticipatory breach.  The proprietary interests in the valve units do not vest in  EPS until such time as they are accepted.

  Therefore by insisting that they meet the new specification EPS is effectively putting Connection Developments on notice that they will no longer be accepting them.  Under the Sale of Goods Act 1979 an agreement for the sale of goods does not become a sale until the: “...

conditions are fulfilled subject to which the property in the goods is to be transferred.”[13]Whether or not EPS’s anticipatory breach rises to the level of repudiation will depend upon the facts and circumstances of the case.  As Lord Selborne explained in Mersey Steel v Naylor Benzon it is necessary to look at the conduct to determine if it “amounts to renunciation” of the duty to perform under the contract: “and whether the other party may accept it as a reason for performing his part.”[14]On the facts it appears that the initial agreement anticipated that suppliers would comport to a minimum standard for the prevention or correction of valve units.  Obviously each party to the contract must be taken to have had a procurement strategy in mind when they agreed to the adaptation of the specification ultimately agreed upon and each party worked within a specific budget for the adaptation of the standard with the intention that the standard would remain a part of the contract for its duration.

The contract was for three years and has one more year before it runs its course. Using Lord Selborne’s test, EPS’s new specification is such that it alters the terms of the initial contract so that it amounts to anticipatory breach.The House of Lords considered whether or not the broken term in respect of a breach was such that it could give rise to a claim in damages.  In the case Federal Commerce and Navigation v Molena Alpha the House of Lords determined that even if the term broken was not a condition, if it had the impact of depriving one party of practically the entire benefit of the original contract, it could give rise to a claim in damages on the grounds of wrongful repudiation.[15]  EPS’s anticipated repudiation would deprive Connection Developments of a big part of its benefit under the terms and conditions of the contract since there are currently only three suppliers in operation in the area.

  Therefore the onerous and expensive measures required under the new specification are such that they will deprive Connection Development of a big part of the benefit of the contract. If EPS insist upon the new specification such insistence can and probably will amount to wrongful repudiation.In assessing damages the injured party, and in this case, the injured party is Connection Developments is required to mitigate damages in the event a contract is repudiated.  According to Treital in The Law of Contracts:“Under this (mitigation) rule, the injured party may, and if there is a market generally will, be required to make a substitute contract; and his damages will be assessed by reference to the time when the contract should have been made. This will usually be the time of acceptance of the breach (or such reasonable time thereafter as may be allowed under the rules stated above) …"[16]Making a substitute contract may be impossible since Connection Developments is only one of three suppliers in the region.  Even so, it might not be possible for EPS to secure a contract with another supplier, who are apparently low in number who might be prepared to subscribe to the expensive and onerous specification.

EPS will be better off allowing time to see if the new measures taken by Connection Developments in compliance with the old and agreed upon specification can achieve essentially the same results that EPS desires in keeping with its procurement mandates.  In taking this approach, they might want to continue with a relationship with Connection Development since they are familiar with the company and are aware of its reputation.  Besides, prior to the induction of the new specification the parties enjoyed a relatively good relationship and EPS is aware of Connection Development’s $215 million turnover rate in 2006.  It is therefore a sound business with which to sustain continued relations with.A similar situation arose in North Sea Energy Holdings NV v Pertroleum Authority of Thailand [1999] 1 Lloyd’s Rep 483 (CA).[17]  In this case, the oil purchasers repudiated an agreement for the purchase of oil and the sellers accepted the repudiation.

  The sellers could not demonstrate to the satisfaction of the court that hey would not have been able to obtain oil to sell, with the result that the Court of Appeal declined to make an award for substantial damages.[18] Megaw LJ stated as follows:"In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost; subject to his duty to mitigate. If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events."[19]In light of the authorities and the facts of the case EPS stands to be liable to substantial damages awarded in favour of Connection Developments.  On the facts of the case for discussion, EPS’s actions with respect to the new standard specifications are such that they give rise to an anticipatory breach.  Since they go to the heart of the contract, the anticipatory breach can be reasonably regarded as a wrongful repudiation of the contract, if Connection Developments refuses to agree to varying the contract to import the new standard specifications.

  Given that Connection Developments can likely demonstrate to the satisfaction of the court that they are unlikely to negotiate a substitute contract, EPS will be assessed for substantial damages.  As already noted the turn over for Connection Development in the year 2006 was $215 dollars.  Assuming that the turn over increased with the contract concluded between EPS and Connection Developments it is likely that the difference will be calculated in any assessment of damages.