Select Committee on Public Accounts Minutes of Evidence


Supplementary memorandum submitted by Tony Purton MCIPS, a former MoD Director of Contracts


  In response to questions from the Committee about the problem of getting contractors to deliver on time in accordance with the agreed contractual delivery date, Sir Robert made a number of statements implying that:

    (a)  some terms of MoD contracts are punitive;

    (b)  MoD contracts cannot be enforced, even by the courts; and

    (c)  MoD's contractors have to be incentivised to fulfil their contractual obligations.

  The purpose of this memorandum is to examine these statements, put them into context, and draw to the attention of the Committee the range of legal and commercial remedies available to the MoD, as to any buyer, in the face of a contractor's breach of contract. References are made in the text to MoD's official handbook of Legal Awareness (LA page X etc)—see footnote.


  Sir Robert said more than once in his evidence that one could not have "punitive" contracts.

  None of MoD's contracts is punitive, because no contract can be made under duress. MoD contracts are mutual agreements based on offer and acceptance of proposals willingly made by the contractor, competitively or non-competitively (LA page 49 "Offer and Acceptance"). Any unfair term of contract can be challenged in the courts under the Unfair Terms of Contract Act 1977.


  Sir Robert told the Committee that MoD could only obtain compensation "to put it in the same position it would have been in if the contract had never been placed".

  This is a reference to the legal doctrine of Specific Performance that can only be ordered by the courts (LA page 61 "Specific Performance"). The courts will only order performance of a contract by an unwilling contractor in exceptional circumstances. It is true, therefore, that MoD cannot force a contractor to perform the contract, but this is an extreme situation that has little to do with MoD's routine management of its contracts.


  Sir Robert told Mr Steinburg that it was necessary to encourage contractors with incentives, not just "sticks". He instanced Eurofighter production where part of the 20 per cent retention of the price contractually due on final delivery is being brought forward to encourage the contractor to keep to his manufacturing milestones.

  The size of the final contractual payment on Eurofighter will have been set at 20 per cent originally to incentivise the contractor to meet the agreed final delivery date, in line with MoD's commercial policy outlined to the Committee by Sir Robert in June 1998 (HC101 98/99, pages 14 & 15 Q.75, 77, 78). Under this policy, interim payments are related to performance milestones rather than to expenditure, and a significant (up to 30 per cent) element of the price is retained to be paid only on satisfactory final delivery. Any alteration to these arrangements weakens the intended contractual incentive and effectively rewards or excuses the contractor for his failure to perform (LA page 33 "Incentives").


  If a contractor is in breach of contract by not delivering at the agreed date (LA page 3 "Breach of Contract"), or repudiates the contract by declaring in advance that he cannot or will not deliver by that date (LA page 61 "Repudiation"), the MoD has the following legal rights:

    (a.a)  grant the contractor an extension of time alone, without any increase in price or VOP terms, and claim from the contractor the cost to MoD of the delay in delivery in the form of damages or recover pre-agreed liquidated damages due against delays in the contractual delivery date (LA page 44 "Liquidated Damages"). The MoD's only legal duty is to mitigate the damages it suffers to the best of its ability in the absence of a pre-agreed (liquidated) sum of damages (LA page 46 "Mitigation").

    (a.b.)  terminate the contract in default, recover any interim payments made, buy the contract goods/services from another source, and claim from the defaulting contractor the extra cost of doing so (LA page 39 "Late Delivery").

  If the contractor is granted more time and fails to meet the new delivery dates, the same remedies are again available to MoD in relation to the new dates.

  These rights, if exercised by MoD, provide the contractor with a powerful and very natural incentive to meet, if not beat, his contractual promises and obligations. Sir Robert himself told the Committee in February 2000 "If you put in contractual remedies which you do not then enforce, people start getting used to that". (HC247 99/00 page 18 Q139).

  The following extract from MoD's Defence Contracts Handbook chapter on breach of contract, extant 1974-93, puts the matter into perspective:

    "The argument runs that it is the supplier's own fault that he has run the risk of heaving to perform an impossible task for he could have taken steps to protect himself from this eventuality in the terms of the contract—into which he was not in any case obliged to enter."

Tony Purton

26 January 2001

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