Serco and Sitel contact-tracing contracts agreed to be penalty-free for underperformance

Contracts with services company Serco and contact centre provider Sitel covering the troubled NHS Test and Trace service do not feature penalty clauses for under-performance, and Conservative MP David Davis has been a thorn in the government’s flesh in respect of this ostensible failure.

On LBC’s Swarbrick on Sunday, the famously libertarian MP had a full-throated go at Whitehall for the trials and tribulations of the NHS Test and Trace programme. Davis said on the show on 4 October that the civil service was “bloody useless at running commercial contracts”.

“The contract with Serco should have been really tough – there should have been penalties if they didn’t hit 80%. I haven’t seen any penalties paid,” he said.

“[Whitehall] do this too often – big comfortable contracts with big comfortable companies not doing the job properly, and we are seeing it here.”

In a more formal vein, Davis asked the Department of Health and Social Care on 28 August in a written parliamentary question: “What assessment did the department make of the performance of bidders for the Covid-19 test-and-trace contact-tracing contract on previous government contracts?”

The answer came from Helen Whately, minister of state in the department, on 16 September: “Serco and Sitel are approved suppliers on the Crown Commercial Service contact centre framework. They gained their places through fair and open competition via an Official Journal of the European Union procurement. Value for money and capability were part of the assessment criteria. The department has put in place arrangements to ensure robust contract management in terms of performance and quality standards in line with relevant guidance.”

But on 12 October, in response to this question, again asked by Davis: “What performance targets are in place for commercial providers of track and trace functions; what penalties can be imposed for failure to meet those targets; and what penalties have already been imposed for failure to meet those targets?”, Whately said: “Contractual penalties are often unenforceable under English law, so they were not included in test-and-trace contracts with Serco or Sitel.

“Sitel and Serco are approved suppliers on the Crown Commercial Service contact centre framework and the contracts have standard performance and quality assurance processes in place. Some information on key performance indicators and service levels has been redacted from these published contracts as it is considered to be commercially sensitive.”

There has been commentary on Twitter berating Whately for this statement. However, one commentator drew attention to this opinion from law firm Pinsent Masons. Damian Cross, partner at the firm, wrote in July 2018: “The legal test for penalty clauses has recently changed, meaning that more clauses may be unenforceable and ineffective under English law.”

Cross added: “A penalty clause is a contractual provision which levies an excessive monetary sum unrelated to the actual harm against a defaulting party. Penalty clauses are generally unenforceable under English law.”

This view was based on a 2015 Supreme Court judgment by Lords Neuberger and Sumption, which described the penalty rule in England as “an ancient, haphazardly constructed edifice which has not weathered well, and which, in the opinion of some, should simply be demolished, and in the opinion of others, should be reconstructed and extended”. 

The judges decided that although the rule remains good law, in the abstract, “its application to any but the clearest cases requires some underlying principle to be identified”.

Pinsent Mason’s Cross further wrote: “The penalty clause rule applies only to secondary, rather than primary, obligations. Broadly speaking, a ‘primary’ obligation is a standalone contractual obligation, while a ‘secondary’ obligation is only triggered as a consequence of a party committing a breach of contract and is intended to provide a contractual alternative to damages.”

That implies that Whately was invoking, in her 12 October response to Davis, the difficult enforceability of penalty clauses in relation to “secondary” obligations as a way of avoiding the question of more mundane penalties within an IT contract to ensure that service levels are adhered to – more of a “primary” obligation, in the terms that Cross explained. In plainer English, her response looks like a red herring.

How unusual is it, then, for government contracts to avoid the writing in of penalty, or performance, clauses?

Mark Lewis, technology outsourcing expert and senior consultant in Commercial Practice, Macfarlanes told Computer Weekly: “government IT and outsourcing contracts are literally stuffed full of ‘performance’ clauses.  If you come to think of it, almost everything in a contract is a ‘performance’ clause. In my experience, the problem with central government IT and outsourcing contracts isn’t the way they have been drafted, but the way in which government has or hasn’t managed them”.

On the 2015 Supreme Court judgement, he said: “The reality – and irony - is that, since the Supreme Court case, it should be easier, not harder, for the government to have included and enforced liquidated damages clauses in these contracts.

“What the Supreme Court said in that case is: ‘the true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.’  Note the ‘out of all proportion’.

“This means, in effect, that  it would and should more likely have been harder for the likes of Serco and Sitel to have argued successfully that a well-informed and well-drafted liquidated damages or similar clause was a penalty and therefore unenforceable. Moreover, ... the government’s commercial interests would have come into play here, making it even less likely that a liquidated damages clause would have been unenforceable.

“In other words it wasn’t legal doctrine that got in the way here, it was something else”.

He added: “It shouldn’t have been about legal technicalities, but about what redress the government had included in these contracts to protect its, the citizens’ and taxpayers’ interests.  The minister’s answer implies that there was no one sufficiently capable in or outside government to have drafted a legally enforceable remedy.  Which is just nonsense.”