The ongoing importance of ethical conduct of suppliers in procurement

What you need to know:

• The Department of Finance has recently published a Procurement Policy Note and an accompanying template clause to support Commonwealth procurement processes and new contracts.
• The Procurement Policy Note states that a supplier’s ethical behaviour is an important factor to consider in Government procurement, including when approaching the market, evaluating tenders and monitoring supplier performance.
• The new template ‘Notification of Significant Events’ clause gives the Commonwealth greater oversight over conduct by a supplier which may damage the reputation of the Commonwealth, as well as increased powers for the Commonwealth to address such conduct. Commonwealth entities are encouraged to include the clause in all new procurement contracts, including Deeds of Standing Offer and Head Agreements. The clause is already incorporated into the latest Commonwealth Contracting Suite.

What you need to do:

• Commonwealth entities should ensure that their procurement processes include the consideration of a potential supplier’s ethical behaviour when approaching the market and assessing value for money, as well as including ongoing monitoring of ethical conduct as part of periodic performance reviews over the course of any resultant agreement.
• Project teams and industry organisations should review the template ‘Notification of Significant Events’ clause, as it is likely to be adopted across Commonwealth contracting templates.

Detailed Insights

Pre contract award – considering ethical conduct

The Department of Finance periodically publishes Procurement Policy Notes, which provide guidance to both Commonwealth officials and industry on relevant Government procurement issues. The Department’s most recent Procurement Policy Note confirms that the Commonwealth must consider a potential supplier’s relevant experience and performance history when assessing value for money under the Commonwealth Procurement Rules (CPRs), and adds that this can extend to consideration of a supplier’s unethical behaviour in previous contracts.

This is consistent with the fundamental obligation on Commonwealth entities to promote the proper use and management of public resources, which includes using and managing those resources in an ethical manner. In a procurement context, this means that the Commonwealth should not, and should not seek to, benefit from supplier practices that may be dishonest, unethical or unsafe.

There are related rules in the CPRs which seek to prevent the Commonwealth engaging suppliers that have behaved unethically, including:

• not entering into contracts with tenderers who have had judicial decisions against them relating to employee entitlements and who have not satisfied any resultant order; and
• making reasonable enquiries that the procurement is carried out considering relevant regulations, including practices regarding labour regulations (including ethical employment practices), workplace health and safety, and environmental impacts.

Post contract award – monitoring behaviour

The Procurement Policy Note encourages Commonwealth officials to monitor the ethical behaviour of its suppliers during the term of a contract. Often this is reflected in the contract terms and conditions, including obligations on the supplier to:

• avoid breaches of confidentiality, conflicts of interest, security and applicable laws and policies;
• promptly notify the Commonwealth of any breach; and
• comply with the Commonwealth’s directions to resolve any such breach.

Where a supplier does not comply with these obligations, the Commonwealth may terminate the contract for default.

Notification of Signficant Events – a new clause in Commonwealth contracts

The Department of Finance has updated the ClauseBank and the Commonwealth Contracting Suite to include a new ‘Notification of Significant Event’ clause. The Procurement Policy Note encourages Commonwealth entities to insert the clause in new contracts and panel agreements. The clause is consistent with the drafting described above and includes the following features:

    1.   The suppliers must give immediate notice to the Commonwealth upon the occurrence of a Significant Event, which is defined as:

• any adverse comments or findings made by a court, commission, tribunal or other statutory or professional body regarding the conduct or performance of the supplier or its officers, employees, agents or subcontractors that impacts or could be reasonably perceived to impact on their professional capacity, capability, fitness or reputation; or
• any other significant matters, including the commencement of legal, regulatory or disciplinary action involving the supplier or its officers, employees, agents or subcontractors, that may adversely impact on compliance with Commonwealth policy and legislation or the Commonwealth’s reputation.

The definition is broad and ensures that the Commonwealth has oversight over any evidence of ethical conduct by the supplier.

    2.   Where the supplier notifies the Commonwealth of a Significant Event or the Commonwealth makes the supplier aware of the event first, the supplier must then provide the Commonwealth with:

• a Remediation Plan, detailing how the supplier will address the event without impacting the services or fulfilling its obligations under the contract, how the similar events will be avoided in future and any other matter reasonably requested by the Commonwealth; and

• upon request, any additional information reasonably required by the Commonwealth regarding the event.

    3.   The supplier is then required to work with the Commonwealth to refine the Remediation Plan until it is approved by the Commonwealth, after which the supplier is required to comply with the approved Remediation Plan at no additional cost to the Commonwealth.

    4.   If the supplier fails to comply with its obligations under the clause, it is considered a material breach of the Contract (which typically attracts a right to terminate).

Similar to all clauses in the ClauseBank, the clause will need to be adjusted to fit the relevant contract and interact with related clauses (such as conflicts of interest, confidentiality, compliance with law and policy, termination for default etc).

Although the Department of Finance’s Procurement Policy Note has not mandated that Commonwealth entities adopt the new clause, it is expected that it will be incorporated into Commonwealth template agreements in addition to the Commonwealth Contracting Suite. Contract managers will need to be aware of the new clause and its intent, and suppliers will need to adjust their processes to comply with the relevant obligations, as it is likely to be applied in contracts for future Commonwealth projects.

Further Information

The Procurement Policy Note and the template clause are available at Procurement Policy Note and Notification of Significant Events | Department of Finance respectively.

If you have any questions or would like any specific advice on the Department of Finance’s Procurement Policy Note or new clause, please feel free to contact us.

Authors:

Rory Alexander, Principal

Tristan Croft, Associate

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