The public sector should carefully examine its Interserve contracts

19 Mar 19

Sharon Renouf and Virginia Cooper, partners at law firm Bevan Brittan, give some advice to local authorities with Interserve contracts on what to do now. 

Unsigned contract


The pre-pack sale of the outsourcer Interserve on Friday was carefully managed, and undoubtedly designed to reassure the market and Interserve’s customers with the message that everything is “business as usual”.

The administrators sold Interserve PLC’s business and assets to a new company, Interserve Group to be controlled by Interserve’s lenders – saying this will restore the group’s balance sheet and provide additional liquidity.

But - depending on which Interserve entity they had a contract with (and also how that arrangement performed) – public sector organisations should now be urgently reviewing their contractual and legal rights.

For those public sector organisations that were being well served by Interserve before its administration on Friday, this may be a welcome end to a period of uncertainty, providing Interserve Group can trade its way out of the problems faced by Interserve PLC.

Organisations which contracted with Interserve PLC may be approached for consent to novate their contract to Interserve Group or one of the group companies (so securing the business going forward).  Public sector organisations may wish to consider what new conditions they should attach to such an agreement.

But what about those whose contracts have not performed well?

The contracts are likely to include termination grounds for insolvency including administration and if this is the case, the majority of contracts, especially PFI will have ‘step-in’ or ‘self-help’ provisions which may need to be invoked.

While Interserve’s assets may have been transferred to Interserve Group, the contracts with the public sector will still be with the old Interserve companies.  For anyone who has a contract with Interserve PLC that contains a termination clause in the event of an administration, it may be possible to terminate the contract with immediate effect. 

Some contracts may also require consent to any change in control. Where this is the case, public sector organisations that were not asked and did not provide consent, termination may still be an option. 

'Delaying a decision and/or making payment to Interserve Group or one of the group companies could have the effect of waiving termination rights so careful consideration should be given to any termination option as soon as possible.'

Delaying a decision and/or making payment to Interserve Group or one of the group companies could have the effect of waiving termination rights so careful consideration should be given to any termination option as soon as possible.

It is also necessary to consider the practical and operational consequences and potential liabilities that may be incurred, and the contracts may be light on dealing with such matters. Consideration may need to be given to staff, pension issues including any deficits, assets, data, systems, subcontracts and many other issues.

However, services still need to be delivered - so what can replace Interserve if the contract is terminated?  It is often the case that authorities have relationships with more than one contractor and some may be willing and able to take on additional work. 

Procurement law will also be a factor in decision-making.  It may be possible for the authority to use a framework agreement or let a short-term contract pending a re-procurement.

There may be issues with capacity and market appetite in the facilities management sector to take on more demanding contracts, with some of the Carillion deals still not finalised.

Customers with performance concerns whose contracts are with an Interserve company other than Interserve PLC may not have much choice at the moment but to wait and see whether Interserve Group and the funders’ rescue secures improvements in service delivery. 

You should be closely monitoring performance in the coming weeks and months and keeping your rights under review.  The pre-pack may have prevented a collapse but it remains to be seen whether it can reverse a decline in Interserve’s fortunes and fix what was clearly a flawed operating model.

Interserve’s PFI investments may be less affected as typically they only had part of the shareholding in the PFI company, so while the PFI facilities management contracts may come under pressure, this will be an issue for the PFI investors (including Interserve Group) to manage, assuming the PFI company remains solvent.

The Interserve administration and pre-pack sale has raised new questions about the public sector’s reliance on outsourcers to deliver some of its key service requirements. 

Perhaps it is no coincidence that the chancellor announced a new consultation on March 12 seeking views on an appropriate model for private sector investment in UK infrastructure.

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