councils

What to do when your contract counterparty goes ‘belly up’

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Local Government Contracts Series – Article #3

ASIC’s latest insolvency data from 1 July 2023 to 31 March 2024 showed that there was a 36.2% increase in the number of companies entering external administration, compared to the previous corresponding nine-month period. Construction, accommodation and food services industries were the most affected.

Councils often engage external parties to provide some of their services. If a counterparty goes bust, that can significantly impact Council’s responsibilities to the community and understandably, it is an urgent situation.

Re-tender or move to the next best option(s)?

Unlike other parties who don’t have to follow any procurement “rules” to pick an entity to contract with, Councils use public funds and are required to follow probity principles in procuring goods and services.

These are set out in each Council’s procurement policies, usually in the form of a tender requirement. However, there are usually some exceptions to the tender requirement (unforeseen events, lower value contracts, novations, emergencies or the absence of competitive circumstances etc).

Service providers shutting their doors can put Council in a sticky spot – can Council focus on replacing the outgoing party as soon as possible, to ensure continuity in services, with someone who submitted a bid in the latest tender, or does it have to repeat the tender process? Which option is “fairer” and better for the community?

The below factors are key to making that decision:

  • precise wording of the procurement policy – as stated above, procurement policies set out the procedure to be followed by Council, and can contain relevant exceptions. You should carefully consider the wording of the exceptions to check whether Council’s counterparty going insolvent is covered, or whether another exception is available.
  • time since “market testing” – if Council last went to the market ≤ (say) 6-12 months ago, it may well be able to avoid another tender process at this point. This would save time and costs.
  • quality of other top tenderers – if the parties who ranked (for example) second, third and fourth during the tender process were competitive under the tender’s assessment criteria, Council may sequentially approach them to check whether they can perform the rest of the contract on the terms of their tender response. If, however, there was a large gap between the now-insolvent counterparty and the other tenderers, it may be necessary to go to market again, especially if a substantial portion of the contract’s term is remaining.

Therefore, the answer to this question will depend on how the above three factors drop out, in addition to anything else Council considers important from a risk perspective.

At Hunt & Hunt, we provide sound commercial advice on the application of your procurement policy and weighing other relevant considerations. Please reach out to any of the three authors below if you require further advice.

Local government contracts series article 1: What can you do better before signing the contract?

Local government contracts series article 2: What can you do better in the contract?

What can you do better in the contract?

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Local Government Contracts Series – Article #2

Assisting local government with various agreement-related tasks such as drafting, review and advice on interpretation throws up some recurring themes.

Councils are large and busy organisations and are required to engage in a number of activities, often engaging the services of other organisations. Being mindful about a few factors in Council contracts can help avoid inconveniences at best and disputes, costs and loss of services at worst.

Agreements to agree

Sometimes, contracting parties “fudge” dealing with a difficult issue and leave it to be decided at a later stage by including an “agreement to agree” in a contract. This (non) solution is perhaps more frequently used in contracts with a local government counterparty than outside that domain. However, such “agreements to agree” may well be unenforceable because of the uncertainty involved.

While superficially attractive, the “agreement to agree” approach can lead to serious problems. To ensure that Council can receive from the contract what it has bargained for, if the matter is a key aspect of the contract (eg a price review or an option for a further term), it is essential to come up with an objective method of resolving such issues. There are various possible tools available, but it is necessary to engage in the detail of the topic and come up with a solution with which both parties are comfortable.

However, if the details left to be agreed upon later are relatively minor and do not relate to the main elements of the contract (subject matter, price, etc.) and/or Council has (and is confident it can maintain) a cooperative relationship with the counterparty, it may draw some comfort from these factors as, understandably, not every detail can be contemplated and fixed at the time a contract is signed.

The end game – holding over, transition services and “getting your stuff back”

Often, it’s easy to focus on the life of a contract and less on who has what and who does what when it expires. Holding over after a contract term ends is fine, but does it oblige your “old” contractor to deliver up to you valuable Council assets if holds? Possibly not. “Transition out” obligations sound great but what if they only apply once a new service provider has been formally appointed (noting that this can drag on for a bit)?

What if the Council assets involved are Council records and archives, obviously highly sensitive and subject to privacy obligations?

We’ve seen an instance where the “delivery up” service that a Council would need in this circumstance was not covered under the “old” contract – so the “old” (and outgoing) contractor could nominate its own price – not a happy situation!

Fortunately, there was another obligation of the “old” contractor that could be put to (unintended) work – the “return confidential information” provision.

So, do some “scenario planning” to identify what might go wrong. Sometimes, overly specific drafting can trip you up and hand your counterparty considerable unplanned leverage. As services contracts become more complex and more IT-intensive, so too does changing-over to a new provider. To allow Councils to have a competitive procurement for the next service provider requires carefully thought through “transition out” provisions, else the old contractor could leverage its incumbency to effectively become permanent.

For robust commercial advice tailored to local government needs, please reach out to us to any of the three authors below.

Local government contracts series article 1: what can you do better before signing the contract?

 

What can you do better before signing the contract?

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Local Government Contracts Series #1

Councils are large organisations and being public bodies, have detailed and systematic protocols for undertaking most activities. Entering into contracts is no exception. Council use public funds and have to follow probity principles in procuring goods and services. These principles are contained in a Council’s Procurement Policy (mandated under section 108 of the Local Government Act 2020) and unless an exception applies, generally require Council to engage in an open public process (eg tender, expressions of interest) before choosing an appropriate counterparty for any significant procurement.

The tender process can be long and drawn out, especially for larger projects. Councils put out a request for tender and potential suppliers submit tender responses. In the request for tender, Councils will usually include the specifications they require the successful tenderer to meet. After evaluating the responses received, Council selects a preferred supplier. Subject to any negotiation, the parties then enter into a contract for the relevant services, goods or works.

Specifications – watered down in a long process?

The specifications are likely one of the most critical parts of the contract for Council – they address what it requires (and after accepting a proposal, what Council can expect) from a performance perspective, from the other party. Although the specifications form part of the final contract, because of the time elapsed between formulating the specifications at the outset of the tender, and contract execution (signing and exchange), it’s possible that the specifications have been somewhat “diluted” in the contract. This may be the case even if the specifications themselves are unchanged.

This dilution can be because of negotiations with the counterparty, especially a more sophisticated one. The result of discussions and conferences with them might be that you’ve agreed to amend the contract in a way that limits your specifications – for example, by including a clause in the body of the contract which conflicts with the specifications and stipulating that the body of the contract prevails over any annexures (where the specifications reside). Or, limitations or exclusions may have been negotiated which materially water down the intended benefit of the specifications, even if they nominally remain intact.

This is especially likely to happen in a lengthy process where it is natural to focus on what is immediately in front of you rather than contemplating the big picture.

What can you do about it?

To ensure that you obtain the best outcome for your ratepayers, Councils should develop an internal process that ensures your procurement or legal team re-visits the objectives of the tender process before finalising the contract, with a particular focus on indirect impacts on the “value” of specifications. Refreshing on this can protect against Council unwittingly agreeing to limit the specifications in some way and ensure the purpose of the contract or the probity of the procurement are not lost amidst all the back and forth and legal paperwork.

At Hunt & Hunt, we can help review any changes suggested by your preferred supplier and also your internal process from time to time so that it remains robust and protects you appropriately. Please reach out to us to any of the three authors below.

Victorian Government launches new loans framework for councils

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From 1 January 2022, Victorian councils seeking financial assistance will be able to take advantage of the new Local Council Lending Framework (new Framework). Under the new Framework, councils will have access to a low interest loan financed by the Treasury Corporation of Victoria (TCV) and secured against the council’s revenue from general rates. Unlike other existing loan programs, councils will be able to borrow money under the new framework for the purposes of general working capital requirements as well as project specific infrastructure investment purposes. Councils intending to do infrastructure works or requiring funds for general services are encouraged to consider this cost effective alternative.

Local Government Victoria (LGV) has published a useful guide for Councils to understand the key steps involved in the new Framework. Below is a summary of the guide.

Borrowing intentions survey and council annual budgets

LGV will work with the Department of Treasury and Finance (DTF) and the TCV to administer the new framework. The first step in the implementation of the new framework is that LGV will conduct an annual survey to determine a council’s indicative borrowing intentions for the following financial year. LGV will then communicate these borrowing intentions to the DTF and the TCV for budget and planning purposes.

As required by the Local Government Act 2020 (Vic), councils will adopt a budget by 30 June. LGV will use the adopted budgets to calculate the planned new borrowings for the financial year and present them to the Minister for Local Government for consideration and endorsement.

Credit risk assessment and approval of borrowing limit

After endorsement is given, LGV provides the endorsed individual council and total annual new borrowings to the DTF for a credit risk assessment. The credit risk assessment determines each individual council’s financial viability, capacity to repay the loan and ability to meet other loan conditions.

Councils will need to provide supporting documentation to assist with the DTF’s credit risk assessment including a comprehensive income statement, balance sheet and cash flow statement which have been audited for the previous 3 years and projected and approved by the council for the next 4 years.

Following the credit assessment process, and provided the council meets the credit criteria, the DTF will recommend to the Treasurer that the council can take out a TCV loan up to an approved limit. Subject to the Treasurer’s approval, councils will receive written confirmation from the DTF of its TCV borrowing limit.

Application for the TCV loan

Once all the above steps have been completed, the council may make a formal application to TCV for a loan up to the approved limit. It is essential that councils provide accurate information on the application and during the period of the loan to avoid default or the loan being cancelled.

To access the TCV’s lending, councils will need to create a TCV client account. From there, TCV will assist the council with deciding on a loan product from its range that is most suitable for the council’s needs. While the loan interest rate will be relatively low, it is important to note that the TCV’s interest rates will be subject to market fluctuations. As such, the actual interest rate that a council will receive will depend on the rate at the date that the loan transaction is executed.

To assist councils, the table below is an indicative timeline for the new framework.

 

2021-22 financial year
(establishment year)		 2022-23 onwards
Framework formally launched August 2021 –
Councils notify LGV via annual survey of indicative borrowing intentions for the following financial year Not applicable 31 March
LGV communicates these borrowing intentions to both DTF and TCV for budget and planning purposes Not applicable 30 April
Councils adopt (four-year) budgets 30 June 2021 30 June
LGV collates individual planned council borrowings disclosed in adopted budgets to determine total new borrowings for consideration and endorsement by the Minister for Local Government September 2021 July
Minister for Local Government notifies the Treasurer of planned council borrowings for the financial year September 2021 August
DTF credit assessment and loan recommendation process October 2021 – November 2021 September/October
Treasurer approves TCV borrowing limits and DTF writes to each council confirming individual TCV borrowing limits December 2021 October
Council applies to TCV for loan From January 2022 From November
TCV loan agreement execution process As required As required

Source: Department of Jobs, Precincts and Regions ‘Treasury Corporation of Victoria loans to Victorian councils’ 2021

Availability

The timing for completion of the adopted budget in June and the various other steps required in the new framework means that the first TCV loan is unlikely to be available before 1 January 2022. Councils should utilise the months until then to plan for any projects or works which could benefit from a TCV loan.

LGV has made it clear that the new framework will be an addition to existing funding programs therefore councils that take out a TCV loan are not precluded from seeking financial support from other fund providers or under other loan schemes. However, if a council borrows from TCV, it may be restricted by financial covenants pursuant to the TCV loan agreement. It is prudent for councils to review the specific terms and conditions of a TCV loan agreement and satisfy itself that the loan is appropriate to meet council’s needs.

While the TCV loan is not restricted to specific types of works, councils cannot use the TCV loan to refinance an existing loan or for investment in financial assets. If you require assistance in this area, please contact Hunt & Hunt’s local government lawyers.

~ by Michelle Nguyen, Lawyer

An update on rates while Councils wait

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The Local Government Act 2020 (new Act) has implemented a long awaited overhaul of the Local Government Act 1989 (old Act). While the new Act received Royal Assent early last year, such an ambitious reform of the local government sector necessarily requires a reasonable time for transition. Parliament has chosen to address this by gradually repealing most sections of the old Act and proclaiming the new Act in various stages, with the last stage of the new Act set to commence on 1 July 2021, but leaving a “rump” of the old Act still in operation.

During and after this transition period, Councils need to be aware of the co-existence of the new Act and the old Act as it is particularly important for Councils in meeting their governance obligations.

Old rates methods in new Annual Budgets

For example, the provisions dealing with rates and charges in the old Act are still very much in operation, and will remain so even when all provisions of the new Act have commenced, on and from 1 July 2021. Section 94 of the new Act sets out the procedure for Councils to prepare their budget for the financial year, including proposals to levy Council rates. Each Council is able to set a uniform rate across all types of properties or differential rates that will apply to different categories of land (e.g. residential land, commercial land, farm land etc.). If a Council proposes to declare a differential rate, section 94(2) of the new Act requires the budget to contain matters specified in section 161(2) of the old Act, so that the budget defines and identifies the types, classes or zoning of land to which each differential rate category would apply. Council is therefore required to comply with the relevant provisions of the old Act in parallel with the budget provisions of the new Act.

Councils have had various concerns about the current local government rating system, as ventilated in a number of their submissions to the 2019-20 review of the rating system by a specialist panel appointed by Local Government Victoria (LVG). Following the rating system review, the Victorian Government has expressed support for 36 of the LVG Panel’s 56 recommendations in full, in-principle or in part. The Government says it’s response prioritises the reforms that will support ratepayers in financial hardship, improve the transparency and consistency of decision making regarding proposed rates and charges, and build greater equity and fairness in the rating system. The final report of the review and the Government’s response are available here.

An end for the transition?

We anticipate that there will be further amendments to the new Act and that the rating provisions of the old Act will eventually be repealed when the new Act is amended, as with the repeal of other sections of the old Act. However, at this stage we do not know the Government’s proposed timeline for rating amendments to the new Act, or how long the current but temporary transition phase will last.

For the time being, and possibly into the 2022-23 Financial Year, Councils will need to continue to refer to both Acts when setting budgets and Council rates. Local Government Victoria has a range of resources to provide Councils with guidance and support. If you have any specific questions in this area of law, including on Councils adopting revenue and rating plans under the new Act by 30 June, please contact our local government specialists at Hunt & Hunt.

 

~ with Michelle Nguyen, Lawyer