It has been estimated that the UK arm of Gazprom, the Russian state-owned oil and gas organisation, has a UK market share of around 20% across a range of sectors. The unfolding military and humanitarian situation in Ukraine has led to a number of organisations in the UK, including public bodies, reporting that they are either actively seeking to cut ties with Gazprom, or are deliberately investigating their options on this point. It has been reported that the University of Sheffield, who has a supply contract with Gazprom ending in September 2022, does not intend to renew its arrangement and is considering options for switching supplier before its current arrangement ends.
For organisations who are looking to exit current supply contracts with Gazprom, or who are currently procuring their supply arrangements, there are several practical considerations.
For those with existing supply contracts, what rights does the purchaser have to terminate the arrangement?
- Termination for breach – most contracts include a right to terminate for breach but there is no current suggestion that this is relevant here
- Termination for conduct that brings the client into disrepute – some public sector contracts contain this additional ground but again, there is no suggestion that this would apply to Gazprom’s UK arm
- Force majeure – most contracts include provisions that apply in the event of war or sanctions but if the UK itself is not involved in the war and there are no formal UK sanctions in place against Gazprom this is unlikely to assist institutions with current supply arrangements
- Termination on notice (without breach) – a right of this kind usually attaches to an obligation to pay compensation to the other party which organisations, particularly in the public sector, may struggle to afford.
For those in the procurement process there will be questions as to whether they can exclude Gazprom from the process. For those organisations which are subject to the Public Contracts Regulations 2015 (as amended) in carrying out their procurements, if they are keen to avoid contracting with Gazprom will need to consider if that legislation allows them to do so. If not that organisation is likely to be vulnerable to challenge.
Finally, customers (whether public sector or otherwise) will need to consider the financial costs of switching suppliers. In a situation where energy prices are only going up, whereas the budgets of many institutions are increasingly squeezed, organisations will need to consider whether their budgets can sustain a move to another supplier. It remains to be seen whether the UK government will provide any form of assistance to the public sector or UK business more widely in order to allow them to move to other suppliers.
It should also be remembered that, whilst the recent focus has been on Gazprom, similar principles will apply to other organisations with strong links to Russia and in the current climate many organisations, particularly in the public sector, will be reviewing their supply chains.
If you would like to discuss this topic in more detail, please contact Angela Lovett, Virgina Cooper or Nathan Bradberry.