Guidance

DSPCR Chapter 4: exemptions and exclusions in the DSPCR

Updated 24 July 2024

Important note, the current Chapter 4 guidance on Exemptions and Exclusions replaces two documents that previously covered the subjects separately. There is therefore no guidance entitled Chapter 5.

Purpose

1). This guidance explains what exemptions and exclusions are, when they may be applied and what procurers must consider when applying them.

2). Specifically, this guidance sets out the legal framework, explains the circumstances in which an exemption or exclusion can be applied, their effect and how to apply them.

3). Chapter 10 - Guidance on Research and Development contains further details on the definition of research and development (R&D) in the DSPCR which must be satisfied when relying on exemptions relating to R&D.

What are exemptions and exclusions?

4). An exemption allows you to relieve yourself (i.e. the MOD ) from complying with your obligation to comply with a requirement that would ordinarily require compliance. The effect of an exemption applies to the element of the procurement to which it applies (e.g. supply of information).

5). An exclusion if relied upon, means that the DSPCR will not apply to the procurement.

6). It is important to note that exemptions and exclusions are not interchangeable terms, and they have different legal implications. You should consider carefully and seek legal advice particularly if you intend to rely on an exemption without also excluding the procurement.

What it the legal framework?

Exemptions

7). The exemptions in the DSPCR are set out at Regulation 6(3A), which was made by the 2019 amendment to the DSPCR when the UK left the EU. Regulation 6(3A) reproduces the effect of the treaty exemption at Article 346 of the Treaty on the Functioning of the European Union (TFEU) in the UK Regulations.

Exclusions

8). The DSPCR set out several exclusions at Regulation 7, which cover:

• disclosure of information;
• intelligence activities;
• co-operative programmes based on Research and Development (R&D) between the UK and an EU member State;
• military or security operations outside the UK or Gibraltar;
• international rules;
• acquisition of land;
• government to government sales;
• arbitration or conciliation services;
• financial services except insurance services;
• employment and other contracts of service; and
• R&D services.

9). You must interpret the wording of the exemption and exclusions strictly in accordance with the case law of the Court of Justice of the EU (CJEU) which remains relevant as it is retained in UK law under the European Union (Withdrawal) Act 2018. They cannot be abused just to circumvent the DSPCR. However, the principle of strict interpretation cannot result in any preconditions which are not set out in the wording of the exemption or exclusion, (i.e. they must not be construed in such a way as to deprive that exception of its intended effect ^{[footnote 1]}).

Procurement principles

10). The MOD must treat all suppliers from UK and Gibraltar equally and in non-discriminatory manner and act in a transparent way. These principles are underpinned by Regulation 5.

11). Before the 31 December 2020 (Transition Period completion day), procurement under these Regulations and below their thresholds was subject to several obligations under the EU Treaties that were clarified in EU case law. The extent to which these obligations are retained in domestic law after exit day is unclear. Therefore, as a matter of policy, in addition to the obligations in Regulation 5, the principles of mutual recognition within the UK and Gibraltar, and proportionality remain best practice for how you will undertake procurement.

12). You can only justify failure to comply with these procurement principles in your treatment of suppliers from the UK and Gibraltar through the exemptions at Regulation 6(3A) of the revised DSPCR.

13). There is no case law on whether or the extent to which the procurement principles apply to contracts that are subject to a general exclusion at Regulation 7 of the DSPCR. However, as a matter of good practice, you should seek to minimise any violation of these principles, subject to the wording of the exclusion.

Exemptions

14). You must decide as part of your procurement strategy whether an exemption applies. The exemptions in the DSPCR are at Regulation 6(3A), they allow a procurer to:

• withhold information the disclosure of which the UK considers contrary to the essential interests of UK security; and
• take measures necessary for the protection of UK essential security interests which are connected with the production of, or trade in, arms, munitions and war material; provided that these measures do not adversely affect competition in the common market for products which are not specifically intended for military purposes.

Regulation 6(3A) has 2 elements:

Regulation 6(3A)(a): security of information

15). Regulation 6(3A)(a) allows procurers to withhold the supply of information if disclosure would oblige the procurer to “supply information, which they consider contrary to the essential interests of UK security”.

16). This does not automatically exempt the requirement from the DSPCR. Instead it allows you to impose restrictions that would otherwise breach the procurement principles. For example, you may be able to withhold details of a requirement under Regulation 6(3A)(a) which are not material to the outcome of a competition run under the DSPCR, but which may then be released to a winning bidder.

17). You can only exempt the procurement from the DSPCR where the security restrictions on disclosing information mean that you cannot use the DSPCR. In that case, you must use the general exclusion at Regulation 7(1)(a) of the DSPCR to exempt the requirement from the DSPCR in conjunction with Regulation 6(3A)(a) (see paragraphs 49 to 60).

National eyes-only information

18). You may need to use the Regulation 6(3A)(a) exemption together with the general exclusion at Regulation 7(1)(a) of the DSPCR if the requirement demands that the supplier’s staff have personal security clearances and are citizens of the UK.

19). This type of use of an exemption is likely to be more limited under the amended DSPCR, as only economic operators established in the UK and Gibraltar have legal rights and remedies. You could therefore limit the tenderers to suppliers from the UK and Gibraltar without exempting the procurement. In this case, you would need to state any nationality requirements in the contract notice.

20). In exceptional circumstances, you may need to discriminate on the grounds of nationality within the UK market, for example, only UK citizens within a UK supplier have access to the information. This would infringe the non-discrimination principle so you would need an exemption.

21). For the 6(3A)(a) exemption to apply to classified information, it would normally be necessary to show that the proposed contract:

• involves access to material classified as SECRET (or higher) and bearing a UK Eyes Only or other similar caveat
• could potentially involve access to particularly sensitive sites or equipment for which only UK nationals cleared to an appropriately high security level can have access to; and/or
• restrictions are of a similar nature required for the protection of the UK’s essential security interests

Foreign Arms Export Controls

22). Imported military equipment is very likely to be subject to export controls that may impose restrictions on the disclosure and use of information (for example, technical data and software) associated with the equipment. During the award of the contract for the equipment, you should seek to minimise the restrictions that might prevent or restrict your market for subsequent contracts for support of the equipment.

23). Such restrictions on the disclosure and use of information invariably require the consent of the relevant foreign export control authorities before you can disclose information to or for use by, amongst others, third country nationals, dual nationals, and contractors working on the procurer’s behalf.

24). Arms export controls will not affect procurement processes for the initial procurement of military equipment. However, they are likely to restrict the method of procurement for maintenance, modernisation or adaptation of military equipment that is already in service. That does not mean necessarily that you cannot use the DSPCR to meet such requirements. You must take this decision on a case-by-case basis.

25). For example, it may be possible in some circumstances to amend the terms of a license before embarking on a procurement process to enable more competition. MOD procurers should seek advice from DE&S International & Industry Cooperation (I&IC) (link accessible to MOD personnel only) in the first instance. In that case, and more generally, the ability to receive the controlled information may be used as a supplier selection criterion in a procedure run under the DSPCR (including the non-competitive negotiated procedure under Regulation 16 where justified).

26). You may use the Regulation 6(3A)(a) exemption to withhold information subject to export controls, if you can show that the proposed contract:

• involves access to information (including software) provided by another country (or contractors located in that country) that may not be transferred to third country nationals or dual nationals, or other entities (whether located in the UK or in third countries) without the consent of the export control authorities of that other country; and/or
• those restrictions would result in sanctions or damage to key relationships with foreign nations contrary to the essential interests of UK security if it failed to honour those restrictions.

Authority to use the Regulation 6(3A)(a) exemption

27). For the Ministry of Defence (MOD):

• Delivery teams are responsible for determining whether and the extent to which the Regulation 6(3A)(a) exemption applies to a procurement that involves information classified as SECRET (or higher) and bearing a UK Eyes Only caveat, including site access restrictions, where applicable. The Security Aspects Letter (SAL) as produced by the Project Security Officer (PSyO) or those individuals with a security responsibility in the particular procurement should provide this level of information. You must consult Commercial Legal Services (CLS-CL) if you intend to rely on an exemption without also excluding the procurement. Authorisation to use Regulation(6)(3A)(a) to exempt a procurement from the DSPCR on account of these restrictions must be approved by a Grade 7 or equivalent Commercial Officer..
• Delivery teams must consult Defence Intellectual Property Rights (DIPR) on the extent to which restrictions on information under arms export control law applies to the procurement, if the delivery team does not understand the full extent of the restrictions. Authorisation to use Regulation(6)(3A)(a) to exempt a procurement from the DSPCR on account of these restrictions must be approved by a Grade 7 or equivalent Commercial Officer.

28). Delivery teams must consult either either CLS-CL or Defence Intellectual Property Rights (where appropriate) and keep any advice on the exemption in the contract file.

29). Further guidance regarding Security Aspect Letters (SALs) can be found within JSP440 Part 2 Leaflet 6A and the Confidentiality and Information Security CPS.

30). You are not required to apply an additional exemption under Regulation 6(3A)(a) where your procurement is already exempt from the DSPCR under Regulation 6(3A)(b).

Regulation 6(3A)(b): warlike stores

31). The warlike stores exemption at Regulation 6(3A)(b) of the DSPCR allows the UK to take measures it considers necessary for the protection of the essential security interests of the UK connected with the production or trade in arms, munitions or war materiel. The measure taken may allow the procurer to exempt all or part of any procurement from the DSPCR depending on the circumstances.

32). The rules for using the Regulation 6(3A)(b) exemption operate by:

• first, establishing whether the goods appear on the list of products to which Regulation 6(3A)(b) applies, known as the 1958 List^{[footnote 2]}. The exemption can also cover the procurement of services and works directly related to the goods included in this list; and

• second, deciding whether the protection of essential national security interests requires that all or part of the procurement be exempt by evaluating and recording:

• details of the essential security interest concerned
• the connection between this security interest and the procurement
• why using the exemption in this specific case is necessary to protect these essential security interests
• why using the exemption does not adversely affect the conditions of competition in the domestic market for non-military products

33). An outline of the decision making process is at Annex B. If you can fully satisfy the rules for using the Regulation 6(3A)(b) exemption, that may mean that all or part of the procurement is exempt from the DSPCR or from certain obligations depending on the circumstances.

34). You must base the use of Regulation 6(3A)(b) on a case-by-case assessment and consider it as part of drawing up the procurement strategy at the earliest possible time.

35). There will be some requirements where you can clearly justify the use of Regulation 6(3A)(b) to exempt the procurement from the DSPCR as a whole, for example, security of supply requirements and important reasons of national sovereignty, etc. In other circumstances Regulation 6(3A)(b) may be used to depart from certain requirements of the DSPCR only.

36). Every case must demonstrate why application of the provisions of the DSPCR would not be sufficient to protect the essential security interest and that use of the exemption is the least restrictive means available to achieve that protection. MOD procurers should contact Central Legal Services – Commercial Law (CLS-CL) for further advice on the application of Regulation 6(3A)(b).

Authority to use Regulation 6(3A)(b) exemption

37). You must seek authorisation to use Regulation 6(3A)(b) to exempt a procurement from the DSPCR from a Grade 7 Commercial Officer or equivalent to establish a consistent approach across MOD. By this means, officials with the appropriate knowledge and experience will be instrumental in setting the precedents that will shape how we conduct our future procurement.

38). Whilst authority to use Regulation 6(3A)(b) is delegated to Grade 7 Commercial Officers or equivalent, the 1-Star Commercial Officer retains ultimate responsibility and accountability for correct application of exemptions in their operating centres.

39). For MOD organisations that do not have a Grade 7 Commercial Officer or equivalent in their chain of command, authorisation for application of Regulation 6(3A)(b) should be at Grade 7 level or equivalent within that organisation/operating centre.

40). The Director Commercial Operations for DE&S based teams and the MOD Commercial Director for non-DE&S based teams will be available to offer advice on complex cases, as necessary.

41). Best practice is for you to prepare a formal submission (i.e. issue, recommendation, timing, background, presentation) to the Grade 7 Commercial Officer (or equivalent) to maintain an audit trail in case of a legal challenge. It is important to prepare a structured argument, which must include:

• details of the specific treaty exemption being considered
• the essential security interest concerned, for example, security of supply such as UK maintenance capability for a specific platform, or national sovereign capability requirements
• an explanation of the proposed measures to protect the essential security interest, for example, exemption from the DSPCR to award the contract to a specific national supplier
• any implications of the proposed measures on military operations or our relationship with key Allies
• an assessment that shows the proposed measures are the least restrictive means available to protect that essential security interest, for example, it would be disproportionate to exempt the entire procurement if you need to withhold only part of the award criteria, or using a national supplier was the minimum necessary to maintain the requirement for security of supply of that product; and/or
• an explanation of why these measures cannot be put into effect by procurement under the DSPCR, for example, by use of the security of supply or security of information provisions

42). You are not required to apply an additional exemption under Regulation 6(3A)(b) where your procurement is already exempt from the DSPCR under Regulation 6(3A)(a).

Mixed contracts

44). Regulation 6(5) describes the rules that apply to single contracts that partly come under the DSPCR but with the other part being outside. This may be where the latter part is exempt under Regulation 6(3A)(b).

44). The DSPCR do not apply to the contract award if an exemption applies to part of the contract, if the award of a single contract is “justified for objective reasons”.

45). The DSPCR does not say what it means by “justified for objective reasons”, as this will be different from one situation to another. The procurer will have to decide its meaning, on a case-by-case basis, and ensure a consistent approach within their own area.

46). You must strictly interpret “justified for objective reasons” when you are assessing whether a single contract is appropriate, as the application of these rules may result in, for example, the whole requirement being excluded from the scope of the DSPCR. You must not therefore join requirements solely for the purposes of benefiting from a treaty exemption.

47). In all cases, when assessing whether a single contract is justified for objective reasons, procurers relying on this provision must demonstrate that the various elements of the mixed contract relate to each other in a way that makes it reasonable and proportionate to award a single contract to a single supplier.

Notification to Tenderers

48). If you are exercising an exemption you should inform tenderers, in the contract documents, what that exemption is, and that the DSPCR does not apply to the procurement. You must only take this action when it will not compromise the security interest concerned.

Exclusions

Disclosure of information

49) . Regulation 7(1)(a) states:

“(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement— (a) where the application of these Regulations would oblige the United Kingdom to supply information the disclosure of which it considers contrary to the essential interests of its security;”

50). Regulation 7(1)(a) can be used for contracts or framework agreements where, if you were to apply the rules of the DSPCR, the UK would be obliged to supply information which, if disclosed, it would consider contrary to the essential interests of its security.

51). You can apply the exclusion at Regulation 7(1)(a) in certain circumstances in defence or security procurements, for example:

• to contracts which are so sensitive that it would be inappropriate to apply the DSPCR. That may be the case where the very act of advertising the requirement is contrary to the essential interests of the UK (for example, if the act of advertising a requirement would reveal covert military or sensitive security capabilities or requirements)
• to sensitive purchases which require an extremely high level of confidentiality either in respect of the award procedure or the performance of the contract, for example, procurement for sensitive activities carried out by police and security forces related to border protection, combating terrorism or organised crime

52). You may only apply this exclusion if the specific provisions in the DSPCR addressing security of information concerns (see Chapter 12: security of information) are insufficient to address adequately the security of information requirements in a procurement. These provisions in the DSPCR include:

• specific selection criteria set out at Regulations 25(2)(m) (Information as to technical or professional ability);
• the ability to impose special conditions (Regulation 36(2) (Conditions for performance of contracts)); and
• the ability to seek commitments relating to the security of classified information (Regulations 38 (Security of information) and 39(2)(b) (Security of supply)) for the performance of the contract.

53). The MOD expects these provisions in the DSPCR should be sufficient in the majority of cases for MOD procurements to protect its security interests with regard to protection of classified information. Sensitive procurements in Other Government Departments (OGDs) and Agencies will involve different security interests, sensitivities and requirements. OGDs and Agencies should therefore take their own security interests into account when considering an exclusion under Regulation 7(1)(a).

54). Regulation 6(3A)(a) was based on Article 346(1)(a) Treaty on the Functioning of the European Union (TFEU), this was subsequently written in to the DSPCR and is explained at paragraph 13 to 20 above.

55). Regulation 6(3A)(a) allows procurers to withhold information, it does not automatically exempt the requirement from the DSPCR. Regulation 7(1)(a) however, does allow you to exclude the requirement from the DSPCR.

56). You may need to use both Regulation 6(3A)(a) and Regulation 7(1)(a) in the context of highly confidential and sensitive material where, for example, access is required to classified information that has been marked with a national caveat, such as UK Eyes Only or other similar national caveats. This may occur in the context of:

• non-military security contracts; or
• military contracts where the application of Regulation 6(3A)(b) is not possible, as not all modern weapons (for example, 5.56mm calibre assault rifles) are covered by Regulation 6(3A)(b)

57). To apply the Regulation 7(1)(a) exemption to those requirements it would normally be necessary to show that the procurement process and/or the performance of the contract requires the bidders and/or the successful contractor met the criteria required access as outlined in paragraphs 17 to 20.

58). Application of Regulation 7(1)(a) does not necessarily preclude competition. It may still be appropriate to advertise and compete such a requirement, for example amongst suitably cleared list x companies.

59). Alternatively, it may be appropriate to split the requirement, exempting under Regulation 6(3A)(a) that part of the requirement which is subject to the UK Eyes Only restrictions and competing the remainder under the DSPCR. However, where it is objectively justifiable to award a single source contract using the exception you may do so. For further advice (MOD only) contact CLS-CL.

60). The MOD specific process outlining how to apply for an exclusion is outlined at paragraphs 130 to 135.

Intelligence activities

61). Regulation 7(1)(b) states:

“(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement — (b) for the purposes of intelligence activities;”

and is applicable to contracts or framework agreements “for the purposes of” intelligence activities. It assumes that contracts related to intelligence are, by definition, too sensitive to be awarded in a transparent and competitive procedure.

62). The DSPCR does not define “Intelligence” but it includes both military and security intelligence functions. In addition, “intelligence activities” is not a defined term in the DSPCR but it includes counter-intelligence activities.

63). The exclusion at Regulation 7(1)(b) applies to contracts for the purposes of intelligence activities, which could include the collection, communication and processing of information required to maintain and defend the security and resilience of the procurer’s activities, infrastructure, and economic well-being, and influence and deter those who are hostile to that requirement.

64). For MOD, the exclusion does not cover contracts that are merely incidental to the carrying out of those activities. However, it is for OGDs and Agencies to interpret the scope and extent of intelligence activities and applying the exclusion under Regulation 7(1)(b) taking account of their own specific requirements and sensitivities, as well as the categories outlined in paragraph 65 below.

65). Subject to the rules excluding “in-house procurement” set out in Chapter 2: scope, categories of contract covered by the exclusion at Regulation 7(1)(b) include but are not limited to:

• contracts awarded by the intelligence services^{[footnote 3]} for their intelligence activities, including counter-intelligence;
• contracts awarded by dedicated intelligence services sections located within procurers who are not part of the intelligence services, (for example, such “non-intelligence procurers” may include central government departments, the armed forces, security forces or agencies, police forces, and utilities), for their intelligence activities;
• contracts awarded by non-intelligence procurers to the intelligence services for specific supplies, services and works for the purposes of intelligence activities of the non-intelligence procurer concerned,for example, protection of government information technology (IT) networks;
• contracts awarded by dedicated intelligence services sections located within non-intelligence procurers to the intelligence services, provided the contract is also in support of the intelligence activities of the non-intelligence procurer;
• contracts awarded by non-intelligence procurers which provide benefits to the intelligence services in respect of their intelligence activities, provided the contract is also for the intelligence activities of the procurer; and
• contracts awarded by the intelligence services for the intelligence activities of others, provided the subject of the contract is for the purposes of intelligence activities.

Co-operative programmes based on R&D

66). Regulation 7(1)(c) states:

“(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement — (c) where the contract is to be awarded or the framework agreement is to be concluded in the framework of a co-operative programme based on research and development, conducted jointly by the United Kingdom and a member State for the development of a new product and, where applicable, the later phases of all or part of the life cycle of the product;”

and it excludes contracts or framework agreements concluded in the framework of a co-operative programme based on R&D conducted by the UK and at least one EU member State for the development of a new product, and where applicable, the later phases of the life-cycle of the product. It is different to the exclusion available for the provision of R&D services (Regulation 7(1)(l)) which is detailed in Chapter 10: research and development.

67). This exclusion was maintained within the 2019 amendment to ensure that where appropriate the UK could continue to participate in collaborative programmes and excludes these procurements from the DSPCR where necessary.

68). Recital 28 of the Defence and Security Directive explains the rationale for this exclusion, but this rationale holds true for the reasons for maintaining the existing exclusion:

“Member States often conduct co-operative programmes to develop new defence equipment together. Such programmes are particularly important because they help to develop new technologies and bear the high research and development costs of complex weapon systems. Some of these programmes are managed by international organisations, namely the Organisation Conjointe de Coopération en Matière d’Armement (OCCAR) and NATO (via specific agencies), or by agencies of the Union, such as the European Defence Agency, which then award contracts on behalf of Member States. This Directive should not apply to such contracts. For other such co-operative programmes, contracts are awarded by contracting authorities / entities of one Member State also on behalf of one or more other Member States. In these cases too, this Directive should not apply.”

69). There are several conditions that must be met to use the exclusion at Regulation 7(1)(c) which are explained in turn below. These are:

• co-operative programme
• joint R&D
• developing a new product
• later phases – production and maintenance

Co-operative programme

70). The co-operative programme must involve the UK and at least one member State but can also include additional non-Member States.

71). Although the DSPCR are silent on the issue, the co-operative programme does not necessarily have to be concluded by central government departments (for example, they can be concluded by forces, services or agencies not part of the central government departments). However, if this is the case, the participants must be acting on behalf of their State.

72). There must also be genuine co-operation between the participants. That means a proportional sharing of the technical and financial risks and opportunities within the programme along with an effective (if proportional) participation in the management and decision-making process of the programme by all parties.

73). A participant joining a co-operative programme on completion of the R&D phase can benefit from this exclusion for the later phases of the programme, if it becomes a full member of the programme. Moreover, a participant cannot use the exclusion if it participated in the R&D phase of a co-operative programme but decided to make its purchases for the later phases of the programme outside the co-operative programme.

74). An international organisation, for example, NATO (the North American Treaty Organisation) or OCCAR (the Organisation for Joint Armaments Co-operation), or an EU agency, (for example, the European Defence Agency (EDA)), may manage the co-operative programme on behalf of the States. The international organisation or agency may act as either agent or principal in this regard.

75). In addition, and if the principle of genuine co-operation applies, one of the participating States may take on this management role and award a contract under the “lead nation” model, for and on behalf of, all participating States.

Joint R&D

76). The co-operative programme must include a joint R&D phase. R&D is defined in Regulation 3 (Interpretation) of the DSPCR (see Chapter 10: research and development) and covers any of the following three main activities:

• fundamental research
• applied research
• experimental development

77). R&D does not include the making and qualification of pre-production prototypes, tools and industrial engineering, industrial design or manufacture.

78). In terms of Technology Readiness Levels (TRL), R&D would typically include fundamental research (TRL 1-4), applied research (TRL 4-6) and experimental development (TRL 6-9).

Developing a new product

79). A key factor in applying the exclusion is the nature of the programme and its purpose, (i.e. the aim of the co-operative programme is the development of a new product). Co-operative programmes involving purchases of off-the-shelf, or technical adaptations to existing or off-the-shelf equipment, do not qualify for the exclusion unless such adaptation will result in a fundamentally new product.

Later phases – production and maintenance

80). Contracts for the production and maintenance of the new product and all other later phases of the product life cycle may benefit from this exclusion if these later phases formed and remain part of the co-operative programme requirements. So, for example, a new product resulting from a R&D co-operative programme which is subsequently put into production, would be covered by the exclusion if the option to produce was covered in the original R&D programme and the co-operative programme remains in existence.

Operations outside the UK and Gibraltar

81). Regulation 7(1)(d) states:

“(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement — (d) where the contract is to be awarded or the framework agreement is to be concluded in a State other than the United Kingdom or Gibraltar, including a contract or framework agreement for a civil purchase, carried out when forces are deployed outside the United Kingdom or Gibraltar where operational needs require them to be concluded with economic operators located in the area of operations;”

82). This exclusion at Regulation 7(1)(d) covers the procurer’s military, security or civil operational requirements that are placed by the procurer locally during operations in a third country.

83). If the procurer is deployed outside the UK or Gibraltar on a temporary basis on a military or security operation (for example, to support specific crisis management operations), the procurer does not have to use the DSPCR to procure goods, works or services (including civil purchases) that they are required to source locally for operational reasons.

84). This may be the case where the award of the contract within the UK or Gibraltar may be impractical, overstretch supply lines or result in delay and costs that would pose a real threat to the operational capability of the troops or security services deployed.

85). The exclusion will apply where the personnel of the procurer and the contractor are in the area of operations. This could be a purely local supplier, or the local subsidiary of a company established in another State. However, contracts for operational requirements placed by procurers located in the UK or Gibraltar would not qualify for the exclusion.

86). The area of operations refers to the geographical zone designated for operations and may include one or more States in which the operations are being undertaken. This recognises the reality of operations on the ground and the difficulties that can arise which might necessitate contracting with suppliers in the countries where operations are taking place.

87). The geographical zone designated as the area of operations may extend beyond the immediate area of conflict or activity (for example, an intermediate country providing transport facilities) but should be limited to the geographical neighbourhood to limit the risk of abuse and misinterpretation of the exclusion. If you award contracts to suppliers outside the area of operations, then there is no justification for applying this exclusion.

88). The exclusion covers civil purchases undertaken in the area of operation, directly connected to, and arising out of, the conduct of those operations. Examples include non-military products; works and services for logistical purposes such as storage; transport; distribution; maintenance and disposal of material; transport of personnel; acquisition or construction, maintenance, operation and disposal of facilities; acquisition or provision of services, medical and health service support; food and water supply.

International exclusions

89). Regulation 7(1)(e) and (f) states:

“(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement — (e) which is governed by specific procedural rules —
(i) pursuant to an international agreement or arrangement concluded between the United Kingdom and another State;
(ii) pursuant to a concluded international agreement or arrangement relating to the stationing of troops and concerning the undertakings of a member State or a State which is not a member State, including Norway; or
(iii) of an organisation, of which only States are members (an “international organisation”) or of which only States or international organisations are members, purchasing for its purposes;
(f) which must be awarded by the United Kingdom in accordance with specific procedural rules of an organisation referred to in sub-paragraph (e) (iii);”

90). The international agreement, arrangement or rules of the organisation referred to in Regulation 7(1)(e) must specifically set out details of the contract award procedure, including the principles and steps you must follow for the types of contract to be included, which itself must be compatible with UK law. If this information is not included within the terms of the agreement or arrangements or you do not follow it then you cannot use the exclusion.

91). The term international agreement or arrangement covers not only treaties but also instruments such as Memoranda of Understanding (MOUs) together with other forms of international instruments between States.

92). An agreement or arrangement specifically related to the stationing of troops covers not only troops from a Member State in a non-Member State, or Norway, or vice versa, but troops from a Member State stationed in another Member State. The most relevant application of this exclusion is likely to be an agreement or arrangement concluded between Member States only, as other arrangements with third country participation will be covered by Regulation 7(1)(e)(i) as well.

93). Regulations 7(1) (e)(iii) and (f) refer to contracts or framework agreements awarded by, or in accordance with the specific procedural rules of, an international organisation.

94). The term “international organisation” refers to a permanent institution with separate international legal personality, set up by a treaty between States or intergovernmental organisations and having its own rules and structures. In the field of defence, NATO and OCCAR are the most prominent examples. However, you should note the EDA is not an international organisation but is an agency of the EU.

95). You must award the contract in accordance with the specific procedural procurement rules of the international organisation. The exclusion will apply when, as part of fulfilling its member role or commitments to the international organisation, the UK (or any other member of the international organisation) must award a contract in accordance with those rules.

96). Purchases made by the international organisation in its own name and “for its purposes” may also qualify for this exclusion. The phrase “for its purposes” must be interpreted in the context of the purpose or mission of the international organisation, which is normally set out in its Charter. For example, OCCAR was set up to manage co-operative equipment projects on behalf of its members. That is its purpose.

Acquisition of land

97). Regulation 7(1)(g) states:

“(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement — (g) for the acquisition of land, including existing buildings and other structures, land covered with water, and any estate, interest, easement, servitude or right in or over land;”

98). It excludes contracts for the acquisition of land and interests in land including the lease of land and buildings. However, you may classify certain land transactions as works contracts in certain circumstances. An example is a building constructed to the procurer’s specifications on another party’s land, which the other party subsequently transfers the ownership of to the procurer, see Chapter 6: classifying contracts.

Government to government sales

Interpreting the Exclusion

99). Regulation 7(1)(h) states:

“(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement —
(h) where the contract is to be awarded or the framework agreement is to be concluded by a government to another government relating to —
(i) the supply of military equipment or sensitive equipment;
(ii) work, works and services directly linked to such equipment; or
(iii) work, works and services specifically for military purposes, or sensitive works and sensitive services;”

100). The exclusion applies to contracts or framework agreements concluded by a government to another government relating to:

• the supply of military equipment or sensitive equipment;
• works and services directly linked to that equipment; or
• works and services specifically for military purposes or sensitive works and sensitive services.

101). For the purposes of paragraph (1)(h) “government” means the State, regional or local government of a member State or a State which is not a member State.

102). Only contracts concluded exclusively between two governments can constitute “contracts awarded by a government to another government” in the sense of Regulation 7(1)(h). Government to government supply contracts entail, in principle, transfer of title from the selling government to the purchasing government.

103). By contrast, the fact that a government provides guarantees of good execution, or similar forms of support to a contractor competing for a contract does not make the exclusion applicable to that contract. Moreover, the exclusion only covers the contract between the 2 governments; it does not cover related contracts concluded between the selling government and a contractor.

104). The exclusion would apply for example where the MOD decides, for operational reasons, to place a service contract with the government of another State for the training of its pilots by the air force personnel of that other State. However, if that other State needed to procure goods and services to satisfy that service contract it would have to apply the procedures for contract awards which are applicable in their own State.

105). The exclusion may apply to any contracts for the supply of military or security equipment (including, in principle, purchases of new material) that are government-to-government sales. For example, the United States of America (USA) Foreign Military Sales (FMS) regime by which the US Government sells military capability to its allies on a government-to-government basis in accordance with the US Arms Export Control Act.

Justifying the Exemption

106). To apply the exclusion under Regulation 7(1)(h) you must undertake “appropriate analysis”, which clearly establishes that awarding a contract to another government is the only or the best option to fulfil the requirement. This analysis should, identify whether competition is absent or impracticable, see paragraphs 109 or whether on the contrary, competition for the contract appears to be possible, see paragraph 111.

107). “Appropriate analysis” implies a good understanding of how the market can respond to the specific requirements, which may involve surveying the market before finalising the requirement. For example, you could publish a request for information notice on your website, for MOD personnel this would be through a request for information on the DSP. This will give potential suppliers the opportunity to comment on the proposed requirement that could result in identifying alternate solutions. You must document this analysis within the business case or contract files to justify the decision.

108). By their very nature, some contracts can only be awarded to other governments. For example, in the training example above, contracting authorities generally award such contracts within the framework of military cooperation between States. Since there can be no commercial alternative, they have no impact on the functioning of the domestic market.

109). In some situations, there may be no viable alternative to awarding a contract directly to another government. This may include, although is not limited to:

• where market analysis demonstrates that commercial competition is absent or impracticable;
• the requirements identified can, for technical reasons or reasons connected with the protection of exclusive rights, only be satisfied by one government;
• the requirement is an urgent operational requirement such as an urgency resulting from crisis or extreme urgency brought about by unforeseeable events;
• additional supplies from the original selling government are needed as partial replacement or extension of existing supplies and a change of source of supplies is not practicable due to reasons of interoperability; and/or
• where it is clear from the outset that a call for competition would not trigger more competition or better procurement outcomes than government to government procurement.

110). You can find full guidance on procuring urgent capability requirements[FAC(CFP41] in Chapter 9 - Procuring Urgent Capability Requirements.

Optional Pre-Procurement Advertising

111). In cases where the analysis in paragraph 106 is unclear whether competition for the satisfaction of the requirement is absent or impracticable, you should examine the market further via pre-procurement advertising. The objective of this further market examination is to establish whether at least one supplier could genuinely compete to satisfy the requirement (i.e. to deliver a similar or better solution that the government to government model).

112). Where it is clear from market analysis that you know all potential suppliers, sending requests for information to such suppliers can constitute an alternative to pre-procurement advertising.

113). Where it is not clear from the market analysis that all potential suppliers are known you should utilise the VTN on the DSP. You should consult Chapter 17: standstill period, contract award and voluntary transparency notices for detail on how to draft the VTN.

114). You can also choose to invite potential suppliers to comment on the proposed requirements and to offer solutions that might facilitate competition or generate better value for money. Should you decide to do this you must ensure that equal treatment is respected and competition is not distorted.

115). At the same time, you can contact other governments to explore whether the requirement can be satisfied via government to government. Then using the information gathered from the advertisement and from the discussions with other governments, you can finalise the procurement strategy with full knowledge of the market.

116). If based on an impartial assessment of the information gathered from pre-procurement advertising, you reach the conclusion that awarding a contract to another government is the only, or the best, option to fulfil the requirement; you will proceed with negotiations and ultimately award a government to government contract.

117). If, on the contrary, an impartial assessment of the information gathered from pre-procurement advertising, shows that one or more supplier can deliver a better value for money solution than the one offered by government to government. And there is no objective justification to procure from the selling government, you must start a procurement procedure under the DSPCR. The relevant provisions of the DSPCR must be complied with.

118). Further guidance regarding advertising and transparency obligations can be found within the Advertising Commercial Policy Statement and Transparency: Publication of Tenders Commercial Policy Statement.

Arbitration or conciliation services

119). Regulation 7(1)(i) states:

“(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement —
(i) for arbitration or conciliation services;”

120). This exclusion covers arbitration or conciliation services, which are undefined, so their normal meaning will apply. You may use these services in a dispute resolution process in contracts.

Financial services except insurance services

121). Regulation 7(1)(j) states: “(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement —
(j) for financial services, with the exception of insurance services;”

122). This exclusion covers financial services other than insurance services. Financial services are undefined but could include issue, purchase, sale or transfer of securities or other financial instruments to raise money or capital, and central bank services, (i.e. the Bank of England).

123). Insurance services are undefined. They are not included in the exclusion and are categorised as a Part A service at Schedule 2 (Category 12) of the DSPCR.

Employment contracts

124). The exclusion at Regulation 7(1)(k) states:

“(1) These Regulations do not apply to the seeking of offers in relation to a proposed contract or framework agreement —
(k) for employment and other contracts of service;”

125). It covers employment contracts and other contracts of service. “Contracts of service” is undefined but may include the engagement of non-executive directors of Top Level Budgets or agencies or appointments from the private sector to senior civil service positions or chairpersons of public enquiries. You may distinguish “contracts of service” from “contracts for services” in that “contracts of service” are for employment, where the person is an employee for payroll and employment rights purposes.

126). You must use two key tests to identify an employee, for example, a person who works under a “contract of service”. These are:

• “mutuality of obligation”, (i.e. both parties to the contract have obligations to each other, the employee to perform work as directed, the employer to pay for the work performed); and
• the “degree of control” exercised by the employer over the work performed by the employee

127). Other factors to take into consideration include:

• whether the individual must perform the work personally, or is able to send a qualified substitute;
• the nature of the pay and benefits that the employer provides;
• whether or not the individual has a business structure;
• who decides on how the contract should be performed;
• the extent of the financial risk borne by the individual; and
• who provides the materials and equipment necessary for the work.

128). The duration of the contract is also important; the longer the engagement or where it is not of a fixed term duration, the more likely it is that the relationship is employment.

Research and Development Services

129). The exclusion for the provision of R&D services at Regulation 7(1)(l) is explained at Chapter 10: research and development.

Authority to apply an exclusion

130). Procurers should note that you must not apply an exclusion simply with the sole purpose of avoiding the requirements of the DSPCR. You must be able to justify objectively the application of the exclusion.

131). You must interpret the exclusion strictly and use it proportionately. You must record the circumstances justifying its usage and approval at the appropriate level on file.

132). Procurers should issue local instructions setting out the process for authorisation of DSPCR exclusions.

133). For the MOD, a Senior Commercial Officer at SEO level (or equivalent) must authorise the use of the exclusion to establish a consistent approach across each area of business in the MOD. Authorisation to exclude under 7(1)(a) in conjunction with Regulation(6)(3A)(a) to exempt a procurement from the DSPCR must be approved by a Grade 7 or equivalent Commercial Officer.

134). You must record the decision to use the exclusion for audit purposes and in the event of legal challenge.

135). For those procurements being excluded under 7(1)(a) in conjunction with Regulation (6)(3A)(a), delivery teams should complete an Exemption Information Form to evidence the exemption justification and to provide an audit trail of the decision-making process.

Competitive procurement

136). Using an exemption or the availability of and exclusion may not necessarily mean non-competitive procurement in all cases.

137). There may very well be circumstances where the reason for using the general exclusions prohibits or constrains use of competition, for example for government-to-government sales, a non-competitive approach is very likely to be the only practical option; or

138). If an open competition is not practical, you may organise a limited competition among a restricted field of tenderers. For example, under the general exclusion for disclosure of information, it may only be possible to conduct a limited competition, for example, compete amongst national suppliers who have the appropriate security clearance.

139). To seek best value for money, you must seek to maximise the use of competition in any exempt procurement except where you can justify the reasons not to do so. You must keep a record of, why using a limited competition is a proportionate measure in the circumstances.

140). Procurers must still treat suppliers fairly by setting out the rules under which such a restricted competition is to run, ensuring that they comply with those rules and giving all participating suppliers equal opportunity. Failure to do so may give rise to a breach of implied contract to treat bidders equally and fairly.

Contacts, training and further information

Annex A

Information exemption process

1). Does the procurement fall within the scope and financial thresholds of the DSPCR (check the scope (Regulation 6 / DSPCR - Chapter 2 - Scope) and financial thresholds (Regulation 9 / DSPCR - Chapter 3 - Financial thresholds ))?

If no, consider if any other procurement legislation applies (i.e. PCR 2015 / UCR 2016).

2). If yes, does the exemption set out under regulation 6(3A)(a) apply? Consider whether the DSPCR oblige the UK to disclose information contrary to its essential security interests and discriminate on the grounds of nationality if necessary. (For the warlike stores exemption set out in regulation 6(3A)(b), go to Annex B checklist.)?

If no, you do not need to exempt the requirement, and DSPCR applies in the usual way.

3). If yes, can the procurement be conducted under DSPCR without breaching the procurement principles, except for the information withheld under the regulation (6)(3A)(a) exemption?

If yes, consult CLS as the application of other procurement legislation and / or exclusions may need to be considered.

If no, use Regulation 7(1)(a) in conjunction with Regulation 6(3A)(a) to exempt the requirement to comply with the supply of information obligation and exclude the whole procurement from DSPCR.

Annex B

Regulation 6(3A)(b): warlike stores exemption process

1). Is the requirement for warlike goods, or works or services or related to warlike goods (for example, on the Council Decision 255/58 List)?

2) Does the procurement affect essential security interests?

3). Do measures have to be taken in this specific procurement to protect the security interest?

If no to all of these, the exemption does not apply.

4). Can those measures be adopted under the DSPCR or PCR 2015?

And do the measures adversely affect the conditions of competition in the domestic market for non-military products?

If no to both, apply the exemption using the minimum necessary measures to protect the security interest.

If yes to number 4). above, the exemption does not apply.

1. See Case C-19/13 Fast web, paragraph 40. ↩

2. The list of arms, munitions and war material adopted by the Council of the European Economic Community in its decision 255/58 of 15th April 1958. ↩

3. Intelligence services” refers to the functional body and not to an activity. It includes the SIA, departmental intelligence services sections and other administrative sections concerned with intelligence matters. ↩