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Modifications To Contracts During Their Term (Regulation 72)

Modifications To Contracts During Their Term (Regulation 72)

Contractors and professional advisers must exercise caution when agreeing to an amendment of an existing contract with a public authority or utility. When a “substantial” variation is made to a public contract during its term, it can be considered a new contract which should be subject to a fresh procurement and which could result in the contract being rendered ineffective or terminated by the authority.  For the first time, we have a regulatory regime which explains when can you safely modify an existing contract.

What’s the problem?

  1. In the case of Pressetext [1], the Court concluded that when a “substantial” variation is made to a public contract during its term (assuming, of course that the contract is subject to the procurement rules), it is considered a new contract, which should be subject to a fresh procurement.  Making a substantial or material change is tantamount to making a direct award in breach of the procurement rules, which runs the risk of an ineffectiveness order.
  2. Pressetext said that substantial variations are those that result in the agreement being “materially” different in character from the original agreement, such as to demonstrate an intention by the parties to renegotiate the essential terms of the agreement.  To determine whether a variation would be material you must ask: would (had the changes been part of the initial procedure) the outcome of the procurement have changed; is there a "considerable" change in scope; or does the amendment change the economic balance of the contract in favour of the contractor?
  3. If the answer to any of these is yes, there is a risk that an aggrieved party may challenge the decision to amend the contract, as a breach of the procurement rules.  See Councillor Gottlieb’s challenge against Winchester City Council.
  4. The Public Contracts (Scotland) Regulations 2015 have codified the position.  The previous regulations were silent on the point.

When can you safely modify an existing contract?

(A) Future proofing your contract – Regulation 72(1)(a)

“where the modifications, irrespective of their monetary value, have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses, which may include price revision clauses, or options, provided that such clauses:

(i) state the scope and nature of possible modifications or options as well as the conditions under which they may be used; and

(ii) do not provide for modifications or options that would alter the overall nature of the contract or the framework agreement;”

There have been a few cases where the courts have not permitted contracting authorities to rely on their review clauses - often because they are simply not specific enough / too wide [2].

Dos:

  1. Tie possible market changes into the scope of the OJEU notice;
  2. Have a pre-agreed pricing mechanism;
  3. Make sure that the change is within a reasonable compass to avoid altering the overall nature of the contract  – evenbetter: write down at the outset what the overall nature of the contract is;
  4. Expressly state that the amendment is not intended to create a new contract.

Don’ts:

  1. Rely on absolute discretion;
  2. Include unnecessary “mandatory requirements” that may be dispensed with;
  3. Use the word “material” or “substantial” in your review clause.

(B) Economic or technical reasons (Regulation 72(1)(b))

Where there are economic or technical reasons for having that particular contractor perform necessary additional works, services or supplies (which were not included in the initial procurement) where it would cause significant inconvenience or substantial duplication of costs for the contracting authority.  In addition, the change will only be allowed if it does not result in an increase in price of more than 50% of the value of the original contract.   If a contracting authority relies on this provision to make a permitted change, it must publish a notice in the OJEU saying that it has done so.

(C) Unforeseen Circumstances (Regulation 72(1)(c))

If an event or set of circumstances occurs which a contracting authority acting "diligently" could not have foreseen, it is possible to modify the contract without procurement. It is a permitted change where the modification does not alter the overall nature of the contract and does not result in an increase in price of more than 50% of the value of the original contract.

It is possible to make several modifications relying on this exemption. The 50% increase in price limit applies to each separate modification. There is a "good faith" element in that this must not be used as a means of circumventing the procurement rules.  If a contracting authority relies on this exemption it must publish a notice in the OJEU saying that it has done so.

(D) By replacing the original contractor (Regulation 72(1)(d))

Where a new contractor replaces the one to which the contracting authority had initially awarded the contract as a consequence of either:

(i) an unequivocal review clause in conformity with Regulation 72(1)(a)  (ie. it still cannot alter the overall nature of the contract);

(ii) succession into the position of the initial contractor (by corporate restructuring, including takeover, merger, acquisition or insolvency), of another economic operator that fulfils the criteria for qualitative selection initially established provided that this does not entail other substantial modifications to the contract and is not aimed at circumventing the application of the procurement rules.

Key point here is that a change of contractor is permitted by reason of structural changes during the term of the contract, including internal reorganisations as well as takeovers/mergers.  It is not a carte blanche for the contracting authority to go out and choose a replacement contractor.  For instance, a contractor cannot be replaced by another contractor without a fresh procurement where the contract has been terminated due to deficiencies in performance.

(E) Insubstantial Modifications (i.e. codification of Pressetext)

Modifications (irrespective of their value) are permitted where they are not substantial.  Modifications are substantial where they:

  • render the contract materially different in character from the one initially concluded;
  • could have resulted in a different outcome in the procurement;  i.e. which would have allowed for the admission of other candidates, acceptance of other tenders, or attracted additional participants in the procedure;
  • shift the economic balance of the contract in favour of the contractor.  For example, a price increase without an equivalent increase/improvement in the specification;
  • extend the scope of the contract considerably;
  • replace the original contractor, other than where this is allowed under exemption D.

This is the traditional material changes test established by Pressetext.

(F) Minor Variations

There is a safe harbour provision for low value modifications, where:

  • the value of the modification falls below the relevant procurement threshold; and 
  • is less than 10% of the initial contract value for supplies and services contracts or 15% of the initial contract value for a works contract.
[1] Pressetext Nachrichtenagentur GmbH v Republik Österreich [2008] ECR I-4401

[2] Edenred (UK Group) Ltd v (1) Her Majesty’s Treasury (2) Her Majesty’s Commissioners for Revenue and Customs and (3) National Savings and Investments; R (The Law Society) v Legal Services Commission [2007] EWCA Civ 1264

 

 

[1] Pressetext Nachrichtenagentur GmbH v Republik Österreich [2008] ECR I-4401
[2] Edenred (UK Group) Ltd v (1) Her Majesty’s Treasury (2) Her Majesty’s Commissioners for Revenue and Customs and (3) National Savings and Investments; R (The Law Society) v Legal Services Commission [2007] EWCA Civ 1264
LChalmers