Living in a material world…

Pressetext confirmed that to change a contract in a material way was to defeat the purpose of the original competition to such an extent that, if a challenge were received, the courts would say to the purchaser: “start again”.  Pertinent examples of material changes include a change that would have affected the outcome of the initial competition, that would have changed how the competitors behaved and the decisions they made or that would change the economic balance of the contract in favour of the contractor.

Nevertheless there are good and genuine reasons to change a contract during its life: changes in regulations or legislation that require changes to services or specifications; additions to the contract that couldn’t sensibly be provided by another contractor; or a genuine need for more of something.

With the new Public Sector Directive (Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC), as reflected in the Public Contracts Regulations 2015 in England, Wales & Northern Ireland, we have at last a codified and (hopefully) certain test that reflects and expands upon Pressetext to guide us when identifying what changes can be made during the life of a contract without threatening a new procurement exercise.

Regulation 72 (“Modification of contracts during their term”) sets out the changes that can be made to a contract or framework agreement without needing a fresh procurement exercise:

1. where the changes are provided for in the procurement documents in “clear, precise and unequivocal review clauses” (which may include price revisions).  This is provided that such review clauses:
   • state the scope and nature of possible changes, and the conditions under which they may be used; and
   • would not alter the overall nature of the contract or framework;

2. including additional works, services or supplies that have become necessary but weren’t included in the original procurement, where a change in contractor cannot be made for economic or technical reasons, or would cause significant inconvenience or substantial duplication of costs for the contracting authority.  Such additions are limited to a maximum of 50% of the original value of the contract;
3. where:
   • the need is due to circumstances which a “diligent” contracting authority could not have foreseen;
   • the change does not alter the overall nature of the contract; and
   • the changes doesn’t exceed 50% of the original value of the contract;

4. a replacement contractor is put in place, so long as this is because of:
   • an unequivocal review clause or option that conforms with (a) above; or
   • the complete or partial succession into the initial contractor’s position following corporate restructure (such as takeover or merger) the new contractor must fulfil the original qualitative criteria for selection, and there can’t be other substantial modifications to the contract;

5. modifications which, irrespective of their value, are not “substantial”.

“Substantial” is used in the Directive and in Regulation 72, though the word does not appear in the Pressetext judgment, which instead uses the word “material”.  “Substantial” has a detailed definition which follows the logic of the Pressetext case:

1. a modification which renders the contract materially different in character;
2. a modification which introduces conditions which (had they been part of the procurement) would have:
   • allowed other candidates to be selected;
   • allowed for a different tender to be accepted; or
   • attracted additional participants in the procurement;

3. a modification which changes the economic balance of the contract in favour of the contractor and was not provided for in the original contract;
4. a modification which considerably extends the contract’s scope;
5. a new contractor replaces the original (unless it complies with Regulation 72).

The key message remains that, if you want or need to make changes to a contract during its lifetime, then you will need to consider whether that change complies with Regulation 72.  The most straightforward way of doing so is to build clear and unequivocal change control provisions into your contract in advance which anticipate probable changes.  And so, to the extent that future changes are anticipated (or can reasonably be expected), express contract provisions catering for future changes will be the most straightforward way of ensuring compliance with Regulation 72.

The recent case of Edenred (Edenred (UK Group) Ltd v HM Treasury [2015] UKSC 45) demonstrates the importance of ensuring that variation provisions in a contract are clear, precise and unequivocal.  National Savings & Investments (NS&I) procured operational services with an initial contract value of £660 million, but the procurement process clearly set out that the specified contract range ranged from £1.25 billion to £2 billion.  The contract envisaged the extension of the operational services (within the confines of the services described in the contract notice) up to the financial range estimated in the contract notice.  By anticipating this extension, the procurement was defensible against challenges that the contractual changes affected the initial competition, or that tenderers might have acted differently (as tenderers were aware of the anticipated scope).  NS&I also ensured there was a contractual mechanism to restrict any increases in the service provider’s profit margin and prohibited the alteration of the allocation of risk; all of which meant that there was no change to the economic balance of the contract as a result of its variation.

Changes to contracts procured before February 2015

The Edenred judgment (from 1 July 2015) also determined that the rules set out in Regulation 72 apply not only to contracts and frameworks procured under the 2015 Regulations, but also to contracts and frameworks that were procured under the 2006 Regulations.  Be aware, therefore, of the impact that the restrictions on changes to contracts will have on existing contracts and frameworks.

Regulation 72 is complex (as you see!), so if in doubt, seek legal advice on any change to a contract that you think might fall foul of the rules.

For further information, please contact Gayle Monk

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