How to modify existing contracts within EU procurement rules - Christopher Brennan - ThinkHouse November 2014

20 November 2014

Christopher Brennan talks about how to modify existing contracts within EU procurement rules.

Mark Greenburgh: I am now joined by Chris Brennan, the Head of our Public Procurement Team, to talk about changing an existing public sector contract. Chris can you start off by defining what is a material change?

Chris Brennan: OK well in any situation which the procurement rules apply to so think of a public contract, a contract for example which a local authority might have let for a particular service or a particular supply so for example street lights, you might have a situation where at some point in the lifetime of the contract the terms of that contract need to be changed for whatever reason and changes to public contracts along those lines happen all the time and they're not necessarily a problem from a procurement perspective. They are only a problem when they are what we procurement lawyers term as material and those are changes which render the contract materially different in character from the way they were when they were originally procured so in other words they are changing the essence of the contract if you like and that can be a problem from a procurement perspective simply because the procurement rules may bite on that situation again and trigger a requirement for a fresh competition of a new procurement.

Mark: I have heard about a case called Pressetext. Can you explain how that's changed things?

Chris: Prior to the Pressetext case which was a decision of the European Court of Justice as it then was in about 2008, the law on material change or just when a change might be regarded as being significant enough to cause a procurement problem was not particularly clear. Pressetext is to us procurement lawyers probably one of the most important pieces of jurisprudence in procurement law. The reason is that it clarified what is meant by material change by setting out a series of tests to help work out, if you like, whether a change is significant enough to cause a procurement problem or whether it isn't. So the essence of the tests are first of all is the contract being made materially different, ok that remains the essential test, but then specifically what is clearer is in what situations that is likely to happen so first of all a change will be material where it introduces conditions which would have affected the outcome if they had been part of the original procurement. Secondly if new subject matter, new works or services or supplies are added to the contract to extend the scope of the contract in a considerable way, to a considerable degree and thirdly where the change shifts the economic balance of the contract in favour of the contractor and again in a way not originally provided for at the time of the initial procurement so you can see how the dynamic works, it's is there something being added or being changed which makes the contract different in a way not originally envisaged.

Mark: What happens if a material change is made without going through the necessary procurement?

Chris: Well essentially the law treats an illegal material change if you like in the same way as it would a directly awarded new contract so if a contracting authority awards a new contract in violation of the procurement rules, in other words it fails to run a procurement where one is required, the remedy in the worst case scenario could be that the change or the contract, the new contract which is what it essentially is, is declared ineffective by the court. In addition to that the court would be required to impose a fine or a civil financial penalty as the law in this country calls it and in addition to that it's quite possible that damages could be claimed by anyone who can show that they were owed a duty by the authority to be given the opportunity to compete for that changed requirement or that new contract.

Mark: How does the new procurement directive take account of the Pressetext decision?

Chris: There are three new procurement directives. There is one for the public sector, one for utilities and a new one for what's called the concession contracts, but actually the rules on material change are all the same in each of the three directives and what the new public procurement directives seek to do, as well as to clarify procurement law more generally, is to codify the decision in Pressetext and also to group that together with the other situations in which the direct award of a material variation may be permitted without needing to go through a competitive procurement process. The first thing the new directive does is to in effect import the Pressetext tests, the three Pressetext tests which I explained earlier on into their own new section of the directives so all of those tests are set out pretty much as they are in the Pressetext decision itself. However those are then grouped together with other situations in which no fresh procurement is required, one of which is the situation where the change was contemplated in advance in the initial procurement documents, the initial OJEU notice and the initial tender documents in an unequivocal way including where the conditions under which the change may be implemented are also clearly set out. Secondly there is a situation where the change is permitted where there is a need to bring in additional subject matter but where a change of contractor would for various reasons be regarded as inconvenient or not really possible. The third situation in which a change can be implemented without a fresh procurement is one where it is necessary to bring in an additional contractor. However there are certain rules around that where it is contemplated in advance, well that's ok, but also any change to the identity of the contractor mustn't be implemented with the aim of circumventing the directive in the first place, so in other words you can't just swap contractors for the sake of it. It's also possible to implement a change unadvertised where unforeseen circumstances arise which in effect a diligent contractor couldn't foresee. Now there are certain rules around that, one of which notably is that any increase in price must not be more than 50%. However quite surprisingly that 50% rule applies to each successive change where you have a series of changes made to a contract rather than the cumulative net effect of all of the changes that are made, so that's perhaps quite surprising because you could have a series of stepped changes. However, there is a requirement for transparency in all of this because in a situation where unforeseen circumstances have caused the change to be made, and also in a situation where it's necessary to bring in additional subject matter to the contract, there is a new requirement for a type of OJEU notice to be published after the event which I guess we can probably call a modification notice, it's not required at the moment but it will be once the new directives are implemented from the spring of next year. In this notice one has to set out in effect a before and after description of the contract and also a statement of any price change so there is a transparency requirement and publishing a notice of that sort will enable contractors or enable interested parties, let's say, to establish whether or not the change should have been advertised or not.

Mark: To help me understand can you give some examples of where changes would be substantial or insubstantial?

Chris: OK well if we start with the non-material because the examples of that will generally I think, be simpler. If let's say you have a 15 year contract, let by a local authority to supply, install and maintain 50,000 street lights ok. Half way through the contract let's say the technology has moved on a little bit and there are new types of light available, and the contractor says well ok the level of light that the new lanterns give is such that even though they are much lower energy, it'll save you a fortune, we need to increase the density of the lights a little bit so in other words we rather than having 50,000, let's say we have 55,000. That sort of change probably won't be material, now you might have to look at the detail a bit but in essence, something like that may well be immaterial from the perspective of the new rules because there is additional subject matter which perhaps has come around through unforeseen circumstances. If however you have the same situation but let's say seven years down the line the contractor starts thinking um I've got my pricing a little bit wrong here, I'm not making enough of a margin and ooh well yes the technology has moved on but I think we need to supply 60,000 lights in total rather than just 50,000, and maybe I can talk to the authority to increase my margins at the same time, well there you have a very different situation where actually not only is the change in terms of the actual subject matter rather more substantial, but also the economic balance potentially is being shifted in the contractor's favour in a way not originally provided for, so in other words the contractor is modifying the contract or should I say the authority is modifying the contract at the contractor's behest in order to give the contractor a better deal and that is almost certain to form the wrong side of the Pressetext tests or article 72 as that will be.

Mark: Can you explain how a contracting authority can take steps to minimise the risk before making a material change?

Chris: Well first of all get advice before thinking about implementing anything. I think that's step one. However there are steps that one can take generally by exposing a proposed change to some degree of publicity through some sort of transparency notice before making the change, or actually for that matter after making the change in order to try to de-risk it. However there is a requirement there for good faith, in other words you cannot make what you know will be an illegal material change and then expect to try and protect that through the issue of a transparency notice. That won't work and recent case law has emphasised that.

Mark: And finally what are the key points for in-house counsel to take away?

Chris: First of all spread the word, these are important reforms to the law. They will probably raise the profile of material changes they may well cause more suppliers to look more carefully at, for example, transparency notices to work out whether or not their competitors are getting material changes through the door, and being advantaged as a result. Secondly have a think at the initial stages, in other words before an initial procurement starts of the extent to which the contract might in due course need to be modified and try to legislate for that within the initial procurement so that if and when the time does come to make a change it's already provided for or it's already scoped and the conditions under which it can be exercised are all clear and then of course there won't be a problem.

Mark: Chris Brennan, thank you very much.

Chris: Thank you.


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