"All change, please": recent developments to public contracts

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

The Public Contract Regulations 2015 (the 2015 Regulations) came into effect on 26 February 2015 and include some significant changes to the public procurement rules as well as the codification of a significant body of procurement case law. Procurements commenced on or after 26 February 2015 will be subject to the 2015 Regulations whilst any procurements commenced prior to this date will continue to be governed by the Public (Contracts) Regulations 2006 (the 2006 Regulations).

This is the first in a series of six bulletins to be published over the next few months where our public procurement experts will examine in some detail the legal and practical implications of the 2015 Regulations and what they have in store for procuring authorities and contractors/suppliers.

To be added to our database to receive updates on public procurement or to attend our annual public procurement conference in London, please contact Alex Payne.

Material changes to contract

One issue commonly faced by parties to a public contract, particularly one which is long or complex, is that circumstances may change over time and parties may want to vary the contractual arrangement. However, it is recognised that this can have risks under public procurement law. It is generally well understood, since the Court of Justice's judgment in Pressetext (C-454/06), that a material change to the essential terms of a contract constitutes a new agreement and an obligation to retender. But there is only limited practical guidance on precisely what such material changes would trigger that obligation. That uncertainty was highlighted recently when the High Court (the Court) ruled (on 11 February 2015) that Winchester City Council (the Council) had acted unlawfully in varying an agreement with a developer for a local property development project, without going out to a new tender.

This briefing considers the implications of that case and considers what clarity the new provisions under the 2015 Regulations will bring to the situation in the future.

The Winchester case

In the Winchester case, a city councillor (the Claimant) successfully sought a judicial review on the basis that the variation constituted a new agreement and that it should have gone out to tender under the provisions of the 2006 Regulations.

In December 2004 the Council entered into a development agreement with Thornfield Properties, later, Silver Hill (the Developer), for a mixed-use residential-retail-transport centre development. The Developer would be remunerated out of the profits from the development and pay rent to the Council. By June 2014, the economic viability of the original scheme had changed. When approached by the Developer to renegotiate the scheme, the Council agreed a number of variations to the original scheme. The variations had the effect of reducing certain obligations on the Developer (e.g. in terms of the number of affordable housing units and parking spaces, a change to the requirement of a new bus station, the removal of the requirements to provide certain public amenities) and permitted an increase in retail space.

The Claimant took a legal challenge contending that the variations were a material change to the character of the original contract and changed the economic balance in favour of the Developer. The Council disagreed and claimed that the changes were consistent with variation clauses in the agreement and did not change the overall nature of the arrangement.

The Court found in favour of the Claimant.

It held that the original development agreement, which did not go through an advertised procurement exercise, could be classified as a works concession and that it should have gone out to tender under the procurement rules. The Council had failed to put it out to tender in reliance upon mistaken legal advice.

In determining whether variations to the contract triggered an obligation to re-tender, the test applied was whether the variations to the contract:

"are materially different in character from the original contract and therefore, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract" (Pressetext, paragraph 34)

The Court found that, contrary to the Council's assertions, the variations to that original development agreement could be regarded as "materially different" under this test. Although the subject matter of the agreement remained the same, the terms made it a significantly more attractive commercial proposition for a potential bidder. Economic benefit, in the context of a concession, was to be assessed not just on the basis of financial terms between the Council and the Developer but also on potential profits from third party contact.

Mrs Justice Lang concluded she was satisfied:

"…on the balance of probabilities, that the more favourable terms would have enabled other realist bidders to bid, because of the reduced costs and increased opportunity for profits" (para 141).

What lessons can be learned from the Winchester case?

The key takeaway points from the Winchester case are that modifications are material and will trigger an obligation to re-tender where:

  • they substantially change the economic balance of the agreement in favour of the contractor in a way which was not provided for by the contract; and/or
  • they introduce conditions that, if they had been part of the original award, it would have potentially attracted other bidders or resulted in the acceptance of a different bid.

In this context, it was not necessary to identify actual or potential alternative bidders who would be disadvantaged. This might assist, but it was not an essential requirement.

The case is a helpful example and clarification for when there is an obligation to re-tender. But how in practice should parties "risk proof" against potential changes in the economic viability of long-term and complex contracts?

What assistance do the 2015 Regulations provide in terms of permitted modifications?

The good news is that under the 2015 Regulations (Regulation 72 (1)) there are new rules that make it possible for modifications to be made without breaching the procurement rules. These changes derive from the Pressetext case law and exclusions under the 2006 Regulations but there are significant clarifications.

Non-substantial modification "safe harbour"

The new rules provide a safe harbour for modifications which are deemed to be "not substantial" and for which there is no obligation to re-tender. This includes modifications where, the overall nature of the contract remains unchanged and the value of the modification is below the procurement threshold and:

  • less than 10 per cent of the initial contract value (for contracts or framework agreements for supplies or services); or
  • less than 15 per cent of the initial contract value (in the case of contracts or framework agreements for works).

Substantial modifications which are excluded under the rules

It will be permissible to modify contracts and framework agreements without a new procurement in the following circumstances:

  1. Where modifications or options are provided for in the initial procurement document and unequivocal review clauses (including price), provided that all the conditions are clear and the modifications and options do not change the overall nature of the contract.
  2. For additional works, services or supplies by the original contractor that have become necessary and which were not included in the contact, and where a change of contractor cannot be made for economic or technical reasons or would cause significant inconvenience or substantial duplication of cost, provided that any increase in price does not exceed 50 per cent of the original contract value.
  3. Where the need for modification has been brought about by unforeseeable circumstances, provided that the modification does not change the overall nature of the contract and any increase in price does not exceed 50 per cent of the original contract value.
  4. Where a contractor is replaced by a new one as a consequence of either: (i) an unequivocal review provision or option (see point 1 above); or (ii) there being a universal or partial successor of the original contractor as a result of a corporate restricting, merger or takeover, provided that the new contractor fulfils all the criteria for initial selection and there are no substantial modifications to the contract.

Transparency obligation

Whenever a contracting authority makes use of the exclusions relating to additional requirements or unforeseen circumstances, there is an obligation to publish an award notice in the Official Journal of the European Union.

When would a modification require a new tender under the 2015 Regulations?

A modification that would require a new tender would be one that substantially changes the contract.

This would include:

  • modifications that materially change the character of the contract; or
  • its scope; or
  • changes which, if included, would have attracted different participants or potential candidates or might have resulted in the acceptance of an alternative tender; or
  • where it provides for a new contractor, it is one that does not fulfil the conditions for the exclusion.

Which law applies?

The new rules under the 2015 Regulations will apply to all tender procedures that commenced (e.g. they were advertised or expressions of interest were sought) after 26 February 2015. Tender procedures that began before that date remain regulated by the 2006 Regulations and the Pressetext case law.

Practical tips

Possible ways to reduce the risk of re-tendering include:

  • considering and planning tenders carefully with an eye to future changes;
  • "hardwiring" clear options and variations into the contract with specific conditions;
  • defining in the parameters of any pricing re-negotiation or adjustment (e.g. indexation);
  • working within the permitted exclusions for additional works and services, unforeseen and necessary modifications or technical necessity; and
  • benchmarking changes against original bid evaluation to operate within the permitted "safe harbour" of non-substantial changes.