Contract variations and termination rights

Until recently, discussions on contract variations between contractors and authorities have invariably led to the parallel procurement universe of Pressetext and the case-law of the Court of Justice of the European Union. From 26 February this year, practitioners and their clients in England, Wales and Northern Ireland can now turn to Regulation 72 of the Public Contracts Regulations 2015 (PCR 2015). While it doesn’t necessarily make the discussion any easier, the new provisions do at least provide a much better framework for those discussions and the associated procurement risks.

A related new provision in Regulation 73 of the PCR 2015 provides authorities with an implied right to terminate contracts inter alia where the contract has been subject to a substantial modification that would have required a new procurement procedure.

Here we provide a brief summary of the relevant provisions and some practical considerations both for authorities and for contractors.

Variations

Regulation 72 sets out six situations where modifications can be made to a public contract without triggering a requirement for a new procurement procedure:

• Clear, precise and unequivocal review clauses: Where the change, irrespective of its monetary value, has been provided for ‘in the initial procurement documents in clear, precise and unequivocal review clauses’; but provided that they (i) state the scope and nature of the possible changes or options as well as the conditions under which they may be used and (ii) do not permit changes that would alter the overall nature of the contract. The requirement is not for the review clause to be in the actual contract. It must be in the ‘initial procurement documents’, a term not defined but which presumably means the tender documents issued to bidders as part of the original procurement process.
• Additional works, services or supplies: Where these ‘have become necessary’ and were not included in the initial procurement and where a change of contractor (i) cannot be made for economic or technical reasons such as requirements of interchangeability or interoperability with existing equipment, services or installations and (ii) would cause significant inconvenience or substantial duplication of costs. However, any increase in price must not exceed 50% of the original contract value and the authority relying on this ground must publish a modification notice in the OJEU;
• Unforeseen circumstances: Where the need for the change (i) ‘has been brought about by circumstances which a diligent contracting authority could not have foreseen’, (ii) the change does not alter the overall nature of the contract and (iii) any increase in price does not exceed 50% of the original contract value. Again, to rely on this ground, the authority must publish a modification notice in the OJEU;
• New contractor: Where a new contractor replaces the one that was initially awarded the contract, but only where as a consequence of (i) an ‘unequivocal review clause or option’ meeting the requirements of 1 above or (ii) universal or partial succession into the position of the initial contractor (including corporate restructuring, merger or acquisition or insolvency) provided that the new contractor meets the original pre-qualification criteria and the appointment does not result in other substantial changes to the contract and is not aimed at circumventing the procurement rules;
• New Pressetext: Where the change, irrespective of its value, is not ‘substantial’ in terms of one or more of (i) the contract being materially different in character from the one initially concluded (ii) the change introducing conditions which, if they had been included in the original procurement, would have allowed admission of other candidates or the acceptance of another tender or attracted additional participants in the procedure, (iii) the change impacting the economic balance of the contract in favour of the contractor in a way that was not provided for in the contract, (iv) the change considerably extends the scope of the contract or (v) a new contractor replaces the contractor originally awarded the contract in circumstances not permissible under 4 above; or
• De minimis thresholds: Where the change does not exceed both of the following two thresholds (i) the relevant works, services or supplies threshold and (ii) either 15% of the original contract value for works contracts or 10% of the original contract value for service or supply contracts; but provided always that the change does not ‘alter the overall nature of the contract’. However, unlike changes made relying on 2 or 3 above, these thresholds must be applied cumulatively to successive modifications.

Terminations

Regulation 73 provides that authorities must ensure every public contract they award contains provisions enabling the authority to terminate the contract where:

• the contract has been subject to a ‘substantial modification’ (i.e. a modification not permitted by Regulation 72);
• where post-award it is discovered the contractor should have been excluded from the procurement process on certain mandatory exclusion grounds (including bribery or corruption offences); or
• the Court of Justice of the European Union has declared the contract was awarded in ‘serious infringement’ of the authority’s obligations under EU law and Directive 2014/24/EU in infringement proceedings brought by the European Commission against the Member State concerned under Article 258 TFEU.

If the authority fails to insert such a provision into the contract, Regulation 73(3) provides authorities with an implied right to terminate contracts on those grounds (and on giving ‘reasonable notice to the contractor’). To the extent express provisions are not included in the original contract, contractors need to be aware of the potential risks of this implied term.

Practical considerations

While the PCR 2015 implement the new Public Sector Directive (2014/24/EU) in England, Wales and Northern Ireland, similar provisions will apply in Scotland when the Public Sector Directive is implemented by the Scottish Government later this year. Similar provisions will also apply to utilities and concessions procurements when the new Utilities Directive (Directive 2014/25/EU) and the new Concessions Directive (2014/23/EU) are implemented later this year.

The recent Winchester and Edenred cases highlight the importance of disputes around contract variations. These new provisions at least provide a much better framework for discussions on contract variations. They will apply to any modifications to existing public contracts being made by authorities in England, Wales and Northern Ireland after 26 February this year (i.e. the relevant date is the date on which the modification is agreed, not the date of the original contract). The requirement on authorities to include termination provisions will apply to any new contracts awarded after 26 February. However, the UK Cabinet Office’s has issued guidance in March taking the view that an implied term will nevertheless apply to all existing all contracts, which may be a concern for contractors.