Changing a Public Procurement Contract?

05/04/2017

Note: On 29^th March 2017, the British Government triggered Article 50, officially beginning the process of the UK leaving the European Union.  The law in this article is correct as at the date of writing, 31^st March 2017.

The long-running woe of the Nuclear Decommissioning Authority (NDA) continues.  It was revealed earlier this week that the amount of work needed to decommission 12-*-***-+ redundant Magnox sites is so much larger than specified in its contract with Cavendish Fluor Partnership (CFP), it amounts to a ‘material change’ in the terms specified during the tender process. The NDA has therefore decided to terminate its contract with CFP with two years notice. The contract will be terminated in September 2019, after just five years rather than the full 14-year term, and arrangements are being made for a new contract to be put in place for the remaining works.

Section 72 of the Public Contracts Regulations 2015 (PCR 2015) governs the extent to which public contracts and frameworks can be amended without triggering a new tender process.  Prior to section 72, firms and local bodies had to rely on common law principles set out in case law to establish how far a public contract could be modified and it was considered an extremely grey area of public procurement.

The key case prior to section 72 was Pressetext Nachrichtenagentur (Law relating to undertakings) [2008] EUECJ C-454/06, commonly known as the Pressetext case.

The principles of the Pressetext case

Decided in the European Court of Justice (ECJ), the Pressetext case concerned several changes made to a contract for press agency services that had originally been concluded between Austria and an entity called APA in 1994.

The ECJ held that a public contract would need to be terminated and a new award made if changes to the original agreement were "materially different in character" from the original contract, demonstrating the parties' intention to renegotiate the "essential terms" of the agreement between them.

A material change was defined by the ECJ as one which:

• would have changed the outcome at shortlisting or award had it been present from the outset; or          

• extends the scope of the contract considerably; or          

• changes the economic balance of the contract; or          

• risks distorting competition to the detriment of other potential tenderers.

Clarification by section 72 of the PCR 2015

A key element of section 72, which codified the law set out in the Pressetext case, is that it provides that a modification which is provided for in the original contract in “clear, precise and unequivocal” terms will not trigger a new procurement process.

Examples of where a substantial change in the original contract will require a new award include where:

• a party to the contract is changed (usually); or          

• the new conditions would have opened the tender up to new bidders or changed the original award of the contract; or          

• there has been a significant change in the scope of the contract; or          

• the economic balance has been changed in favour of the contractor in a way that was not provided for in the agreement.

Under section 72 of the PCR Act 2015, the original contract does not require termination if the changes to the original agreement are:

• relatively small (under 10% (services & supplies) or under 15% (works) and is also under the applicable EU financial threshold; or         

• the changes are the result of unforeseen circumstances, so long as they do not affect the whole nature of the award and the price increase does not total more than 50%; or          

• where additional duties, services or supplies are necessary and an alteration in contractor cannot be made for economic or technical reasons; for example, where to change suppliers would cause significant inconvenience or doubling up of costs. Under this category, the price increase must not exceed 50% and an OJEU notice must be published describing the modification; or          

• following a restructuring, M&A or insolvency, the supplier has been replaced and meets the original tender criteria.  To fall into this criterion, no other changes to the contract can be present.

Final words

Thanks to the clarification of section 72 of the PCR Act 2015, room for changes to a public contract can be allowed for in the original agreement, saving both private and public organisations thousands (if not millions) of pounds in having to terminate a public contract and issue another award.

Unfortunately, the NDA was not able to rely on the criteria under section 72.  It has been announced that an independent inquiry is being launched to establish why the 2012 procurement process and the reasons why the 2014 contract proved unsustainable.

Steve Holliday, former chief executive of National Grid, will lead the inquiry which will:

• begin with the NDA’s procurement          

• end with the contract termination          

• review the conduct of the NDA and of government departments          

• determine if disciplinary proceedings are required

Energy Secretary Greg Clark has said, “This was a defective procurement, with significant financial consequences, and I am determined that the reasons for it should be exposed and understood, those responsible should properly be held to account and it should never happen again.”

Fisher Scoggins Waters are a London based law firm who are experts in construction, manufacturing and engineering law.  If you would like more information about procurement law, please phone us on 0207 993 6960.