When do changes to public contracts bring about new contract awards?
PRESSETEXT
A difficult question for public authorities is whether a contract initially tendered under the Public Contracts Regulations 2006 needs to be re-advertised where there are post-contract amendments reflecting changes in circumstances. This was considered by the ECJ in the Pressetext case which confirmed that where there is a proposed extension, renewal or amendment to a public contract, the authority cannot just allow the existing contracting party to continue. Instead the authority must award the work under a new procurement process if the new terms are “materially different” from the original contract and therefore show the parties meant to renegotiate its essential terms.
This case has helpfully provided some direction on this question and will be useful as a guide for all public sector bodies facing this very common situation.
decision:
- The ECJ stated the following key principle: “To ensure transparency of procedures and equal treatment of tenderers, amendments to provisions of a public contract during the currency of the contract constitute a new award of a contract ... when they are materially different in character from the original contract and, therefore, are such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract.”
- The ECJ added that ‘material’ amendments are those that:
- would have allowed others to participate in the tender or a different tender to be accepted;
- extend the scope of the contract considerably to encompass services not initially covered; or
- change the economic balance of the contract in favour of the contractor in a manner not provided for in the terms of the initial contract.
On the other hand minor changes that can be objectively justified and do not give the contractor a significant advantage do not re-trigger the procurement rules.
- The ECJ, somewhat surprisingly perhaps, suggested that the following variations would, or are very likely to, constitute a change to one of the essential terms of the contract so as to amount to the award of a new contract and thus triggering the need for a new procurement:
- substitution of a new contractual partner (although this would not apply if the services are transferred to a subsidiary which is wholly owned and controlled by the initial contractor which gives the subsidiary instructions, and the initial contractor remains responsible for compliance with the contractual obligations);
- novation of a contract to a new independent provider; or
- changes in the identity of the contractor’s shareholders (other than in relation to publicly listed companies).
- Conversely, in the circumstances of this case, the following were not considered amendments which would give rise to a new contract award:
- a different expression of the fees in the contract as a result of the introduction of the Euro so as to facilitate a calculation which resulted in a small reduction in fees payable that operated to the detriment of the contractor; or
- a clause inserted into a contract by which a party agrees not to terminate a contract prior to a certain date (termination waiver clause) provided that such a clause is not repeatedly renewed.
points to note:
- Authorities need to carefully consider how they deal with changes to an existing contract. They should perhaps consider as part of the original procurement process, making provision for future variations within agreed parameters to avoid having to re-tender.
- A way round substitution of a new contractor may be to utilise a provision that permits sub-contracting. It may also be important to provide in the contract for a permitted change of control (subject to consent) to avoid a re-tender if there is a sale of the contractor’s business.
- This case provides some assistance in providing guidance as to when a new procurement exercise should be considered. Each case will of course depend on its own particular facts as to whether or not a variation is seen as being a material contractual amendment which brings about the necessity of a new procurement process.
- Pressetext appears to ignore the practicalities inherent in running procurement exercises. Even if operated under an accelerated process, procurements take some considerable time (and cost) and the transition to a new provider will not happen immediately. Ensuring fair competition between the incumbent and a new provider is also sometimes difficult to achieve.
- The decision also begs some interesting questions about what rights public authorities have to terminate an existing contract where a variation they are seeking has brought about the need to conduct a new procurement. Many current contracts are simply not terminable in such circumstances without substantial compensation having to be agreed.
- Finally, the case seems to propose that some situations which would never historically have been considered as requiring a new procurement (such as the sale of a business as a going concern or an acquisition of share capital) may now require precisely that even where the terms of existing contracts are completely unaffected. This could have implications for suppliers and any companies considering buying any public sector providers. We would suggest that many authorities will be faced with difficult situations as a result and may be forced to take a more practical and pragmatic view than the Pressetext case would indicate.