On 25 March 2015, the Crown Commercial Service (“CCS”) issued guidance on amendments to contracts during their term as permitted under regulation 72 of the Public Contracts Regulations 2015 (“PCR 2015”) and the right to terminate a contract in regulation 73. We set out below a summary of the key points in the guidance. The guidance itself can be found here.
Modification of contracts
The guidance explains that regulation 72 is aimed at clarifying the extent to which concluded contracts may be amended without the need for a new advertised tender process by establishing “safe harbours” for certain types of amendments. CCS take the view that PCR 2015 go further than a simple codification of case law (namely Pressetext C-454/06) in setting out all the circumstances in which amendments can be made in order to reduce uncertainty.
It is important to note that this guidance confirms that regulation 72 of PCR 2015 will apply to modifications to contracts on or after 26 February 2015 and therefore applies to existing contracts procured under the Public Contracts Regulations 2006 which are being amended now or may be amended in the future. The guidance emphasises that it is the date of the amendment(s) which is important, not the date when the original contract was entered into.
The guidance describes changes by reference to four categories:
Category 1 “any change”
These are changes where there is no financial limit provided the conditions set out in regulation 72 are satisfied. These changes cover the “clear, precise and unequivocal review clauses” in regulation 72(1)(a) and changes which are not substantial within the meaning of regulation 72(8).
The guidance explains that a substantial change is defined in regulation 72(8) as any change, irrespective of value which meets any one or more of the following conditions:
- Materially alters the character of the original contract/framework; or
- Would have allowed other potential suppliers to participate or be selected, or another tender to be accepted; or
- Changes the economic balance in favour of the contractor; or
- Extends the scope of the contract/framework “considerably”; or
- A new contractor replaces the original contractor, other than where the change arises from an unequivocal review or option clause in the original contract or from corporate changes such as merger takeover or insolvency.
The guidance goes on to say that it is not possible to define “materially alter” or “considerably” as this may depend on the circumstances of each case. Accordingly, contracting authorities are advised to exercise their judgment, taking legal advice as necessary.
Category 2 “major changes”
These are described as changes the value of which is limited to up to 50% of the value of the original contact and:
- relate to additional works, services or supplies which have become necessary and certain other conditions are met (regulation 72(1)(b)); or
- the need for these changes could not have been foreseen by a diligent contracting authority and the changes do not affect the nature of the original contract or framework (regulation 72(1)(b)).
According to the guidance, where an authority makes more than one major change, the 50% limit will apply to each individual major change (rather than cumulatively), subject of course to the change not being aimed at avoiding the procurement rules. The guidance also confirms that the 50% limit is calculated by reference to the value of the original contract, not any increased value which resulted from an earlier variation.
Category 3 “minor changes”
These are changes where the value is:
- less than the relevant value threshold triggering the application of the procurement rules; and
- less than 10% (for services or supplies) or 15% (for works) of the original value of the contract or framework.
CCS have taken the view that, where there are multiple changes, the cumulative assessment is against the 10% or 15% limit and not against the value threshold triggering the application of the rules. In other words, the guidance suggests that it is possible to have multiple changes each having a value which is below the value threshold for the application of the rules, provided that, in aggregate, the changes are below the relevant 10% or 15% limit.
We view this as an interesting interpretation of regulation 72(5) and (6) which, given the EU Court’s consistent strict interpretation of exemptions, is not without risk. A stricter reading of the legislation (and by implication the one which carries less risk) is that the changes need to be cumulatively under the threshold and under the relevant 10% or15% limit.
Category 4 “corporate changes”
The guidance merely restates the position under regulation 72(1)(d) that a safe harbour is available in circumstances such as where a supplier has been the subject of a merger, takeover or insolvency provided the replacement meets the original selection criteria and other substantial changes are not made to the contract or framework.
Termination of contracts
Regulation 73 introduces a new obligation on contracting authorities to include a right to terminate in certain circumstances including where a substantial modification has been made outside of the safe harbours set out in regulation 72. If such a right is not included, the power to terminate the contract on reasonable notice will be an implied term of the contract.
The guidance clarifies that the right to terminate must be included in all contracts awarded on or after 26 February 2015. However, the guidance also goes further and takes the view that a termination right will be implied into existing contracts. Whilst, in principle, we consider this to be the correct approach (and indeed the approach which we have supported in the context of the consultations on the draft Regulations) it must be recognised that this is now inconsistent with previous Cabinet Office statements on this point and, most importantly, with the general transitional provisions as set out in Regulation 118. Accordingly, it would be important for the Government to provide further clarifications on the apparent inconsistency of this position with the legislation.
Separately, whilst regulation 73 provides a right to terminate, the guidance states that contracting authorities should terminate a contract placed on or after 26 February 2015 which is subject to modifications outside of the safe harbours set out in regulation 72. On the basis that a termination right is to be implied into existing contracts as well as contracts which were placed on or after 26 February 2015 it is not obvious why the guidance considers that contracting authorities should act in this way only in relation to contracts that were awarded on or after 26 February 2015 and not also in relation to existing contracts. The guidance goes on to say that “for all contracts”, in other words irrespective of when they were awarded, a contracting authority “also” has the option of not agreeing to the change.
Ultimately, a contracting authority might not in fact have a choice as in circumstances where a court confirms that there has been a substantial change to a concluded contract, the court can declare the contract ineffective. In addition, one cannot exclude the possibility that, in certain circumstances, the court might find it appropriate to grant an order setting aside the contracting authority’s decision not to terminate the substantially amended contract, or indeed, to require the contracting authority to exercise its express or implied right to terminate that contract.
Overall, this guidance provides some welcome clarifications in this complex area of the law. However, it also raises a number of further questions. The new provisions in regulations 72 and 73 have not yet been tested in the courts and we will have to wait and see the extent to which some of the more controversial points here will be confirmed by the courts. As with any guidance, it is no substitute to understanding the legislation itself and applying it to the specific circumstances of each case.