Overview
Recent economic turbulence has resulted in many public authorities being asked to make savings or accept budget cuts. Whilst the impact of this on the pipeline of future procurement opportunities will emerge in the coming months, contracting authorities may be considering their options when it comes to contracts already awarded.
This update explores relevant legal and wider risk-based considerations for authorities to bear in mind when assessing the potential for modifying contracts through a regulated process, in particular to reduce the cost or scope of those contracts. The consequences of a legal challenge for breach of procurement regulations are significant and therefore the assessment as to where a particular change sits on the ‘risk spectrum’ should be undertaken carefully, objectively and having considered all relevant factors.
Legal Context – What are the risks?
Contracting authorities are not permitted to modify contracts that fall within the scope of the Public Contracts Regulations 2015 (“PCR 2015”) unless the modification in question falls within one of several permitted grounds (often referred to as “safe harbours”).
Absent safe harbour protection, any modification to a contract procured through a regulated process may be susceptible to legal challenge by a third party. Under the PCR 2015, the challenger is typically another supplier who considers that they should have been given an opportunity to bid for the resulting contract, but challenge may also come via other routes such as judicial review by public interest groups or trade associations.
An amendment looking to reduce the value or scope of a contract from that originally awarded, even if it amounts to termination of that contract, may be vulnerable to such a challenge. Accordingly, any assessment of the risk associated with adjusting the contract should consider whether the modifications fall within one of the “safe harbours”.
Similar requirements apply to contracts regulated by other regimes (such as the Utilities Contracts Regulations 2016, Concessions Contracts Regulations 2016 or Defence and Security Public Contracts Regulations 2011) but in the PCR 2015 these safe harbours are found in Regulation 72.
The most relevant safe harbours to consider when looking at this type of change are:
(a) Where the modifications have been provided for in the terms of the contract (Regulation 72(1)(a)). To apply, these terms must be “clear, precise and unequivocal”. The Courts have generally construed the scope of this exception narrowly meaning that it is less likely to be satisfied when relying on boilerplate general variation clauses.
(b) Where the modification is necessary to address unforeseen circumstances (Regulation 72(1)(c)). To apply, the circumstances relied on must be truly unforeseeable as assessed objectively. It is not sufficient that the relevant contracting authority did not in fact foresee it, if it was objectively foreseeable. This distinction, whilst easy to articulate, is often hard to draw in practice.
(c) Where the modifications are not “substantial” (Regulation 72(1)(e)). As with the concept of ‘foreseeability’ above, there can be difficulties in practice in determining when a change to a contract’s value or scope is ‘substantial’. In these circumstances, a proposed change will be considered ‘substantial’ if it:
(i) renders the contract materially different in character from the one initially concluded;
(ii) introduces conditions which, had they been present during the initial procurement procedure, would have had an impact on the outcome of that process e.g. allowing other candidates to proceed who previously wouldn’t have met minimum requirements or attracting other providers who didn’t participate the first time around; or
(iii) changes the “economic balance” of the contract in favour of the contractor in a manner which was not provided for in the initial contract. This typically refers to the contractor being paid more but can also apply where the changes benefit the contractor in other ways such as removing an element of scope that was considered high risk or unattractive.
If a change is made which does not fall within one of the safe harbours, it will be considered a new, directly awarded contract and therefore unlawful unless such a direct award would otherwise be justified.
A direct award alternative?
The circumstances in which direct award of a contract is permitted are detailed in Regulation 32 of the PCR 2015. These include where the direct award is necessary because:
(a) the works, supplies or services can only be supplied by a particular contractor – for example because they hold intellectual property rights restricting the ability of others to deliver the same scope; or
(b) there is extreme urgency brought about by events unforeseeable by the contracting authority where there is not sufficient time for a competitive procurement process to be run. As above, this must be truly unforeseeable, not simply unlikely or unplanned for and must also not be a consequence of action or inaction by the relevant contracting authority.
Assessing the risk
Whilst ideally an assessment of applicable safe harbours (or alternatively the availability of ground to permit a direct award) would result in a clear view as to whether a change is permitted, it is often a case of fact and degree, with arguments on both sides. The more tenuous an argument that a safe harbour applies, the greater the risk of a successful challenge if the contracting authority proceeds with the modification. However, the legal arguments are not the only factor determining where such a change sits on the ‘risk spectrum’. For example, there is likely to be a higher risk of challenge to modifications to contracts in highly competitive markets or in cases where the authority knows there were other potential suppliers aggrieved to have missed out on the opportunity when originally awarded.
The assessment can therefore be a complex and multifaceted one. However, a couple of general trends can be perceived in that:
(a) Generally, termination of a contract as a whole is unlikely to trigger a challenge – Unless there is a clear benefit derived by a contractor as a consequence of the termination (e.g. a substantial settlement payment) there would be little to be gained by a potential challenger so, practically, it is unlikely they would consider the expense and effort of a legal challenge to be worthwhile.
(b) Overall, reduction in value / scope of a contract is less likely to prompt a challenge – In practice for a challenge to be made there would usually need to be some level of reward for the challenger to be worth the expense and effort. This is less likely when a contract is being reduced in value / scope and potential challengers may be content to see their competitor receive less under the contract in question.
Records remain key
As in so many areas of procurement, it is highly recommended that the contracting authority’s decision making process concerning contract changes is recorded and retained. Where supported by legal advice, separating out this advice (along with any instructions given to the advisor to allow them to provide the advice) will increase the prospects that the materials will be protected from disclosure by virtue of legal advice privilege.
Other considerations?
Contracting authorities should also be mindful of their rights and obligations under the terms of the relevant contract. Termination without valid contractual rights to do so or executed in a manner contrary to that prescribed by the terms of the contract can be a breach of contract in itself and give rise to a claim for damages amongst other potential remedies.
As such, we recommend that contracting authorities carefully consider the terms of the contract prior to making any changes and ensure they follow any processes detailed within them, taking legal advice as appropriate.
Whether to proceed
Many contracting authorities may find themselves considering contract modifications amongst a range of difficult decisions to meet revised budgets. However, where that contract is the output of a regulated procurement, a careful and considered approach must to be taken in assessing the risks associated with such changes.
Burges Salmon’s market leading Public Procurement team frequently advise clients across the public sector including central and local government. Our team of experts are available to assist you in exploring these issues further.