UK: Procurement Problems In The Credit Crunch

Last Updated: 14 July 2009
Article by Sarah Hannaford, QC and James Thompson

Tender procedures for public contracts in this country are regulated by the Public Contracts Regulations 2006, which implements the European Directive 2004/18. Until recently, unlike in the rest of Europe, there have been few challenges to tender procedures in the UK courts. However, over the last few years disappointed tenderers have become less reluctant to take their complaints to the courts. But has or will the credit crunch affect this trend? And what sort of issues is the credit crunch throwing up for procurements?

The indications so far are that the credit crunch is unlikely to reduce the number of procurement challenges. With work thin on the ground, the importance of winning new contracts increases. If a tenderer is unsuccessful, contrary to its expectations, it may need to review the reasons for failing to win the contract more carefully than in a more buoyant market.

Inadequate Disclosure

One of the most fruitful areas of challenge recently has been inadequate disclosure by the employer of the intended basis for evaluation of tenders in advance. Where the evaluation is to be carried out to establish the most economically advantageous tender, the Regulations require disclosure at the outset of the criteria (such as price, quality and delivery period) on which the evaluation will be based, together with (in all but exceptional circumstances) the relative weightings of these criteria. However, case law has also established that the general European Treaty principles of equal treatment and transparency (set out in Regulation 4) require disclosure of all the elements to be taken into account by the contracting authority and their relative importance: see Case C-532/06 Lianakis v Alexandroupolis (2008). These principles have also been relied upon by the UK courts to find that employers who did not disclose sub-criteria and their weightings were in breach of the Regulations: see Letting International Ltd v London Borough of Newham (2008) and McLaughlin and Harvey v Department of Finance and Personnel (2008). Whilst there may still be an argument that information need not be disclosed to the nth degree (e.g. sub-sub-sub criteria), in the light of the courts' decisions so far, the message seems to be: Play safe and don't rely on undisclosed factors.

In the current economic climate, it is to be expected that disappointed tenderers will continue to scrutinise award processes to ensure that the evaluation matrix which was ultimately used was made known to them at the outset.

The Need For Change

The credit crunch is also raising its own issues. In particular, it is throwing up the need for change. The economic climate may require changes to deal with the insolvency of the contractor; the wish to re-scope a project to change the mix between residential and commercial property or affordable and private housing; or the need to increase the price.

The need to change may arise before or after the contract has been awarded. Whilst employers no doubt expect European law to be concerned with pre-contract changes, they might be forgiven for thinking that, once they have successfully carried out the procurement, without breaching the relevant Regulations, they are home and dry. Not so! Further pitfalls for the unwary arise if and when changes are made to an existing, properly procured contract.

There are two overlapping factors in determining whether changes are permitted, both of which arise from the need for transparency and equal treatment. Firstly, are the changes so material that they effectively create a new contract which should be re-advertised? Secondly, were the changes identified in advance - by a variation clause which complies with the obligation of transparency?

Is There A New Contract?

The European Court of Justice gave clear guidance on the "new contract" (or material change) issue in June 2008 in Case C-454/06 Pressetext v Austria, a case which related to post-contract changes. The dispute concerned a contract of indefinite length for press agency services. Various changes made to that contract over a period of years were challenged by a rival press agency on the basis that they constituted the award of a new contract, which should have been re-advertised. The changes included relatively minor changes in the price, all to the detriment of the contractor: including the change to the Euro and an increase in a rebate from 15% to 25%. There were also two more controversial changes: the change of contractor for part of the work and the waiver of the right to terminate for a 3 year period.

The Court's guidance was that amendments constituted the award of a new contract when they were materially different in character from the original contract and, therefore, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract. The Court went on to identify 3 situations in which an amendment can be material:

  • Where it introduces conditions which, had they been part of the initial award procedure, would have allowed for the admission of tenderers other than those initially admitted or would have allowed for the acceptance of a tender other than the one initially accepted.
  • When it extends the scope of the contract considerably to encompass services not initially covered.
  • When it changes the economic balance of the contract in favour of the contractor in a manner which was not provided for in the terms of the initial contract.

The Court considered that price changes, which were not anticipated in the original contract, could amount to breach of the principles of equal treatment and transparency. Nonetheless, the actual changes to the agreement were minimal and did not shift the economic balance of the contract in favour of the contractor.

The Court was also in no doubt that, as a rule, the substitution of a new contractor would be a material change, unless it was provided for in the initial terms of the contract. However, in this case, the facts were somewhat unusual. The new contractor was a wholly owned subsidiary of the original contractor. The original contractor controlled the new company and continued to assume responsibility for compliance with its contractual obligations. In these special circumstances, the Court considered that there was no material change and no new contract.

Finally, the Court also decided that the agreement to waive the right to terminate for 3 years was not a material change. It reached this conclusion on the basis that there was no suggestion that the parties would have considered terminating the contract over this period; that 3 years was not excessive in comparison to the time necessary to re-tender the contract; and it had not been shown that the waiver risked distorting competition.

Is The Variation Clause Transparent?

In English law, changes can be made to contracts provided that they fall within the scope of the variation clause. Wide variation clauses are very common in construction contracts. They frequently give the employer the right to add, omit or substitute work and to alter the design, quality or quantity of the work.

But do these wide amendment clauses comply with the European principle of transparency? A decision of the European Court of Justice about fruit and a decision of the Court of Appeal in relation to the provision of legal services suggest that such wide amendments clauses may breach this principle.

Case C-496/99P Commission v Succhi di Frutta (2004) concerned a tender by the Commission for the supply of fruit juice and fruit jams. At the time of tender, the successful contractors for the relevant lots were to be paid in apples. Tenderers had to identify in their tenders, the quantity of the fruit requested as payment. Tento Frutta tendered for Lot 1, offering in the alternative to be paid in peaches. This offer was accepted. Later, further fruits were introduced. Succhi di Frutta, who – as requested – had offered to accept payment in apples, started proceedings complaining of breaches of transparency and equal treatment. The Court decided that an employer was not entitled to amend the contract, after selecting the tenderer, unless it expressly provided for that possibility as well as for "the relevant detailed rules" in the invitation to tender. The Commission had not done this and Succhi di Frutta's complaint was upheld.

This was not just an obscure case about fruit, as the Court of Appeal found that the principles in the judgment had a rather wider applicability in R (on behalf of the Law Society) and Dexter Montague v Legal Services Commission (2007). The Law Society case related to a new contract between the Legal Services Commission and solicitors for the provision of legal aid services. The claim was that the unilateral power to amend in the contract contravened the principle of transparency.

The main power to amend was in Clause 13 of the contract, which provided, amongst other things, that the Commission had the right to amend the contract documents if and when it considered it necessary or desirable to do so in order to facilitate a reform to the legal aid scheme. The Clause also contained procedural requirements including obligations to consult and the requirement to give notice of amendments.

The Court of Appeal accepted that changes might become necessary or desirable during the life of a contract and that a contracting authority might need to reserve a power to amend However, it concluded that the power of amendment in this contract was so wide that it amounted to a power to re-write the contract and that it breached the requirement of transparency. It also decided that the European Court of Justice in Succhi di Frutta, when referring to the "relevant detailed rules", did not mean merely procedural rules i.e. consultation etc. The Court of Appeal also relied on the need in European law for the subject-matter of the contract to be sufficiently defined to allow a tenderer to understand what he was tendering for. The Court did not decide precisely what was required by the "relevant detailed rules" or when amendments would create a new contract. This was unnecessary, in the Court's view, as this contract was such an extreme case.

Where Does That Leave Procurements In The Credit Crunch?

At this stage, it seems unlikely that the credit crunch will cause the rise in procurement challenges to tail off. Failure to disclose full details of the evaluation criteria and their weightings has already been a successful ground of challenge. Employers should be aware that changes, not only during the tender process, but also after contract award may also be challenged. Although the Court in Pressetext decided, in that case, that changes in price and in the identity of the contractor did not create a new contract which needed to be re-tendered, the facts were unusual. The Court did make it clear that changes in the price and the contractor could, and often would, amount to material changes. Care will therefore need to be taken when making changes considered necessary as a result of the credit crunch to ensure that these changes do not transform the contract into something wholly different from that tendered. It is not yet clear how pragmatic the Courts will be in the face of more significant amendments than those in Pressetext or other wide amendment clauses. While the European Commission appears to be sympathetic to the current economic difficulties, for example in its statement of 19th December that the accelerated restricted procedure can be used for all major public projects throughout 2009 and 2010 in order to foster economies, this does not solve the difficulties inherent in making changes to contracts already let.

First published in Construction Law review 2009.

The articles and papers published by Keating Chambers are for the purpose of raising general awareness of issues and stimulating discussion. The contents must not be relied upon or applied in any given situation. There is no substitute for taking appropriate professional advice.

For further information on how our members can assist you, please contact the Senior Clerks, John Munton and Nick Child, in the first instance, on +44 (0) 20 7544 2600. They and their teams of Clerks will be pleased to advise you on the member of Keating Chambers appropriate to your requirements.

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