RIGHT TO MODIFY?

When can an existing public contract be amended without undergoing a new procurement process?

By Alistair Maughan and Sarah Wells

Across Europe, public bodies are under increasing pressure to streamline their services and ensure that their relationships with suppliers continue to deliver value for money. It is therefore common for a public body to seek to amend its existing contract to meet evolving requirements. But the EU procurement rules impose limits on the legitimacy of contract amendments, and that presents risks for both authorities and contractors.

Under the EU procurement regime, if amendments to an existing public contract are too extensive, the public body may find itself in breach of the public procurement regime – with the result that the amendment is susceptible to the risk of legal challenge.

A key 2008 European Court of Justice (CJEU) case from Austria established the principles and constraints within which authorities must work. And the updated EU legislation on which we reported in the Winter 2015 edition of the Global Procurement Quarterly codified the prior case law. Recently, a case in the UK has served as a reminder of the issues that public bodies and their contractors must consider if they wish to amend their existing contracts.

Gottlieb v. Winchester City Council

In 2004, Winchester City Council (WCC), entered into a development agreement for the redevelopment of the Silver Hill area of the city of Winchester, UK. In June 2014, the developer approached WCC to seek approval for amendments to the development agreement in accordance with its terms.

These amendments included removing the requirement for a bus station, removing the requirement for a market store, amending a provision in respect of affordable housing by substituting a financial contribution based on future viability of the scheme (up to the equivalent of 40 percent affordable housing), and increasing the rent payable by the developer as a result of increased retail space. The amendments were agreed to by WCC in August 2014. Mr. Gottlieb subsequently applied for a judicial review of WCC's decision to authorize these amendments, arguing that the amendments were materially different in character from the original contract to such an extent as to be tantamount to a renegotiation. Therefore, the amendments should be held to be unlawful because no new procurement exercise had been carried out.

When is an amendment a material amendment?

The court ultimately had to decide whether the amendments to the development agreement were so substantial as to require a new procurement procedure. Notably, this case was heard before the Public Contracts Regulations 2015 (2015 Regulations) came into force in England and Wales.1 Therefore, the decision had to be made based on existing case law – in particular, the CJEU decision in Pressetext Nachrichtenagentur GmbH v. Republik Osterreich.

The CJEU in Pressetext stated that amendments are material where they are "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." This would include amendments:

  • That introduce conditions which, had they been part of the initial award procedure, would have allowed for other tenderers to be admitted or for a different tenderer's bid to have been accepted;
  • That extend the scope of services to those which were not originally covered; or
  • That tip the economic balance in favor of the contractor in a manner not provided for in the terms of the initial contract.

With regard to other bidders, the court held that evidence of actual or potential bidders may assist, but was not required in assessing these facts. It can be sufficient to demonstrate that a "realistic hypothetical bidder" would have applied if the contract had been advertised.

Was the development agreement materially amended?

WCC argued that the amendments were made to the development agreement because the project was not viable on the original terms and, therefore, would not have been able to proceed had the amendments not been made. In assessing whether the amendments were material, the court had to look at each of the amendments made to the development agreement. For each amendment, the court held that:

  • Removing the requirement for a bus station meant the developer no longer had to pay for it and also would have increased profit making retail space. This change was not anticipated in the contract and a potential bidder could not have anticipated this change. Therefore, applying Pressetext, the court found that this was a material change to the contract because the economic value should be judged by potential profits to be obtained from third parties and not just from the value of the contract.
  • Amending the affordable housing requirement to permit replacement of affordable housing with an off-site sum towards affordable housing with a claw-back mechanism based on future profits was a material change because it would have made the contract significantly more valuable to bidders.
  • Extending the long stop date such that, instead of being able to terminate the contract within five years if specified conditions had not been discharged (or waived), an agreement was reached not to terminate prior to June 2015, benefited the developer by providing additional time for development and more time to recover its upfront costs.

The variation clause

Although a variation clause was included in the WCC contract, because the amendments made to the development agreement related to issues that played a "decisive factor" in the award of the contract, a fresh procurement process was still required. In addition, any variation clause should be specific and the invitation to tender should set out the relevant rules to maintain equality and inform potential tenderers that variation is a possibility.

In this case, WCC had absolute discretion on whether to grant approval under the variation clause. The court held that the variation clause was so broad and generic that it did not meet the transparency requirement.

The decision

The court held that there was evidence that other potential bidders, with a realistic prospect of success, would have bid for the contract. This was due to (i) the terms being more favorable following the amendments; (ii) Winchester being a place of desirable commercial opportunity and therefore attractive to other bidders; and (iii) other companies being in a position to have been able to bid. Thus, Mr. Gottlieb's challenge succeeded and the proposed amendment had to be unwound. The original contract remained in place without the proposed changes.

The 2015 Regulations

As noted above, the 2015 Regulations came into force in the UK in February 2015. The 2015 Regulations clarify when contracts can be modified without undergoing a new procurement process. Regulation 72 sets out specific circumstances in which a new procurement procedure is not required as a result of contract modifications, including:

  • Where any modifications, irrespective of their monetary value, have been provided for in the initial procurement documents in clear, precise, and unequivocal review clauses; price revision clauses or options may be included, provided that these state the scope and nature of possible modifications or options, as well as the conditions under which they may be used and do not provide for modifications or options that would alter the overall nature of the contract;
  • For necessary additional works (services or supplies) where a change of contractor cannot be made for economic or technical reasons (e.g. interoperability), or because such a change would cause significant inconvenience or substantial duplication of costs for the contracting authority; this is, however, subject to an increase in price not being above 50 percent of the value of the original contract;
  • Where the need for modification has been brought about by unforeseen circumstances and (i) the required modifications do not alter the overall nature of the contract; and (ii) any increase in price is not above 50 percent of the value of the original contract; and
  • Where the modifications, irrespective of their value are not substantial (e.g., the modification does not render the contract materially different in character from the one initially concluded, the modification does not extend the scope of the contract considerably, or a new contractor replaces the one to which the contracting authority had awarded the contract (unless such change is as a result of (i) an unequivocal review clause or option or (ii) a universal or partial succession into the position of the initial contractor by merger/ takeover/restructuring, etc., where such new contractor fulfils the original selection criteria, if such switch is not designed to circumvent the procurement rules and no other substantial modifications to the contract occur)).

Many of the factors set out in Regulation 72 effectively codify the principles set forth in Gottlieb v. WCC. Furthermore, under Regulation 73, contracts will be deemed to include a right of termination upon the occurrence of certain events, one of which includes material changes to the contractual terms. Thus, the 2015 Regulations should give more clarity to all parties concerned because a new procurement procedure must be followed for contract amendments unless the modifications meet the Regulation 72 requirements.

Footnotes

1 As previously reported in the Procurement Quarterly Winter 2015 edition, the 2015 Regulations implemented, within the UK, a number of EU-level changes to the procurement regime including simplifying the procedures to make the regime more flexible and widening access for SMEs.

INTERNATIONAL BRANDS MAY TRIGGER CROSSBORDER INTEREST IN EU TENDERS

The European Court of Justice extends applicability of general EU procurement principles to so-called "below-threshold contracts" in international brand case.

By Felix Helmstädter and Philipp Westerhoff

The Court of Justice of the European Union (CJEU) has recently clarified the procurement rules that apply to low value contract awards – and, in doing so, has raised the prospect that referencing an international brand in the technical specifications may trigger greater compliance requirements.

Introduction

It is generally known that, in the European Union (EU), the strict rules on public procurement, as prescribed by the harmonized framework of the EU Public Procurement Directives (PPD), apply when contracting authorities purchase goods or services for a price that exceeds certain financial threshold values. For public service and supply contracts, the current thresholds are set at €207,000 for local authorities and €134,000 for central government departments and agencies respectively. For public works contracts the current threshold is €5,186,000. However, so-called "below-threshold" (i.e., low value) contracts are a key economic factor within the EU. Around 82 percent of the total annual amount of EU-wide public expenditures, approximately €2,400 billion, involve low-value contracts. Thus, below-threshold contracts may still represent major opportunities for businesses operating in the EU. Nevertheless, depending on the relevant legislation in each Member State and the estimated value of the contract concerned, often no (or only rather vague) national rules apply to the awarding of such contracts. As a consequence, tender procedures are more often affected by the arbitrary practices on the part of the contracting authority or contracts are directly awarded without any competitive tendering.

Cross-Border Interest

In a recent decision, issued on April 16, 2015 (case C-278/14), the CJEU reaffirmed the importance of low-value EU contracts. The court emphasized that, where a contract has a "cross-border interest" (i.e., an economic interest for companies located in other Member States), it must still be awarded in compliance with the EU's general principles of equal treatment, non-discrimination, and transparency, as articulated in the Treaty on the Functioning of the European Union. In this regard, the decision is in line with prior CJEU rulings. According to the established EU case law, a cross-border interest may exist if, for example, the value of the contract only marginally falls short of meeting the thresholds, or there is a geographical nexus between the location where the contract has to be performed and an adjacent Member State.

The Impact of an International Brand Reference

In its recent decision, however, the court seems to extend the field of application of the general EU principles to contracts well below the relevant thresholds if certain other criteria are implicated.

The CJEU was asked by a Romanian court to respond to specific questions about a tender for a contract to supply computing systems and equipment valued at €58,000 (the threshold for supply contracts was €200,000 at that time).

In the tender documents, the contracting authority referenced a specific brand of microprocessor ("Intel Core i5 3.2 GHz or equivalent") as part of its technical specification and all bidders were required to offer a product that at least corresponded to the referenced processor.

The contracting authority rejected an offer that included a processor that fully complied with the requirements initially set forth by the authority. At the time it rejected the offer, the authority changed the technical specification, rationalizing that the manufacturer had stopped production of the referenced processor and substituted a next generation processor. The authority used the modified technical specification to disqualify the tenderer.

The court stated that the national court must assess whether the general EU principles are applicable in cases involving low-value contracts by analyzing whether a cross-border interest exists in the particular case. Nevertheless, despite the instruction to the national court, the CJEU suggested that, although the contract at issue had a value of less than €60,000, it could still trigger a cross-border interest because the "case concerns the supply of computing systems and equipment with the reference processor being that of an international brand."

Having indicated that a cross-border interest may be triggered by the reference to an internationally branded product, the CJEU applied the general EU principles to the case. The CJEU held that the contracting authority should be prohibited from rejecting the tender because there was no justifiable basis for modifying the original technical requirements. In particular, in the court's view, it is irrelevant whether or not the referenced product is still in production or available on the market. According to the court, the contracting authority is bound by, and cannot arbitrarily disregard, the conditions it imposed in the tender.

Procedural Minimum Standards for Below-Threshold Procurement

According to the CJEU decisions and corresponding EU Commission guidelines, once a cross-border interest is implicated, a contracting authority has to comply with a set of procedural minimum standards including:

  • Adequate advertising for the benefit of any potential tenderer;
  • Clear description of the subject matter of the contract;
  • Equal access for economic operators from all Member States;
  • Mutual recognition of qualifications;
  • Appropriate time limits;
  • Non-discriminatory contract award decision; And
  • Judicial protection.

Conclusion

The CJEU has equipped tenderers with additional arguments to force contract authorities to comply with procedural minimum standards even where a specific contract fails (by far) to meet the EU financial threshold values. In particular, it could be argued that a cross-border interest exists when a contract authority either references an internationally branded product in its technical specifications or whenever technical standards are defined, de facto, by global market players. The judgement also serves as a reminder, to contract authorities, to abstain from arbitrarily amending technical specifications or other tender conditions once a public tender has been advertised.

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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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