Post-contract amendments: The old world and the new world

19 February 2015

The extent to which you can amend contracts after signature is one of the most grey areas in public procurement. The European Court of Justice's decision in Pressetext made clear that material amendments to contracts would constitute the award of a new contract, which should be re-tendered. However, the Pressetext case and others since have given relatively little certainty as to what 'material' really means, meaning authorities and contractors must very often just take a risk-based approach to amendments. Is anyone going to complain about the amendment?  Is anyone even going to find out about it? 

On 22 January, the UK's High Court considered for the first time in any detail how the Pressetext case law applied to an actual contract amendment, giving some useful pointers. In addition, the new public procurement regulations, which enter into force at the end of February, add some additional considerations into the mix. In this article we'll consider what the law is now, and how it will change going forward. 

It all started with Pressetext

The key case was Pressetext which established that a material amendment to a contract would amount to the award of a new contract. That new contract should be put out to market with a full OJEU notice (assuming it was itself above-threshold and none of the exemptions in the Regulations apply) and failure to do so would expose the contract to the risk of a declaration of ineffectiveness.

Pressetext set out three situations in which an amendment would be a material amendment: if (i) it would have changed who bid for or won the contract; (ii) it extends the scope considerably to encompass services not initially covered; or (iii) it changes the economic balance of the contract in favour of the contractor in a manner not provided for in the original contract.  

There have been surprisingly few cases that have gone on to look at these principles in any detail:

  • Succhi di Frutti had established that there is no material change if the contract provides relevant detailed rules for the change. This was applied in the Law Society case to conclude that a wide change control provision was not sufficient. 
  • In Wall AG, the glamorous world of street toilet procurement taught us that substituting a key subcontractor could constitute a material amendment. 
  • Commission v Germany concluded that covering a new ambulance station was a material change – the new ambulance station increased by 15% the value of the contract, which the court held was 'considerably above' the procurement threshold. 
  • Commission v Spain related to motorway construction – the original notice covered construction of a new section of motorway, but the contract was materially amended to include works to other sections of motorway.

The lack of case law means that there are a number of lingering questions. For example, what is a 'considerable' change in scope of a contract? Is it related to the value of the contract? Will any above-threshold amendment be 'considerable' or should you look at the change in the context of the value of the contract? Some practitioners have concluded that a change in the region of 5% of the original contract value should not be material, but that is not based on any specific case law. Additionally, when is the economic balance of a contract changed in favour of the contractor? A number of contracts are concluded based on a specific margin - if the contractor gets more money on the basis of the same margin, is that a change in the economic balance? Similarly, if the contractor does more and gets more money, does that change the economic balance? 

The Edenred case – typical of the UK approach?

The tendency in the UK has been to assume that the UK courts would adopt a relatively authority-friendly interpretation of these rules. On 22 January, the UK High Court was asked to consider whether anticipated changes to a contract between National Savings & Investments and Atos, for back office operations, were 'material' changes. The changes were brought about by NS&I providing new services to HMRC/HM Treasury, which necessitated additional work by Atos for NS&I. The court concluded that the required changes were not material. There were several points made by the court that are of wider application:

-  the contract was sufficiently specific as it catered for any changes "to include the provision of future B2B services up to a financial ceiling of £2 billion". There was no need to spell out exactly what types of bank accounts might be delivered to exactly which government departments. Anyone bidding would have known that if NS&I were to open a bank account for another government department, the successful bidder would have to service that request. 

-  the types of services to be provided were not new or different; they "plainly fall within the scope of what was advertised". Any new services were therefore just 'more of the same', notwithstanding that they related to a different type of bank account with a somewhat different payment structure.

-  The change would not realistically have allowed for other bidders or a different successful bidder. It was not sufficient that, hypothetically, others may have been interested – there must be evidence which would demonstrate that there would have been someone else ready, willing and able to bid and that such a person had a realistic opportunity of being in the competition (by passing the PQQ tests or being chosen as a sub-contractor). 

-  Although Atos would receive additional payments, such payments were calculated using the same financial model and same profit margin, and were within the scope of the original OJEU notice. 

The case therefore gives helpful guidance, although to sound a note of caution, we note that European courts may yet take a different less liberal approach than the relatively pro-authority UK courts. Certainly we would not be surprised if future European case law on the Pressetext test suggested a somewhat stricter application was necessary. 

What's coming next?

The new procurement Regulations are due to come into force at the end of February and will to some extent simplify the situation. They create express safeharbours within which changes are not material. However, outside the safe harbours, the situation will remain the same. The thought process for an authority and contractor will be:

-  Do I fall within a safe harbour?  These include unforeseen circumstances or additional goods/services/works which only the current provider can provide – the details are set out in Regulation 72 of the Regulations.

-  Is the amendment below both the procurement threshold and 10% of the value of the original contract for goods or services or 15% for works?  This is of limited utility for high value goods or services contracts but may be more useful for works contracts.

-  If not, then the amendment must be assessed on the same basis as currently – simply a self-assessment of the amendment is 'substantial' (which replaces the court's 'material').  The Pressetext and Edenred case law will therefore still be relevant.

If you fall within a safe harbour or below the relevant value thresholds, then the new rules certainly provide greater certainty. However, one downside is that an authority will no longer be able to publish a VEAT notice to 'de-risk' the change. Such notices can only be published when relying on the negotiated procedure without notice, which will not be the case if falling within a safe harbour.

Conclusion

The Edenred case law and the new rules definitely give authorities and contractors greater certainty in some circumstances. Falling within a safe habour, in particular in relation to the value of the amendment, will give significant comfort. However, there will nonetheless be a remaining grey area in relation to self-assessing whether a change is substantial. In such cases, the Edenred case law will be helpful, and will no doubt be carefully scrutinised given how few other pointers there are in this area. However, it certainly does not answer all remaining questions. What it is notable though is that, despite much discussion about the Pressetext case law, very few cases have actually been brought in relation to post-contract amendments. The difficulties in obtaining evidence and perhaps the legal uncertainty have tended to limit challenges, and means that in practice a risk-based approach to self-assessment will almost certainly persist.