Contract Changes Jenny Mellerick CMG Procurement Litigation Conference 23 June 2016

Overview  Why are changes in public contracts a problem?  What are the rules in the new Directives on change?  How to protect against the risks of change  Future-proofing contracts and staying within the rules

Material Change – the Problem  Public procurement rules don’t end when contract awarded – continue on to regulate contract administration  Material change rules reflect this  Basic principle – if contract “materially” changed after competition, it is no longer the contract that was advertised  Treated as an illegal direct award of a new contract  Material change can also occur during competition

Material Change (2)  Prior to new Directives, a number of cases in European and domestic courts  Some key cases –Succhi di Frutta (CJEU) –Pressetext (CJEU) –Wall AG (CJEU) –R v Legal Services Commission (UK HC) –Copymoore (Irish HC)

Material Change (3)  Key takeaways from the case law –Properly drafted change clause, or change rules in tender documents, very helpful in arguing no material change, but very wide change clause is no help (Succhi di Frutta, Legal Services Commission) –Material change rules apply whether competition under Directives or general EU principles (Wall AG)

Material Change (4)  Pressetext – old “core” test for material change  Does change demonstrate intention to renegotiate essential terms of contract? –Affect participants in competition? –Affect outcome? –Change economic balance of contract in way not already provided for? –Considerably expand scope?

Material Change (5)  Examples of material changes under Pressetext –waiving minimum requirement at pre-qual – may have had new entrants –negotiating significant commercial changes with preferred bidder – could have affected outcome –paying contractor extra for work which was supposed to be in fixed fee

New Directives  New procurement Directives have incorporated Pressetext rules, but added other new “safe harbours” for change  A43 of Directive 2014/23/EU (Concessions)  A72 of Directive 2014/24/EU (Public Sector) –(Reg 72 of transposing Regulations)  A89 of Directive 2014/25/EU (Utilities) –(Reg 97 of transposing Regulations)

New Directives (2)  New rules apply to all changes made after 18 April 2016  If change does not fall within one of the safe harbours – must have new competition  Change rules refer to contracts and framework agreements

Safe Harbours  Change permitted, regardless of monetary value, where provided for in procurement documents in clear, precise and unequivocal review clause (e.g. price revision or options clauses)  Provisions must state the nature & scope of possible change and conditions under which they may be used  Cannot alter overall nature of the contract

Safe Harbours (2)  Additional works/services/supplies by original contractor become necessary, where a change of contractor: –cannot be made for economic or technical reasons eg requirements for interchangeability and interoperability and –would cause significant inconvenience or substantial duplication of costs  Must publish notice of change in OJEU  Public sector – each change limited to 50% value of original contract (indexed, if indexation clause)

Safe Harbours (3)  Change needed due to circumstances which a diligent contracting authority could not have foreseen  No modification to the overall nature of the contract  Must publish notice of change in OJEU  Public sector – each change limited to 50% value of original contract (indexed, if indexation clause)

Safe Harbours (4)  New contractor replaces original contractor due to –“unequivocal review clause” as with first safe harbour, or –another entity succeeds first entity due to corporate restructuring eg insolvency/takeover/merger etc  new entity must meet original pre-qual criteria  no other substantial mods to contract

Safe Harbours (5)  Change below EU threshold value and <10% initial value for service/supply contracts/ <15% for works contract  No modification to the overall nature of the contract  Successive modifications must be assessed on net cumulative value

Safe Harbours (6)  Change permitted, irrespective of value, if it is not “substantial”  “substantial” – change renders contract “materially different” from original contract –Pressetext tests for “substantial” change –New contractor outside circumstances in previous slide will also be “substantial”

Protecting from Risk/Futureproofing  Include termination clause to terminate in the event of material change – now required by law (Reg 73 (PS)/98(U), Article 44 Concessions Directive)  Termination is nuclear approach – better to plan for change  Change clause safe harbour gives wide scope for planning –focus at outset on what may change over the life of the contract –keep Pressetext in mind also

Risk/Futureproofing (2) –are there known add-ons eg if budget becomes available? Pre-price in tender (and flag from outset so market knows full potential value of contract) –get rates for additional services/supplies/works and evaluate –right to omit as well as add –benchmarking clause where inclusion at outset not feasible –value engineering clause

Risk/Futureproofing (2) –changes in personnel (if personnel assessed) –options to extend term –rights to assign/novate/sub-contract/add additional parties/step-in –technology refresh –change in law –“What else might happen? What will we do if it does?”

Risk/Futureproofing (3)  In competition – try to avoid obvious Pressetext pitfalls –material changes post-PT eg cap on liability –restrictive PQ requirements which may be dropped later eg high insurance requirements, personnel requirements, bond –ensure anything which could impact value of contract/market interest flagged in OJEU notice

Contract Changes Jenny Mellerick CMG Procurement Litigation Conference 23 June 2016