Making Changes Lawfully CMG Procurement Litigation Conference 18 October 2017 Jenny Mellerick, Partner

Overview Why change can be a problem How the 2016/2017 Regulations deal with it How to protect against the risks of change Future-proofing contracts

What’s the Problem? Public procurement rules don’t go away when contract awarded – continue to regulate contract over its life 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 eg scope change by tender stage from original OJEU ad

Case law Prior to new Regulations, 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) Edenred v HM Treasury (UK SC) Copymoore (Irish HC)

Case law (2) Key takeaways from the case law Properly drafted change clause/clear change potential alerts in tender document will be very helpful in arguing no material change, but very wide change clause is no help (Succhi di Frutta, Legal Services Commission, Edenred) Material change rules apply whether competition under Directives or general EU principles (Wall AG)

Material Change – pressetext Test 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?

Pressetext Test (2) Examples of material changes under Pressetext waiving pre-qual minimum requirement – may have had new entrants negotiating significant commercial changes with preferred bidder – could have affected outcome making a deal in a settlement - Finn Frogne case (CJEU) paying contractor extra for work which was supposed to be in fixed fee (eg to avoid disputes)

New Directives/Regulations New procurement Directives incorporated Pressetext rules, but added other new “safe harbours” for change A43 of Directive 2014/23/EU (Concessions) (Reg 43 of transposing Regulations) 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/Regulations (2) New rules apply to all changes to contracts made after 18 April 2016 (even for 2017 Concessions Regulations – all Regs backdated to same date) New Regulations – black and white if change falls within one of the safe harbours – ok if not – must have new competition Change rules refer to contracts and framework agreements

Safe Harbour 1 – Change Clause 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 Not clear what level of detail in clause required

Safe Harbour 1 – Change Clause (2) Should be one of the most useful safe harbours, because allows authority to plan for change However, lack of clarity about level of detail required unhelpful Edenred case an interesting example Outsourcing arrangement between public entity and private contractor Public entity provided services to other bodies and tender docs explicitly said aim was to grow these (with corresponding increase in work to outsourcer)

Safe Harbour 1 – Change Clause (3) Contract clause envisaged extension of business Confined extension opportunities to matters within scope of original OJEU Set out details on how new opportunities would be incorporated into contract, incl constraints on pricing and risk allocation UKCA had held met change clause safe harbour requirements; UKSC – inclined to agree but “open to debate” – looked at Dir recitals for examples and did not make a final finding Need guidance from CJEU

Safe Harbour 2 – Additional Purchase 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 Harbour 3 – Unforseeable Circs 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 Harbour 4 – Change in Contractor 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 Harbour 5 – Low Value Change Change below EU threshold value and <10% initial value for service/supply contracts/ <15% for works contract (for concession contracts, just 10% of initial concession contract value) No modification to the overall nature of the contract Successive modifications must be assessed on net cumulative value

Safe Harbour 6 – pressetext Tests 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 contractor change safe- harbour will also be “substantial” Again Edenred a good example – increase in value of £132.8m not “substantial” in this context due to pre-planning and transparency

Protecting from Risk/Futureproofing Include termination clause to terminate in the event of material change – now required by law (Reg 73 (PS)/98(Utilities)/44 (Concessions)) Termination is nuclear approach – better to plan for change Change clause safe harbour gives wide scope for planning (subject to judicial clarification) 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 - Edenred) get rates for additional services/supplies/works and evaluate right to omit as well as add (Finn Frogne) benchmarking clause where inclusion of rates/prices at outset not feasible value engineering clause

Risk/Futureproofing (3) 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 (4) 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 In summary – lots of options but planning is key

Questions?

This document is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed. © McCann FitzGerald, July 2017