Time For Change

Jonathan Davey, Addleshaw Goddard LLP

Addleshaw Goddard's Jonathan Davey discusses the seminal Pressetext case and argues that the harsh rule, as applied in subsequent case law, is ill suited to the real commercial world, sets too low a bar, and does not appropriately (or proportionately) take account of the different circumstances applicable to complex and/or long-term contracts.

addleshaw

Since the seminal Pressetext case 10 years ago, it has been clear that EU law views changes, even relatively minor changes, to contracts awarded by public authorities and utilities, as having the potential to amount to the award of a new contract. Given that typically such changes during the term of a contract will not involve any advertising or adherence to any of the procedures set out in the procurement directives, the analysis will often be that such change equates to the illegal direct award of a new contract. Of course, serious consequences can flow from this if there is a challenge.

Subsequent case law makes it clear that this approach applies in principle even to changes concluded as part of a genuine settlement of litigation between the public authority/ utility and the contractor.

This article argues that this harsh rule is ill-suited to the real commercial world, sets too low a bar, does not appropriately (and proportionately) take account of the different circumstances applicable to complex and/or long-term contracts, and should accordingly be softened, either in the next round of amendments to EU procurement legislation, recalling (for example) that the Commission is required to review functioning of the Concessions Directive in 2021, or even in domestic legislation after the Consorzio case.

Admittedly, the harsh rule originally propounded in Pressetext was softened in the 2014 Directives so that there are now numerous carve-outs including a safe harbour provision based on the value of the change. However, practitioners generally find these carve-outs of limited usefulness in everyday commercial circumstances. This is especially the case because the limits for the safe harbour are very low, and because specific factual circumstances are necessary to access many of the carve-outs.

Viewed from the client's perspective, the rules on contract change are inflexible and do not comprehend the type of change which in parallel unregulated procurements is commonplace and non-controversial. The circumstances are often such that a change of contractor (if that is the result of a fresh contract award process) is not feasible, or at the least would cause undue disruption, uncertainty and cost.  Or that, given that a fresh competition would often involve retendering the whole of the service or supply concerned, running a procurement process would be disproportionate. Proportionality is of course a core principle of EU law. There must be a concern that overly-rigid rules in relation to contract change will result in public sector inefficiencies, with the public sector paying more for the works, supplies or services procured by way of a fresh procurement.

For example, who would argue that requiring a fresh competition in order to effect a £10M change to a 10-year £200M IT contract mid-term was appropriate?

In other cases, the expectation within the industry concerned given the complexity of the contract or other circumstances, is likely to be that change is to be expected. The Commission acknowledged as much, in a state aid context, in its analysis of the complex and long-term contracts awarded for maintenance and operation of parts of the London Underground system.

As an aside, it is sometimes a source of surprise that disgruntled potential tenderers do not object to repeated extensions to the duration or scope of a contract when they might be expected to be interested in securing business with the contracting authority concerned. Why is challenge of this kind not more prevalent? The most likely answer is that, in many cases, any potential tenderer is itself, in other contracts, the incumbent and has been or expects to be in receipt of similarly beneficial contract change. If such challenges become more prevalent, only the lawyers would benefit! It should also be the case that (if the assertion above that, in certain cases, change is to be expected is correct) then (even assuming that a potential challenger were to find out about a change) it may view change as unremarkable and unworthy as a basis for challenge.

One understands, of course, the twin mischiefs at which the rule is aimed:

  • it should not be possible to 'sweeten the deal' after contract signing in favour of the incumbent in a manner which involves unequal treatment of those who participated, or might have chosen to participate, in a competitive process for the contract as amended; and
  • authority requirements which are genuinely new, and do not deserve to be viewed as part of a pre-existing contract, should be the subject of a new award procedure.

In addition to the arguments already advanced, it might be objected as a matter of principle that the procurement rules are not properly to be used as an instrument for regulating the operation of a contract post-award, and that this should encompass not only the operation of a contract but changes to it in-life which would be expected by any reasonably experienced contractor operating in the industry concerned. The European Court arguably came close to suggesting the opposite in Pressetext where it looked at the non-exercise of an express contractual termination right in the context of possible contract change.

A couple of examples, which will be familiar to many procurement practitioners, will serve to illustrate the point:

  • real estate development:  these projects generally involve complex land assembly and often include public realm benefits offered by contractors as part of the broader understanding with a local authority partner. However, the detail of what is to be constructed is usually dependent on planning and other issues, and fluctuations in land values can impact adversely on the amount of public benefit which the contractor can realistically be expected to offer; 
  • complex and long-term IT and outsourcing projects: this was alluded to earlier. The reality is that re-competing is a sledgehammer to crack a nut when the contract is long-term and/or high value and (for example) additional equipment or services are required to reflect emerging customer need, in circumstances where the change is significant in absolute financial terms, but modest in the context of overall contract size.

It might be objected that authorities could do much themselves to avoid these situations arising: open ended frameworks with a single supplier and a capped value are possible; review clauses can offer an answer in some narrow factual situations; the carve-outs from the strict Pressetext rule set out in the Directives will sometimes be available. Much of this is of course based on a large helping of hindsight. And even if it is possible to draft and negotiate something clear, precise and equivocal, this is likely to be a time-consuming and expensive exercise and may complicate the evaluation process unduly.

So what is the alternative?

There is no discernible common approach looking at the procurement laws of developed systems outside the EU, though rules prohibiting or restricting material post-contract change are common.  Interestingly, Mexico has a PPP law which recognises the need for changes to PPP contracts intra-term.

It should be feasible to identify a closed class of contract types which are deserving of a more commercially realistic approach, in circumstances in which there can be a high degree of confidence that recourse to a fair and open competitive process is not realistic or proportionate.

What features might such a contract have?

Duration is likely to be a factor.  Shorter term contracts should not give rise to these issues. Five years might be a sensible cut-off. Perhaps with a remaining duration of, say, 2 or more years at the point of contract change, as in such circumstances the need for change can as readily be encompassed in a fresh competition.

We have defined "particularly complex contracts" before in EU procurement law, and it cannot therefore be argued that it is impossible to follow a similar approach in a slightly different context. Complexity might be defined (preferably non-exhaustively) to include deals involving complex real estate site assembly, provision of complex solutions such as IT, telephony and perhaps AI.

It could conceivably be provided that a mandatory VTN (so an "MTN"?!) must be published in any case where use of this exception is claimed, if some control were considered necessary. This is already contemplated in the Directives for certain types of change.

We have been here before: in the past an over- paranoid concern regarding the potential for misuse of negotiation led to overly restrictive requirements for use of procedures involving negotiation or dialogue. It cannot be argued but that distortions and inefficiencies were forced on contracting authorities, and costs, uncertainty and delay were imposed on bidders, by the inability to conduct the discussions which everyone knew were needed to deliver the most complex projects. Realism eventually prevailed, and as far as the writer is aware, there has been no tidal wave of inappropriate use of negotiation designed to favour certain contractors or resulting in other serious infractions of the fundamental Treaty principles with which procurement law is concerned.

Contract change is analogous. While there is at the core of Pressetext an undeniable and genuine concern that contract change could be misused, a proportionate balance needs to be achieved between that concern and the concern that legitimate change, of the kind accepted and indeed expected by contractors, is being stunted by the worry that change may not be legally compliant.

Change is needed.

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