Changing a contract with a public authority: beware


If you have entered into a long-term contract with a public body, you may think it is open to you and the public body to seek to renegotiate its terms.   However, if the new terms mean that the contract is “materially different in character” from the original you may find that an argument is raised that the entire contract must be retendered or that it could be treated as terminated by the public body.

New regulations came into force on 26 February 2015 (the Public Contracts Regulations 2015/102) implementing EU Directive 2014/24.  A contract procured under the EU public procurement rules is considered to have been substantially changed where:

  • the new terms “would have allowed for” admission of other candidates, acceptance of another offer or “would have attracted additional participants”.  Therefore, a major change to the specification of the contract would be likely to fall into this category;
  • the economic balance under the contract has changed in favour of the contractor. Changes to the price of the contract or to the payment and performance mechanism lead to fewer deductions or more bonuses, for example;
  • the scope of the contract has been increased or decreased significantly.  If the contract is to be performed for two public authorities and not one or a large number of contracted services are removed from the contract, for example; or
  • a new contractor has been appointed.

However, the regulations assist by indicating where changes are insubstantial:

  • if the implementation of the change leads to a change in contract price which is below the threshold for a relevant public procurement and it is below 10% of the initial contract value (or below 15% for a contract for works); and
  • the change does not alter the overall nature of the contract.

In addition, the regulations do allow for four situations (described as providing “a safe harbour”) in which a substantial modification of the contract will be permitted:

  • where the contract contains clear, precise and unequivocal review clauses and the change has been made in accordance with these;
  • in a situation where the scope of the contract is increased leading to an increase in the price of the contract of up to 50% of its original value and the impact of a change in contractor is considered to be very difficult for the public authority to contemplate and would adversely impact the performance of the services, works or supplies under the contract (this has been described as the “too much hassle” principle);
  • where the change is brought about by unforeseeable circumstances, leading to a price increase of up to 50% of its original value and the overall nature of the contract is unaltered; and
  • where a restructuring, takeover or acquisition of the company of the original contractor (including on insolvency) leads to a new legal entity succeeding to the contract.

It is yet to be seen what the practical impact of these changes will mean for contractors and public authorities.  However, it could be argued that the new regulations do give greater certainty about what are permitted changes and that this will prove beneficial for both contractors and public authorities alike.

However, one new feature of the regulations is that they require that new public contracts must contain terms to allow the public authority to terminate the contract if a substantial modification has been made (as described above).  If this is not expressly written in the contract, it is to be treated as an implied term of that public contract allowing the public body to terminate on notice. Termination of public contracts remains an issue in the spotlight since the Treasury published its PPP Policy Note: Early termination of contracts in June 2015.  Of course, termination of a large public contract on grounds where the public authority has promoted the change may prove to have significant cost consequences for the public authority in paying appropriate compensation to the contractor, proving a significant disincentive to termination for the public sector.

Finally, it is worth reflecting that this new European and domestic legislation has appeared rather late in the day, following a significant amount of case law beginning with the case of Pressetext Nachrichtenagentur GmbH v Austria (C-454/06) in 2008.  It is to be hoped that this new legislation on changes does not fire the starting pistol on a further round of public procurement law challenges commenced in order to clarify the intention of what constitutes “a substantial modification” to an existing contract.

View by date:

View by author:

Would you like to hear more?