Why modifying public contracts can be problematic

Modification of contracts which are subject to the public procurement rules can be problematic. If a significant change is made to an existing contract without a new procurement procedure, this can be considered to be the illegal direct award of a new contract.

Disgruntled suppliers who would have wanted the opportunity to bid for this work can challenge such a modification and sue for damages. Courts are able to declare illegal contracts ineffective and must impose a financial penalty on the contracting authority.

Regulation 72 – when can you make changes?

Regulation 72 of the Public Contracts (Scotland) Regulations 2015 is a welcome codification of the previous case-law concerning modification of contracts and sets out the circumstances in which a publicly-procured contract can be modified. Concluding that a proposed modification falls within one of these circumstances is not always easy, however, and the courts have generally adopted a strict approach as to whether Regulation 72 permits modification.

One of the circumstances in which contracts can be modified is where modification is provided for in the initial procurement documents in “clear, precise and unequivocal review clauses”. The difficulty here is being able to anticipate at the time of drafting the original contract what modifications may be required in the future. While the drafting must be sufficiently precise, it must be wide enough to be commercially useful and to cover eventualities which are, by their nature, not anticipated at the time of the original procurement.

Other circumstances where Regulation 72 permits modification include where no other contractor can provide the services which are the subject matter of the original contract (difficult in practice to establish); where the requirement for modification has been brought about by unforeseen circumstances (interpreted narrowly by the courts); and in some cases where there is a replacement contractor (e.g. because of corporate restructuring).

Regulation 72 also provides a de minimis exemption although the rules cannot be circumvented by making several separate modiciations of a minor nature as the overall value will be taken to be the net cumulative effect of all of the successive de minimis modifications. Regulation 72 also provides that modification is permitted where it is “not substantial”. There is some explanation of what is meant by this in Regulation 72(8) although some key terms are left undefined.

Other ways for authorities to mitigate risk

There are steps which a contracting authority can take to mitigate the risk of unlawful modification of publicly procured contracts including through the publication of Voluntary Ex Ante Transparency (“VEAT”) notices, although there are limitations to the protection which such notices provide. Separate, standalone contracts dealing with the subject of the modification may also be an option as long as the aggregation rules are not breached and it may also be useful to consider alternative contractual structures/ alternative procurement strategies (e.g. use of third party framework).

Although there will be difficulties for aggrieved suppliers seeking to challenge an illegal contract modification, particularly in relation to issues of proof and time bar, the consequences for a contracting authority of illegally modifying a contract are potentially severe. As well as the procurement compliance risk, there is always a risk that substantial modification of a contract without testing the market could constitute illegal State Aid and it may be difficult for the contracting authority to demonstrate that it has received value for money in relation to the contract modification.