Beware of settling disputes through a variation to existing contracts

It is perhaps not surprising, in light of the complexities of public contracts, that disputes will arise with contractors and that settlement options will be explored to try to resolve such disputes and allow performance of the contract to continue. 

However, a recent decision from the European Court serves as a reminder that where such a settlement results in an alteration to the original contract, this may result in a breach of the Procurement Regulations and be vulnerable to legal challenge.

The issue

All of those who are involved in public procurement should be very familiar with the provisions of Regulation 72 of the Public Contracts Regulations 2015 (and the equivalent provisions in the Utilities Contracts Regulations and Concessions Contracts Regulations) which set out the limited circumstances in which a contract can be materially modified during its term, without breaching the requirements of procurement law.

But in circumstances where a public body is dealing with a contract which is subject to dispute and perhaps part of the contract cannot be performed in accordance with the original intention, it will be tempting to seek to resolve the dispute – perhaps in part by making a change to the contract to ensure that performance can be completed. It might not then be so obvious whether the Regulations have been breached.

This was the position faced by the Centre for Emergency Communication of the National Police, Denmark ("CFB") who had awarded a contract to Terma A/S following a successful tender for the supply of a global communications system common to all emergency response services and for the maintenance of that system for several years. Subsequently difficulties arose in meeting delivery deadlines with both CFB and Terma disagreeing as to which of them was making it impossible for the contract to be performed as stipulated. The parties subsequently agreed a settlement of the dispute whereby the requirements of the contract were varied from one valued at approximately EUR 70m to one valued at approximately EUR 11.5m for the provision of a radio communications system for regional police forces only and with CFB acquiring two central server farms which were originally intended to be leased to CFB by Terma. The parties agreed to waive all rights arising from the original contract other than those resulting from the settlement.

CFB published a voluntary ex ante transparency notice regarding the settlement agreement and a challenge was then brought by Finn Frogne A/S, which had not applied to tender for the original contract.

The matter was referred to the European Court which provided its judgment on 7 September.

The Court concluded that a material amendment to the contract cannot be made (unless specifically provided for within the Regulations – such as Regulation 72) without a new tendering procedure being initiated.  This is the case even where the amendment is, objectively, a type of settlement agreement, with both parties agreeing to mutual waivers, designed to bring an end to a dispute.

It is worth noting that the problematic change in the Danish case was the significant reduction in the value and scope of the contract, not an increase in value, scope or duration.  It is important for authorities to be alive to this point, both when settling disputes and when amending contracts "for convenience" under change control provisions.

What does this mean for public bodies?

Whilst it is always in the interests of parties to a dispute to reach a mutually agreeable settlement (indeed such an approach is encouraged by the Courts), in circumstances where a dispute arises over the performance of a contract awarded following a tender process, the scope for settlement may be significantly restricted where any such settlement would result in material changes to the contract.

Accordingly, public bodies should be very careful at how disputes are resolved and understand in advance what may or may not be possible through negotiation.

More generally, changes to public contracts may be permitted if the change control provisions are sufficiently clear and precise, anticipating the specific scope and nature of the possible changes and (preferably) the impact on price.  This case highlights the increased importance now of carefully considering the change control clause on a case by case basis when drafting the original contract, rather than treating it a standard boilerplate clause. 

Learn more

Learn more on this topic by contacting Mark on:  T: +44(0)117 915 4613, E: [email protected]