A material amendment to a public contract as a result of a settlement agreement between the Public Authority and the supplier, aimed at resolving a dispute that was raised due to difficulties of the supplier in performing the public contract will require re-tendering, to ensure respect for the Principles of Procurement (Transparency and equal/fair treatment).
Denmark entered into a long term contract with Terma through the Centre for Emergency Communication of the National Police of Denmark (the CFB) for the supply of a global communications system for emergency response services. The value of the contract was over €70m.
A dispute arose between CFB and Terma in relation to delivery deadlines. The parties agreed to settle the dispute by making the changes to the contract: (a) the scope of the contract was to reduce the supply of communication systems worth approximately €4.69m and (b) CFB would pay and buy two central server farms worth approximately €6.7m, which Terma had acquired with a view to lease them to CFB in performing the original contract.
CFB published a voluntary ex ante transparency notice (VEAT) in the OJEU (Official Journal of the European Union) of its intention to enter into a settlement agreement/amend the original public contract.
Frogne, which had not participated in the procurement process saw the VEAT Notice and brought an action against CFB before the national procurement body and Danish court of first instance (both rejected) and the Danish Supreme Court, which referred the matter to the Court of Justice of the EU (the CJEU) for a preliminary ruling.
The CJEU held that:
- Even though the amendment was a type of settlement agreement, a new tendering procedure should have been followed
- Even changes which reduce the scope can be material changes within the meaning of the Pressetext case (Directive 23/2014 was not in force at the time of the preliminary ruling). This was because a ‘smaller contract’ (following the reduction of scope of services of original contract) may attract wider interest and appeal to a larger number of economic operators. It is also possible that more candidates could be qualified to proceed to the competition stage.
- The absence of any intention to renegotiate was not a decisive factor. The CJEU restated the principle outlined in the Pressetext case and held that it is not permissible to substantially amend a public contract even if the ‘material’ amendments was not the intention of the parties to renegotiate the essential terms of the public contract but were driven out of ‘objective difficulties with unpredictable consequences encountered in the performance of that contract’.
- Although the concept of intention is referred to in the Pressetext case and in the case of Commission v France (C‑337/98), the CJEU limited the reference to Case C-337/98 to the specific factual context of the case). The CJEU stated that the question of whether there has been a material amendment is an objective question.
- The unpredictable nature of contract is not a justification and Public Authority ought to have planned and foreseen the difficulties. The CJEU held that the circumstances for a direct award under negotiated procedure without a call for competition were not available in this instance. The CJEU suggested that for public contracts which ‘because of their subject matter can be deemed as being unpredictable in nature’ and which therefore involve a ‘foreseeable risk that difficulties may occur at the implementation stage’, it is for the Public Authority ‘not only to use the most appropriate procurement procedures, but also to take care when defining the subject matter of that contract’.
- The CJEU, suggested that re-tendering could be avoided only if the Public contract provided for the possibility of adjusting certain conditions, even material ones, after the contract had been awarded and fixed the detailed rules for the application of that possibility. This is now Article 72(1)(a) of the 2014 EU Public Contracts Directive and Regulation 72(1)(a) of the Public Contracts Regulations of 2015 (as amended) – PCR15. By providing for the possibility of significant amendments in the public contract and the procurement documents leading to it the Public Authority ensures that all economic operators interested in participating in the procurement process are aware of that possibility from the outset and are therefore on an equal footing when formulating their respective tenders.
- By contrast, where such contingencies are not provided for in the contract documents, the requirement to apply, in respect of a given public contract, the same conditions to all economic operators makes it necessary, in the case of a material amendment to that contract, to initiate a re-tendering.
This decision is an important reminder to contracting authorities that a settlement agreement may amount to a modification of a regulated contract and prior to entering into any such agreement legal advice should be sought. Modifications of contracts post award can be made in certain circumstances provided that the provisions of Regulation 72 of Public Contracts Regulations 2015 (PCR) are respected. At the same time, as the Court has pointed out contracting authorities should take care when planning for a procurement that they are clear with regard to potential modifications that may be necessary in the course of the contract and how those would be applied in practice.
This decision is also an important one in relation to the use of VEATs. A contracting authority may use this method as part of its risk mitigation strategy, however, this may not be advisable in all circumstances especially where the modification has not been provided for within the contract documentation or cannot be justified for any other reason, as provided for in Regulation 72 PCR.