A recent judgment of the European Court of Justice (ECJ), Finn Frogne (C-549/14), serves as a reminder of the usefulness and importance of clear and robust change provisions in contracts and careful planning at the outset of a procurement process. This is particularly the case for long term or complex contracts where adaptation, changes and amendments are highly likely during the life of the contract and may result in a material change to the scope or value of the contract.
In 2008 the Danish State awarded a contract, using the competitive dialogue procedure, for the supply and maintenance of a global communication system for all emergency response services. The estimated total potential value of the contract was nearly 71 million Euro. Approximately 40 million Euro of that total estimated related to the core requirements covered by the tender specification and the balance of approximately 30 million Euro was for additional requirements which were not guaranteed to be purchased. The contract ran into practical problems and a dispute between the contracting authority and the contractor, Terma, arose. The parties agreed a settlement of the dispute under which the scope of the contract was reduced to the supply of a radio communications system for the regional police force. The value of this reduced contract was approximately 4.69 million Euro. The contracting authority also agreed to purchase from the contractor two central server farms from Terma at a cost of approximately 6.7 million Euro. As part of the overall settlement both parties waived all rights arising from the original contract other than those arising from the settlement. Before finalising the settlement the contracting authority published a voluntary ex ante transparency notice (VEAT) in the Official Journal of the European Union.
Finn Frogne challenged the proposed settlement arrangements, arguing that this amounted to a material change to the contract, triggering the requirement for a new tender process. The case was eventually appealed to the Supreme Court of Denmark which sought a ruling from the ECJ. The question was, in summary, whether it is permissible to make a material amendment to a contract as a result of a settlement agreement designed to bring about the end of a contractual dispute.
The ECJ confirmed that the principle of equal treatment and obligation of transparency mean that amendments which render the contract materially different from that originally agreed are not generally permitted. This includes the situation where there is a reduction in the scope or value of the contract. The ECJ pointed out that a reduction in scope may result in the contract being of interest to smaller economic operators than originally was the case and that the minimum levels of ability required at selection stage might be lower than for the contract as advertised. The ECJ made it clear that the fact that the amendments were made as a result of a contractual dispute was not a justification or those changes being made without a triggering a new procurement process. The ECJ also rejected an argument that such amendments are justified because the nature of a contract, such as a complex IT contract, meant that the performance of the contract was unpredictable.
The ECJ commented that a contracting authority has the means available to deal with contracts which are unpredictable in nature. The contracting authority must take care to define the subject matter carefully but that it is also able to include contractual terms at the outset permitting amendments to the contract during the life of the contract. The ECJ confirmed that where there are appropriate express contractual terms covering adjustment of the contract then even material changes may be permitted.
This case was decided on the basis of the pre 2014 EU procurement law. The 2015 Public Contracts Regulations now include a specific provision at Regulation 72(1)(a) covering permitted modification to a contract where the initial procurement documents allow for modification in “clear, precise and unequivocal review clauses”. A broadly drafted, general review clause will not be sufficient. Review clauses must state the scope and nature of possible modifications and the conditions under which they may be used and the modifications must not alter the overall nature of the contract.