Procurement in a nutshell – Brexit effects: contract review and risk management
22nd July 2016
As the dust settles following the UK's vote to leave the EU, it should be more apparent to both contracting authorities (CAs) and suppliers that, in the short to medium-term, it is business as usual.
However, as highlighted in our previous update, the long term outlook, or more specifically the post-Brexit perspective, remains filled with uncertainty.
While there is no need for any knee-jerk reactions, Brexit brings into focus the possibility for CAs to consider renegotiation of contracts. It is an advisable step for organisations involved in contractual relations to review contracts and manage risks.
The uncertainty created by Brexit impacts business priorities. CAs and suppliers may need to review current live projects. This may lead to the reshaping of projects, such as scaling back scope or duration.
What is vital is that CAs must ensure that modifications are compliant with the current UK procurement regime.
Change in public contracts
Making material changes to contracts can be difficult to achieve. Inadequate provision for the change in the original contract runs the risk that the amended contract may be considered to be a new contract. This would trigger the need to re-advertise the contract in the Official Journal of the European Union.
Variations permitted by the Public Contracts Regulations (PCR) 2015
For contracts advertised on or after 26 February 2015, regulation 72(1) PCR 2015 sets out the situations in which modifications are permitted.
- Where the modification, irrespective of value, is provided for in the initial procurement documents under a clear, precise and unequivocal review clause, so long as those modifications provided for do not alter the overall nature of the contract.
- Where the modification is for additional works/services/supplies by the original contractor that have become necessary and where a change of contractor cannot be made for economic or technical reasons and without significant cost or inconvenience to the CA. This is still only permitted if the increase in price does not exceed 50% of the original contract value.
- Where the need for the modification could not have been foreseen by the diligent CA and the modification does not alter the overall nature of the contract. Again this is still only permitted if the increase in price does not exceed 50% of the original contract value.
- Where a new contractor replaces the original one as a consequence of a review clause or where the new contractor is a successor to the old one following corporate restructuring, including takeover, merger, acquisition or insolvency. The new contractor must fulfil the criteria for qualitative selection initially established, provided that it does not entail other substantial changes to the contract.
- Where the modifications are not substantial, in accordance with the definition in Regulation 72(8). Under that paragraph, a modification is substantial if:
- it renders the contract materially different to the original; or
- it introduces conditions that would have (a) allowed for the admission of other candidates for the tender or (b) for the acceptance of a tender other than that accepted or (c) would have attracted additional participants in the procurement; or
- the economic balance is changed in favour of the contractor; or
- the scope of the contract is extended considerably; or
- a new contractor replaces the original one in cases other than those set out above.
- Where the value of the modification is below the applicable EU threshold and below 10% of the initial contract value for services and supply contracts or 15% for works contracts. The modification must not alter the overall nature of the contract. CAs should be aware that, for successive modifications, their value is to be calculated cumulatively.
Modifications to contracts awarded before 26 February 2015
Regulation 118 PCR 2015, as amended by the Public Procurement (Amendment, Repeals and Revocations) Regulations 2016, provides that as a general rule nothing in the PCR 2015 affects contracts awarded before 26 February 2015.
However the regulation provides that contracts awarded under the PCR 2006 (apart from public works concessions) are subject to regulation 72 of the PCR 2015.
Why is this important?
Amended contracts which should have been advertised in the OJEU may be found to be ineffective for breaching EU procurement rules. Where a declaration of ineffectiveness is made, the court must also order the CA to pay a civil financial penalty.
A further note of caution for CAs is that aside from the procurement regime there may be additional statutory obligations imposing constraints on the ability to renegotiate contracts.
For example, in the cases of R (Sefton Care Association and others) v Sefton Council  and R (Forest Care Home Ltd and Others) v Pembrokeshire County Council , two councils lost challenges to their decisions to fix residential care home fees by failing to assess the revised fees lawfully.
The renegotiation of contracts must be a comprehensive exercise taking into account:
- potential impact on service users and providers;
- compliance with statutory processes for making changes including the procurement rules; and
- ensuring that the impact does not risk or result in failure on the part of the CA to discharge its statutory obligations.
How can I find out more?
Brexit – what happens now? Get the lowdown on how the UK’s withdrawal from the EU could affect you. Click here to check out our guide to the essentials.
If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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