CHANGES TO CONTRACTS DURING THEIR TERM IS ONE OF THE AREAS IN WHICH PROCUREMENT LAW ADVICE IS MOST FREQUENTLY SOUGHT. THE PROCUREMENT ACT 2023 WILL MAKE SOME SIGNIFICANT CHANGES IN THIS IMPORTANT AREA.

Updated 19 January 2024

This post looks at the rules which allow a contract to be modified without the need to conduct a new procurement law-compliant process: as those used to dealing with procurement law will know, if a contract is substantially modified then that is treated as if a new contract had been awarded. What are the changes and what impact are they likely to have?

What are the key changes?

A modification to a contract usually will not have been advertised or the subject of any transparent award process. As a result, it will generally be considered to have been unlawful. In mitigation of this potentially-harsh position, the 2014 EU directives, which were largely copied out to constitute the Public Contracts Regulations 2015 (PCR), contained a number of softenings of that otherwise draconian rule.

Those softenings have been useful but are narrow. There are also gaps which negatively impact efficiency and certainty.

Has the Procurement Act 2023 (the Act) delivered a more liberal approach? The relevant provisions are in section 74 and schedule 8 of the Act and the answer is not clear cut:

• There are new softenings, but the opportunity to deal with a number of commonly-occurring situations has not been grasped
• There are some important elements of section 74 and schedule 8 which are not clear or where the drafters' commendable attempt to simplify and move away from 'Euro-speak' has potentially created some pitfalls.
• Arguably, one of the most important softenings (on business transfers) has been narrowed when it could have been widened or at least clarified.

Taking each of these in turn:

What are the new softenings? There are two principal new exceptions which, if applicable, obviate the need for a new award process:

• In cases of urgency and protection of life. The origin of this provision is obvious and is a natural complement to the provisions elsewhere in the Act which allow direct awards in similar circumstances.
• Materialisation of a known risk. This softening is odd, complex and likely not to be useable in all but a narrow range of situations.

What are the missed opportunities?

• It would have been very helpful in practice if the Act were to permit short extensions to longer-term contracts where the time remaining does not permit an orderly re-award procedure. While conceding that this could be seen as rewarding poor contracting authority practise in some cases, in others (for example where legislative change or a challenge to an award process import delays), this latitude would have been useful.
• Removal of the requirement, in the so-called 'safe harbour' provisions (now referred to as (non-) substantial modification), that the value of the contract modification be less than the applicable threshold value would have made the safe harbour provisions much more useful in practice. This requirement renders the safe harbour mostly useless for larger contracts, even where any independent observer would conclude that a new award process would be illogical and inefficient.

Where the act could be clearer: 

• The Act mirrors the PCR by defining what is and is not a substantial modification. While there is some welcome simplification, a new limb has been added which raises more questions than it answers. The Act states that a substantial modification is one that "increase[s] or decrease[s] the term of the contract by more than 10 per cent of the maximum term provided for on award". At first blush this might seem to be a welcome softening, but as this is part of a disjunctive set of tests, it could be read as requiring that an additional hurdle needs to be crossed before a modification is seen as non-substantial.

The changes on business transfers:

• The PCR permit contract modification without a fresh process in cases of "universal or partial succession into the position of the initial contractor, following corporate restructuring, including takeover, merger, acquisition or insolvency" – this is commendably broad (as caselaw has confirmed)[1]. And while the Act expressly refers to "novation or assignment" of a contract (which helpfully clears up a potential wrinkle in the PCR wording) the wording is arguably narrower than the PCR in two critical respects:
  • The relevant provision refers to the change being "required": when can it ever be said (even in the case of the insolvency of the original contractor) that a change of contractor is required, however desirable/efficient/appropriate it might be?
  • The Act's language ("following a corporate restructuring or similar circumstance") is significantly narrower than that in the PCR. Can these words stretch to encompass M&A deals or insolvency? Those types of operation seem well beyond the boundaries of "similar circumstance[s]".The potential ambiguity appears to have been addressed in the explanatory notes for the Act which suggest that "a corporate restructuring may include a business sale as part of a planned strategy or one that has been required following the insolvency of the supplier"..  
  • The Act does not echo the PCR's requirement that the replacement contractor pass the selection criteria for the original competition. While superficially welcome, this may have unintended negative consequences.

What does this mean for contracting authorities and suppliers? 

Unfortunately, an opportunity to make some significant efficiency-enhancing changes has been missed.

The new "materialisation of known risk" exception may sometimes be useful, but will need to be planned in from the outset and included in the tender and/or transparency notice for award.

Stakeholders are advised to watch out for Cabinet Office guidance, which may shed further light on the drafting intent behind the Act.