Modifications of contracts in times of unrest and unpredictability - limitations and opportunities

The opportunity to make modifications to existing contracts has become particularly relevant in the last two years due to the geopolitical situation, the pandemic, increased interest rates and inflation. Due to such rapid changes, the need to modify existing contracts has arisen. This raises particular concerns for contracting authorities, as the ability to modify contracts governed by the public procurement legislation is limited.

Changes and modification of agreement clauses

Contracting authorities are not permitted to make "significant modifications" to contracts which have been awarded pursuant to the public procurement legislation. A change which alters the overall nature of a contract will always be considered significant. This is for instance the case if the acquired product or service is replaced by something else. Further, any change which significantly alters the financial balance of the contract in favour of the tenderer, or expands the scope of the contract, is prohibited.

Whether a significant modification has been made to a contract requires an individual assessment, and it may be difficult to draw a clear line between permitted and prohibited modifications. The public procurement legislation has created so-called safe havens by defining modifications that are always permitted. For instance, modifications made in accordance with modification of agreement clauses which allow the parties to make modifications to the contractual terms are permitted within the safe haven.

A common example of a modification of agreement clause is the ability to adjust prices in accordance with a certain price index. Such a mechanism can satisfy the parties' need for price adjustments in normal instances, provided that the index is appropriate for the products and services in question.

However, there is a risk that such modification of agreement clauses may not be sufficient if the market has been affected by extraordinary price increases during the contract period.

In such cases, contracts may become unbalanced as the tenderer alone would bear the risk of the increased costs. This can be avoided if contracting authorities draft contracts with modification of agreement clauses permitting price adjustments in situations where costs have increased due to unforeseen events beyond the tenderers control. Furthermore, contracting authorities may also draft modification of agreement clauses which allow for the scope of the contract to be increased/reduced or the time of delivery, product quality, etc., to be adjusted.

As the Minister of Trade, Industry and Fisheries expressed in his letters to procurement authorities of 30 May and 16 September, modification of agreement clauses allow for balanced contracts, which encourages small suppliers to submit tenders and thereby ensures effective competition for public contracts. Furthermore, fair and balanced clauses for adjustment of price can contribute to tenderers offering lower prices as they would not have to factor in as much risk in their tenders.

Limitations and possibilities

Even in contracts with flexible modification of agreement clauses, a contracting authority's ability to make changes is, however, not unlimited. In order to ensure equal treatment of all tenderers, the procurement legislation sets out strict requirements for the use of modification of agreement clauses:

• Strict clarity requirement: Modification of agreement clauses shall be specified in the tender documents, and it should be evident which changes the contracting authority may make, to what extent and on what terms. The European Court of Justice and the Norwegian Complaints Board for Public Procurement ("KOFA") have set up a strict requirement of clarity to ensure that contracting authorities do not bypass the obligation to notifying tenders by exercising an unrestricted ability to make changes (see, for example, case C‑549/14 (Finn Frogne) and C-496/99 (CAS Sucucci di Frutta)).
• The performance cannot be changed to something else: Modification of agreement clauses may never change the overall nature of the procurement. This applies even if the clause is sufficiently clear. The contracting authority cannot allow for the acquired product or service to be changed to something other than what was originally published in the tender documents. As an example, KOFA has ruled that that a software provided as a cloud service is something else than a software delivered on premise, and that such a change is not permitted (see case 2018/7 by KOFA).

Market dialogues and adequate amendment clauses

It may be difficult or even impossible for the contracting authority to predict all potential challenges that may arise during the contract period and their remedies. However, market dialogue between the contracting authority and the tenderer in the preparatory stages of the procurement process may uncover a number of the challenges that may arise and should be addressed in the contract. By including relevant, comprehensive and clear modification of agreement clauses, a contract can function well for both parties – not only day-to-day, but also during pandemics, crises or wars.

An alternative to implementing modification of agreement clauses is to make changes in accordance with the rules provided in the procurement legislation, such as the exception for unforeseen circumstances, or to perform a direct award of the contract under the rules for procurements in situations of urgency. However, the threshold for the mentioned provisions is relatively high and does not offer predictability to the parties. Therefore, drafting relevant and appropriate modification of agreement clauses in contracts is to the mutual benefit of both the contracting authority and the tenderer.