The pandemic and war in Europe have led to contracting authorities experiencing challenges as a result of increased costs and uncertainty of delivery to a greater extent than earlier. Hence, it is of particular importance that contracting authorities draft flexible contracts by including relevant and comprehensive amendment clauses.
The opportunity to make amendment to existing contracts has become particularly relevant in the last two years due to the geopolitical situation, pandemic, increased interest rate costs and inflation. Due to such rapid changes, the need to amend existing contracts has arised. This raises particular concerns for public contracting authorities, as the ability to make changes to contracts governed by the public procurement regulations is limited.
Changes and amendment clauses
Contracting authorities are not allowed to make "significant changes" to contracts which have been awarded pursuant to the procurement regulations. 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 bidder or expands the scope of the contract is prohibited.
The assessment of whether a significant change has been made to a contract is based on an individual assessment, and it may be difficult to draw a clear line between permitted and prohibited changes. The procurement regulations have created so-called safe havens by defining changes that are always permitted. For instance, changes made in accordance with amendment clauses which allow the parties to make alterations to the contract terms are permitted within the safe haven.
A common example of an amendment 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 amendment 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 bidder alone would bear the risk of the increased costs. This can be avoided if the contracting authority drafts contracts with amendment clauses permitting price adjustments in situations where costs have increased due to unforeseen events beyond the bidders realm of control. Further, contracting authorities may also draft amendment 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 and Industry expressed in his letters to procurement authorities of 30 May and 16 September, amendment clauses allow for balanced contracts, which encourages small firms to submit bids and thereby ensures effective competition in public tenders. Further, fair and balanced clauses for amendment of price can contribute to suppliers offering lower prices as they would not have to factor in as much risk in their bids.
Limitations and possibilities
However, even in contracts with flexible amendment clauses, a contracting authority's ability to make changes is not unlimited. In order to ensure equal treatment of all bidders, the procurement regulations set out strict requirements for the use of amendment clauses:
- Strict clarity requirement: Amendment 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 Appeal 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: Amendment clauses may never change the overall nature of the acquisition. This applies even if the amendment 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 suppliers 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 amendment clauses, a contract can function well for both parties – not only day-to-day, but also during pandemics, crisis or wars.
An alternative to implementing amendment clauses is to make changes in accordance with the rules provided in the procurement regulation, such as the exception for unforeseen circumstances, or to perform a direct acquisitions under the rules for procurement 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 amendment clauses in contracts is to the mutual benefit of both the contracting authority and the suppliers.