How should you go about varying agreements? Kieran McGaughey provides a practical checklist.
Turn and face the strange….
So sang David Bowie in 1971. Almost 50 years later, we are certainly “facing the strange”! The unique circumstances of this current pandemic have necessitated many changes to the way we live our lives and conduct our business. For local government lawyers, we are advising ever more frequently on variations to agreements. This includes service contracts, funding agreements and loans. From a safe social distance, this article aims to provide a practical checklist for lawyers of issues to consider when making those changes.
1. Clarify the scope of the variation
This is an important first step to discuss with your clients. The variation needs to be considered not in isolation, but with reference to the original agreement:
- What contractual obligations are going to change?
- Which will stay the same?
- Will any schedules change (for example the specification)?
- Is there a financial increase (or decrease)?
- Are the above changes: (i) time limited (as envisaged by the recent supplier relief PPN for example); or (ii) permanent?
2. Ensure the variation is permitted under procurement law
Is the agreement being varied a “public contract” within scope of The Public Contracts Regulations 2015? (covering works, goods or services) If so, you must ensure the proposed variation is compliant with Regulation 72. The full text of the regulation is available here:
and was considered in a previous article:
Whilst a full discussion of the various “safe harbours” is outwith the scope of this note, you may find it useful to consider some of the following questions (depending on the route to compliance being sought):
- What is the reason for the variation? This might include, for example, a corporate restructure or genuinely “unforeseen circumstances”.
- How do the changes affect the contract being varied - How “substantial” are they?
- What is the value of any financial change against the value of the contract being varied?
- How do the changes impact upon the “overall nature” of the contract?
- How do they impact upon its “character”?
(Note that for concession contracts, there are corresponding terms within Regulation 43 of The Concession Contracts Regulations 2016)
3. Consider other general legal obligations
Whilst Regulation 72 is often the most pertinent legal hurdle to overcome, you should also consider any other legal factors. For example, is the variation affected by any guidance (statutory or otherwise)?
Perhaps most relevant in this regard has been the spate of “PPNs” (Procurement Policy Notes) issued by Crown Commercial Services in recent months. Whilst not having the weight of statutory guidance (with the presumption of being followed), it is arguable that these should at least be “relevant considerations” for local authorities. It would therefore appear prudent to have regard to their contents when making a variation.
Whilst Regulation 72 and those PPNs apply only to public contracts, there are other legal considerations which apply to all public sector agreements. For example, where you are making a change based on a unilateral right to vary. In such cases, you must have regard not only to the specific contractual wording, but also your duties in exercising that discretion. The recent case Rail Franchising Litigation* procurement case confirms that:
“Where a discretion is not stated to be qualified, it remains subject to principled limits and may not be exercised on an unlimited, capricious or arbitrary basis.”
This may be relevant where, for example, you are relying on such a contractual term to vary the provision of grant funding or how services are to be performed. Or, where you have similar terms in contracts with members of the public (for gym membership, garden waste collection etc) The latter discretion is perhaps particularly likely to need to be exercised with caution and within sensible limits.
4. Check whether the State aid position is affected
This will be particularly pertinent in respect of funding agreements. Does the proposed variation affect your compliance with the State aid regime? Take for example:
- a funding agreement where the proposed change takes the payment beyond the de minimis thresholds.
- where the increase exceeds permitted aid intensities under GBER etc.
- a loan agreement where the changes mean the loan is now being given below market rates.
Again, there is a need here to review the original agreement and the compliant basis upon which it was made.
5. Consider other relevant background documents
This might include, for example:
- a Cabinet decision authorising the terms of the initial agreement;
- your Council’s standing orders/constitution;
- any overarching funding agreement; or
- any Parent company guarantee in place
You should consult the terms of those documents to ascertain whether the change is permitted. Take, for example, if your local authority is granting funds having received that money from elsewhere (central government, ERDF etc). You should firstly consult the terms in the overarching funding agreement to ensure your proposed variation is permitted. Likewise the specific wording of any cabinet approvals etc. In addition, a particularly high value variation (say for example in a PFI contract) may exceed the “key decision” threshold within your Council’s standing orders.
Depending on the terms of those background documents then, it may be necessary to revert back to the original funder/decision maker for approval.
6. Recording the variation
In the 2018 Supreme Court decision of Rock Advertising Limited v MWB Business Exchange Centres Limited, the Court confirmed that so-called “no oral modification clauses” are binding on the parties. Many public sector agreements will contain such clauses. Even where they don’t, it is always sensible to record your variation in writing.
Factors to consider here include:
- Is there an existing mechanism for varying the contract? (such as a “change control procedure”)
The safest route is often to follow this. If however there is a pressing need to agree the variation, you could consider wording along the lines of: (my emphasis in bold)
“Notwithstanding any other term of the Contract, the Parties agree to vary the Contract by incorporating the following terms into the Contract…”
(This was the template wording in the recent model terms issued within a supplier relief PPN)
- Consistency – is the variation consistent with the remainder of the original agreement?
On a practical level, when incorporating model clauses (whether for suppler relief or GDPR etc) you should be careful to ensure the terminology is consistent around “Supplier”, “Provider”, “Contractor” etc.
Likewise consider whether other existing clauses also need to be amended, to ensure the agreement reads clearly as a whole.
- Is there “consideration” (so as to make the variation legally binding)?
If in doubt, it may be best to add nominal consideration in your variation letter. Or, for particular high value amendments, to opt for a deed (just be careful to stand a metre away from the Mayor when sealing!).
7. Follow ups and formalities
As above, it is important to ensure the variation ties in with the original agreement. On a practical level, this might involve:
- Annotating the hard copy of the original contract post-variation
- Storing the variation letter/deed with the original
- Putting an obvious note on the file (whether physical or electronic)
You should also ensure the variation is communicated:
- Internally to all relevant stakeholders. For example, this might include finance teams, contract managers, procurement officers and client department; and
- Externally (where legally required) This might include, for example, any State aid notifications or where a notice is required to be published under Regulation 72.
Who said varying an agreement was straightforward? It is hoped however that by following the above checklist you can help ensure your variations are legally compliant and properly documented.