Risks of Brexit extensions for public contracts?

United KingdomScotland

The FT recently reported that “hundreds of government contracts with the private sector that are due to expire are to be automatically extended because civil servants are too busy with Brexit to focus on new and better-value tenders” (FT, 10 April). While the Government may have triggered Article 50, the procurement regulations include strict provisions on the circumstances in which public contracts can be extended beyond their term. If challenged, Government departments and other authorities subject to the regulations risk having unlawfully extended contracts declared ineffective and being fined by the Courts.

The prospect of existing contracts being extended may of course be welcome news to the current suppliers and contractors, but the potential risks of a subsequent challenge need also to be considered, in particular given that if challenged the rules afford authorities an implied right to terminate.

Reported Brexit impact on Government procurement

On 10 April, the FT reported that a procurement adviser to the government had said that around 250 government contracts are close to expiring or had already expired in 2016-2017, and that the resource implications of Brexit would mean civil servants simply would not have the time to initiate the necessary re-tender exercises. These contracts are said to cover a wide range of services, from health and justice to back-office processes such as pensions payments.

The Public Contracts Regulations 2015

The majority of higher value public sector procurement in England, Wales and NI is governed by The Public Contracts Regulations 2015 (the PCR 2015). Separate but essentially identical regulations apply in Scotland, The Public Contracts (Scotland) Regulations 2015 (the PC(S)R 2015), procurement being a devolved matter in Scotland. Both sets of regulations transpose into UK law the EU Directive on public sector procurement (Directive 2014/24/EU).

Implementing the Directive, both sets of regulations include a new provision on the modification of contracts during their term (Regulation 72). Regulation 72 contains an exhaustive list of grounds authorities can rely on to extend or otherwise modify public contracts. Where authorities seek to extend contracts and are not able to rely on one of those Regulation 72 grounds they are likely to be acting unlawfully, in breach of UK law.

Contract extensions and Regulation 72

When applied to contract extensions, i.e. where contracts are simply being rolled over beyond their terms, the first question is whether any extensions were envisaged in the contract and in the original procurement documents issued when the contract was tendered.

If not, it is likely that authorities will need to seek to rely on one of two specific provisions in Regulation 72, namely:

  • where additional services (or supplies or works) are needed and cannot for ‘economic or technical reasons’ be provided by a different supplier and where engaging a different supplier ‘would cause significant inconvenience or substantial duplication of costs' (Reg. 72(1)(b)); or
  • where the extension has been brought about ‘by circumstances which a diligent authority could not have foreseen’ and the extension does not change the overall nature of the contract (Reg. 72(1)(c)).

When relying on either of these grounds, the increase in the value of the contract must not exceed 50% of the value of the original contract. In addition, the authority must publish a 'Modification Notice' in the Official Journal of the European Union (OJEU).

There are other grounds in Regulation 72 that authorities could seek to rely on, but key questions are likely to be: (i) whether Brexit could be basis for invoking Reg. 72(1)(b) at all; and (ii) as regards Reg. 72(1)(c), whether Brexit can be considered to constitute an unforeseeable circumstance. Reading the recitals to Directive 2014/24/EU it seems this provision was intended for extensions during their term - and not extension of the term itself.

While the prospect of extending existing contracts may of course be welcome news to the current suppliers and contractors, they should also consider the risks of a challenge. Although not in the firing line themselves in terms of breach of statutory duties, they face the risk that their contracts are rendered ineffective and unenforceable.

Ultimately, the view of both parties may be that a limited extension of the contract is unlikely to provoke a third party challenge and is a risk worth taking (all other things considered). However, with an exhaustive set of modification rules set out in Regulation 72, any general reliance on the resource constraints of Brexit as being a valid basis for extending contracts is likely to present significant risks.