COVID-19 related procurement is the gift that keeps on giving (at least for procurement professionals and aficionados). Dr Pedro Telles has now found another emerging procurement controversy concerning the modification of pre-existing public contracts to award ‘additional services’ to mine and analyse data to inform the UK Government’s response to the pandemic—as reported by the Guardian (12 Apr 2020) and, in more detail from a procurement perspective, by the Byline Times (22 Apr 2020) . I would expect Pedro to blog about it soon, so keep an eye on telles.eu.
In short—and setting aside the controversy that surrounds the links of the awardees with political figures in the UK and the US, which is nonetheless also rather worrying—the situation is that, in the context of boosting the UK Government’s access to data science analysis as an input to its broader decision-making on pandemic response, NHSX modified a pre-existing contract with Faculty, ‘which had a pre-existing contract with other companies to help build a £250 million artificial intelligence lab for the NHSX.’
This is another procurement exercise where there is very limited public information, so my comments are based on the Byline story taken at face value. Whether entirely accurate or not, I think the story raises an important set of questions on the limits of the extreme urgency exemption from procurement rules and its interaction with the regulation of existing contracts.
The questions that immediately spring to mind are: why would NHSX modify an existing contract, and what are the implications of the contractual expansion? Given the extreme urgency in gaining better insights on the evolution of the COVID-19 pandemic, which seems to me beyond doubt, would it not have been possible (as well as neater and easier to oversee and manage ex post) to directly award a new contract? Are there any particular implications of the choice to modify rather than award a separate contract?
Given the limited public information, all I can do at this stage is speculate. However, I think that some of the unanswered questions below should be added to the already lengthy list that should form the core of a post-crisis public inquiry into COVID-19 related procurement.
Rules on modification and extreme urgency
The modification of the NHSX contract would have been justified on the basis of reg. 72 of the Public Contracts Regulations 2015, which transposes Art. 72 of Directive 2014/24/EU. In particular, the Byline piece refers to reg.72(1)(b) and (c) PCR2015, both of which allow for a contractual modification of up to 50% of the value of the original contract. Both rules simply transpose the equivalent rules of Art 72 Dir 2014/24/EU and need to be interpreted in the same manner.
Awarding additional services in the way that NHSX seems to have done it boggles the mind, mainly because the award of the additional services to mine and analyse COVID-19 related data is unlikely to be covered by either of the two rules—which need to be interpreted restrictively [for details, see A Sanchez-Graells, Public Procurement and the EU Competition Rules (2nd ed, Hart 2015) 429 ff].
Reg. 72(1)(b) PCR2015 allows for a contract to be extended to include additional services that ‘have become necessary and were not included in the initial procurement, where a change of contractor—(i) cannot be made for economic or technical reasons such as requirements of interchangeability or interoperability with existing equipment, services or installations procured under the initial procurement, and (ii) would cause significant inconvenience or substantial duplication of costs for the contracting authority’.
To put it simply, reg. 72(1)(b) PCR2015 contains a rule concerning contract modifications for ‘more of the same’ services under the relevant contract. This is also the clear indication based on recital (108) of Directive 2014/24/EU, which states that: ‘Contracting authorities may be faced with situations where additional works, supplies or services become necessary; in such cases a modification of the initial contract without a new procurement procedure may be justified, in particular where the additional deliveries are intended either as a partial replacements or as the extension of existing services, supplies or installations where a change of supplier would oblige the contracting authority to acquire material, works or services having different technical characteristics which would result in incompatibility or disproportionate technical difficulties in operation and maintenance.’
Reg. 72(1)(c) PCR2015 allows for a non-competed contractual modification to add services to an existing contract where ‘(i) the need for modification has been brought about by circumstances which a diligent contracting authority could not have foreseen; [and] (ii) the modification does not alter the overall nature of the contract’.
Reg. 72(1)(c) PCR2015 contains a rule that gets close to the general possibility to award contracts without competition (under reg.32(2)(c) PCR2015). However, this possibility is subjected to the important constraint that it cannot be used to procure something different from the object of the original contract. This is also rather clear in recital (109) of Directive 2014/24/EU: ‘Contracting authorities can be faced with external circumstances that they could not foresee when they awarded the contract, in particular when the performance of the contract covers a long period. In this case, a certain degree of flexibility is needed to adapt the contract to those circumstances without a new procurement procedure. The notion of unforeseeable circumstances refers to circumstances that could not have been predicted despite reasonably diligent preparation of the initial award by the contracting authority, taking into account its available means, the nature and characteristics of the specific project, good practice in the field in question and the need to ensure an appropriate relationship between the resources spent in preparing the award and its foreseeable value. However, this cannot apply in cases where a modification results in an alteration of the nature of the overall procurement, for instance by replacing the works, supplies or services to be procured by something different or by fundamentally changing the type of procurement since, in such a situation, a hypothetical influence on the outcome may be assumed’ (emphasis added).
We are thus in a situation where the legality of the contractual modification will crucially depend on the object of the initial contract. However, it seems really difficult to see how what NHSX describes as a bespoke data store and dashboard to monitor the evolution of the COVID-19 pandemic (see eg this blog) can fit within the remit or previous contracts, not least because it is meant to ‘self-destroy’ after the pandemic: ‘When the pandemic abates and the outbreak is contained, we will close the Covid-19 datastore. The Data Processing agreements put in place with the organisations listed above include the steps which need to be taken to cease processing and to either destroy or return data to NHS England and NHS Improvement once the public health emergency situation has ended‘.
It is quite difficult to see how the services provided in the creation of the datastore and the dashboard can be additional (in the sense of interoperable or directly complementary) to what was already contracted (see eg a rather detailed description here, where there is no reference to population-wide dashboards), when the COVID-19 specific solutions will be completely abandoned and thus, arguably not support the functioning of the NHS going forward. It is also quite difficult to see how the services provided are not substantially different from what was covered in the original contracts.
Of course, it could be possible to find some compatibility if the original contracts were not for specific solutions, but rather for activities—but, even then, this seems to be a rather distorted use of the rules on contract modification.
Assuming modification was illegal, should we care?
Of course, the discussion above can seem rather academic. If the UK Government (including NHSX) was allowed to enter into direct awards on the basis of the extreme urgency procurement exemption (as I have argued myself, eg here), what difference would it make if the modifications were illegal?
I think there are a few relevant differences. The first one concerns the need to ensure that the distortions to the normal functioning of the procurement rules that ensue from their deactivation in cases of extreme urgency are contained and, mainly, result in clear and traceable creations of new contractual relationships that allow for ex post control and oversight. The second, more practical one, is that the remedies for breach of the relevant rules are different.
While a breach of reg.32(2)(c) PCR2015 in the context of the pandemic can leave disappointed tenderers and the general public without much of a remedy, other than the possible (but in my view, rather unlikely) payment of damages, a breach of reg.72(1)(b) and/or (c) PCR2015 can have more significant and lasting effects, as the remedies in that case include the potential termination of the original contracts (see reg.73 PCR2015).
Indeed, reg.73(1)(a) establishes that ‘Contracting authorities shall ensure that every public contract which they award contains provisions enabling the contracting authority to terminate the contract where—the contract has been subject to a substantial modification which would have required a new procurement procedure in accordance with regulation 72’.
Now, this opens another potentially tricky statutory interpretation issue, which concerns whether the implicit direct award of the contract for the additional services would have required a new procurement procedure under reg. 72, given that it could have been exempted under reg.32. This creates two possibilities (or perhaps there are some additional ones we could find with more time to think about it).
First, a functional interpretation along the lines of ‘the greater includes the lesser’, so that we could waive the potential termination of the contract even in case of breach of reg.72, given that the award of the implicit contract would not have in casu required a new procurement procedure.
Second, a more formalistic interpretation, under which the cause for termination could not be waived because reg.73 is meant as a safeguard against abuses of reg.72 and, thus, is unavoidably triggered the moment the boundaries of reg.72 are exceeded.
Whether one option is preferable to the other can be debated de lege ferenda. For now, de lege data, I would incline towards the second option, as I think this is the one more in line with the case law of the CJEU to date—in particular, Finn Frogne.
So, in my view, I think we should very much care that the rules on contract modification may have been breached, and this creates a risk of termination of the modified NHSX contracts.
Why would they modify rather than award fresh contracts?
The possibility and risk of termination of the pre-existing contracts must have crossed the minds of the lawyers advising NHSX. I think this cannot be a simple oversight or a massive discounting of the risk of termination. There are likely to be some reasons why the modification of a pre-existing contract was used at the same time as the UK Government was directly awarding rather substantial contracts (eg in the context of the Ventilator Challenge).
Those reasons are difficult to disentangle with the available information, but my hunch is that they relate to the intellectual property clauses in the contracts and the likely possibility for NHSX’s contractors to retain very valuable know-how and other IP-protectable outputs of the COVID-19 data store and dashboard project. If this was the implication of the decision to modify pre-existing contracts with potentially favourable terms IP-related terms, then the modification could have been used as a shield against some of the scrutiny that these contracts were known to be likely to attract.
All in all, I think there are very relevant questions on this legal strategy that NHSX needs to answer in the context of a post-crisis public inquiry.