The Law Society, R (on the application of) v Legal Services Commission

This is the judgment of the court, to which all of its members have contributed.

Provisions in the new Unified Contract between the Legal Services Commission (“the LSC”) and solicitors wishing to undertake publicly funded work contain extensive powers of unilateral amendment on the part of the LSC. This appeal concerns the compatibility of those provisions with general principles of public procurement law and with Council Directive 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts and public services contracts(“the Public Sector Directive”) and United Kingdom regulations dealing with public sector procurement, the Public Contract Regulations 2006 (“the 2006 Regulations”).

On 27 July 2007, Beatson J, sitting in the Administrative Court of the Queen’s Bench Division in proceedings for judicial review brought by the Law Society against the LSC, in which the Lord Chancellor and Secretary of State for Justice (“the Secretary of State”) was an interested party, made a declaration that the rights of the LSC to amend the Unified Contract referred to in clause 13.1 of that Contract (other than amendments permitted under clause 13.2) were incompatible with Regulations 9(2), 9(4) and 9(7) of the 2006 Regulations insofar as they were applicable to technical specifications (as defined in Regulation 9(1) of those Regulations).

He refused to make a similar declaration in the Law Society’s favour in relation to Regulation 4(3) of the 2006 Regulations. He gave the Law Society permission to appeal against that refusal, and at the same time gave both the LSC and the Secretary of State permission to cross-appeal against the declaration made in favour of the Law Society.

Concurrently with the Law Society’s application for judicial review, a firm of solicitors, Messrs Dexter Montague & Partners (“Dexter Montague”) had brought proceedings against the LSC in the Queen’s Bench Division for damages for breach of the LSC’s obligations under the 2006 Regulations in relation to the Unified Contract. Dexter Montague is based in Reading and, until it refused to sign the Unified Contract, handled about a thousand publicly funded civil cases per annum.

These proceedings were pleaded and advanced on identical grounds to the claim advanced by the Law Society, with the consequence that on 5 June 2007, by consent, the Master of the Crown Office ordered that there be a split trial of Dexter Montague’s claim, and that the question of liability only be referred to the Administrative Court to be determined at the same time as the judicial review proceedings brought by the Law Society.

Accordingly, and consistently with the declaration which he made in favour of the Law Society, in the Dexter Montague proceedings Beatson J. gave limited judgment on liability to like effect in its favour. He directed that the two consequential issues which arose in those proceedings (namely whether or not the publicly funded work undertaken by Dexter Montague would have reached the threshold required to subject it to the Regulations, and if so whether or not Dexter Montague had suffered any loss or damage) be heard separately. He also gave Dexter Montague permission to appeal against his refusal of relief under Regulation 4(3).

This court is concerned with only one, but important, aspect of the Unified Contract, namely whether or not the powers of amendment given under it to the LSC satisfy the transparency provisions of the 2006 Regulations. The appeals and the cross appeal do not embrace any wider considerations of the Unified Contract, which is a substantial document, running to some 96 pages with a further 123 pages (Part D) of specifications and rules covering all aspects of civil work. Nor do they concern certain matters decided by Beatson J which are not the subject of these appeals, namely that (a) the Unified Contract is not a public services concession (which would have put it outside the scope of the 2006 Regulations); (b) there has been no delay in the proceedings for judicial review; and (c) the Law Society has standing.

It should thus be made clear at the outset of this judgment that it is limited in its scope to a consideration of the one issue identified above. In particular, this court was not invited to rule on any other aspect of the Unified Contract, or on the changes introduced by the Secretary of State and the LSC to the system for public funding of legal services.

Beatson J summarised the origin and role of the LSC in the following way (paragraphs 6 to 11 of the judgment), which we adopt:

The financial aspects of the provision of services funded by the LSC were until recently governed by the Community Legal Service (Financial) Regulations 2000 (SI 2000/516) (the 2000 Regulations) as amended by the Community Legal Service (Financial) (Amendment) Regulations 2007 (SI 2007/906). However, following the publication of the report, Legal Aid: a Market Based Approach to Reform,by Lord Carter of Coles in July 2006, the government published a consultation paper, Legal Aid: a Sustainable Future, which set out its proposals for reform. The consultation period expired on 21 November 2006, whereupon the LSC and what was then the Department of Constitutional Affairs published a White Paper entitled Legal Aid Reform: The Way Ahead(Cmd 6993). As Beatson J. recorded (paragraph 2 of his judgment):

All general civil contracts between solicitors and the LSC were due to expire on 31 March 2007. The documents comprising the new Unified Contract were sent to solicitors under cover of a letter dated 27 February 2007, and the solicitors were required to complete, sign and return them to the LSC no later than 31 March 2007 if they wished to continue to undertake publicly funded work. It was common ground that the documents were sent to solicitors on what was described as a “take it or leave it” basis.

In his witness statement dated 19 April 2007, Mr Desmond Hudson, the Chief Executive of the Law Society makes a number of complaints both about the Unified Contract itself, and the timing of its introduction. For present purposes, his principal complaint is that the Unified Contract contains provisions giving the LSC a broad power to make unilateral amendments to the contract terms, including the technical specifications. These provisions, he argues, render it impossible for solicitors to determine with any reasonable degree of certainty what they will be required to do and on what terms over the contract period, and are unlawful.

Faced with the “take it or leave it” choice, many solicitors signed the Unified Contract. Amongst those who did not, however, was Dexter Montague. Its position is set out in the Particulars of Claim in its action against the LSC, in which it asserts that the inclusion by the LSC of the right unilaterally to amend parts of the contract, including its technical specifications, constitutes a breach of the transparency provisions contained in the Public Sector Directive. In paragraph 6 of the Particulars of Claim the firm asserts that the LSC owes it a duty under the 2006 Regulations:

Dexter Montague claims that the LSC is in breach of this duty and seeks damages on the basis that the breach has prevented it from signing the contract with the consequence that it has suffered a loss of profit on the work which it would have undertaken pursuant to the Unified Contact, together with loss and expense consequent upon the winding up of the firm’s civil legal aid practice.

The LSC’s response is contained in the witness statement of Ruth Wayte, its Legal Director. Having dealt in some detail with the events leading up to the despatch of the Unified Contact, she asserts that the LSC tried to set out the proposed reform programme as clearly as possible, and argues that since the specification to the Unified Contract sets out the payment rates, both firms of solicitors and the Law Society were made aware that the new fee schemes would lead to amendments to the contract, a fact which the LSC has made clear throughout the consultation and the implementation process. She also points out that 95% of solicitors signed the Unified Contract, and asserts that Dexter Montague is “very much an isolated case at present”. She argues that the latter’s stance illustrates that it is the fact that the proposals are in the public domain which has driven the firm’s decision rather than any lack of transparency in the process. In paragraph 27 of her statement she says:

The Unified Contract comprises: (1) the contract for signature by the individual contracting organisation, and schedules authorising particular offices within the organisation to provide services and specifying the maximum and minimum “starts” for a given period; (2) the standard terms which apply to all contracting organisations; and (3) the contract specification and payment annex.

The relevant terms are set out in Annex 1 to this judgment. The effect of clauses 7 and 10 is that a firm of solicitors entering into the Contract is required to comply with specified quality assurance standards, and its work must receive certain ratings determined by an independent peer review process. Higher ratings are required if the firm is to be eligible for a contract extension and to bid for a new Unified Contract.

The provisions for amendment are crucial to this appeal, and we shall deal with them more fully below. Clause 13 provides (inter alia) that the LSC may amend any of the terms of the Contract if it considers it “necessary or desirable to do so in order to facilitate a Reform of the Legal Aid Scheme” (clause 13.1). “Reform of the Legal Aid Scheme” is defined in clause 1 to mean such reforms as the LSC may wish to implement in order better to comply with its statutory duties or fulfil its statutory functions including (a) such changes as it wishes to make to, or as are related to the Community Legal Service, Criminal Defence Service, or both, consequent on, or related to, the paper Legal Aid Reform: the Way Ahead Cm 6993; or (b) new approaches to procurement and contracting for the provision of publicly funded legal services.

Provision is made for consultation on amendments (clause 13.3-7). The amendments take effect from such date as the LSC may specify, which (in general) is to be not less than 28 days after notice of the amendment is given if the LSC considers that there is an urgent need for compliance, and not less than 42 days after notice of the amendment is given in any other case: clause 13.8. A firm may terminate the Contract following an amendment which is not acceptable to it: clauses 13.13 and 30.2. Such a termination takes effect on the day before the amendment comes into effect. On termination the firm is immediately to cease acting for the clients concerned: clause 31.

It is common ground that in the material respects the 2006 Regulations faithfully implement the terms of the Public Sector Directive. We set out those provisions of the Directive which are of particular significance in Annex 2 to this judgment. For present purposes it is only necessary to point out that the Recitals make it clear that the Directive is based on the case-law of the European Court (Recital (1)); that it is subject to the principles of equal treatment, non-discrimination, mutual recognition, proportionality and transparency (Recitals (2) and (46), and Article 2); and that technical specifications must be set out in the contract documents (Article 23).

The critical Regulations are Regulations 4 and 9, the material parts of which are set out in Annex 3 to this judgment. It is only necessary at this stage to mention that Regulation 4(3) provides that a contracting authority shall “(a) treat economic operators equally and in a non-discriminatory way; and (b) act in a transparent way”; and that Regulation 9 contains elaborate provisions for the laying down of technical specifications in the contract documents, including a provision that where technical specifications are defined in terms of performance or functional requirements they must be “sufficiently precise to allow an economic operator to determine the subject of the contract …” (Regulation 9(7)). Regulation 47 gives a right to damages to persons to whom, but for a breach of the Regulations, a contract would have been awarded.

A critical feature of the judge’s judgment is the distinction he drew between the duty of transparency imposed by the Regulations on the LSC under Regulation 4(3) and that imposed under Regulation 9. In particular, he considered it significant (paragraphs 80 and 93 of the judgment) that Regulation 4(3) did not require the relevant information to be in the contract documents, whereas Article 23 of the Public Sector Directive and Regulation 9 provided that the specifications had to be set out in the contract documents.

In a very full and careful judgment, the judge’s conclusion was that there was no breach of the requirement of transparency in Regulation 4(3), because the identification and publication of the information about the parameters of the programme of reform and thus of the amendments contemplated enabled reasonably well-informed tenderers to interpret the scope of the amendments which were contemplated in the same way.

In particular, he found, the possibility of amendment was clearly stated in the contract documents. Although the power was very wide, it was not unlimited, since the exercise of the power would have to be in accordance with the principles governing the exercise of discretionary powers by public authorities, including propriety of purposes and the consideration only of relevant factors. In assessing transparency, regard had to be had to what was known about the intentions of the LSC: the parameters of the programme of reform and of the possible amendments had been identified throughout the consultation process, published in the White Paper, and set out on the LSC’s website. In assessing whether the obligation of transparency had been satisfied, it was also relevant that the present case was not one in which there had been a competitive bidding process where a choice had been made between bidders, since the Unified Contract had been offered to all organisations which had General Civil Contracts with the LSC, and the evidence was that new providers had also been given an opportunity of obtaining a contract, depending upon the coverage in any particular area, in accordance with the LSC’s bid rules.

The judge, however, reached a different conclusion in relation to Regulation 9. He found that if the standard of care to be used in providing the legal services, the quality assurance standards, and the key performance indicators could be amended unilaterally, the solicitors would not able to determine the level of service they were to provide. In a contract for services the quality and level of services were of importance and were part of the “subject” of the contract; the amendment provisions did not contain the criteria and parameters of change, and did not comply with Regulation 9(7).

On this appeal neither side supports the judge’s view that there is a decisive difference between Regulation 4(3) and Regulation 9 for the determination of the issues.

The parties were in agreement that there was an inconsistency between the conclusion reached by the judge in relation to Regulation 4 and that reached by him in relation to Regulation 9. The LSC and the Secretary of State argued that the reasoning that led the judge to find that the principle of transparency underlying Regulation 4 was satisfied should also have led him to the same conclusion in relation to Regulation 9. The Law Society and Dexter Montague argued that the lack of transparency that the judge found in relation to Regulation 9 was equally an infringement of Regulation 4. In these circumstances, much of the argument was applicable both to Regulation 4 and Regulation 9.

The Law Society and Dexter Montague accept that the principle of transparency does not prevent a contracting authority from reserving a right to amend the terms of the contract. But if the contracting authority wishes to reserve such a right, not only must all those who may be interested in the contract be informed of that possibility, but they must also be informed of “the detailed rules” governing its exercise (Case C-496/99 P Commission v CAS Succhi di Frutta SpA [2004] ECR I-3801, at [111], [118]) so that “the subject-matter of [the] contract [is] clearly defined” (Case C-340/02Commission v France [2004] ECR I-9845, at [34]).

The obligation of transparency is not satisfied here. The contract contains general and unlimited powers of amendment. It is not sufficient for the LSC to satisfy the obligation of transparency simply by virtue of the fact that the power of amendment is limited by public law limitations. Even if public law limitations may exclude purely arbitrary or improper amendments in fact being made, that is insufficient to satisfy the obligation of transparency in relation to the definition of the content of the rights and obligations of any contract on offer.

Nor is it sufficient for the LSC to satisfy the obligation of transparency by reference to the knowledge of solicitors as to the general parameters of reform which may be likely in the future. In fact it cannot be said that the scope of possible amendments is already known, since the power is not limited to amendments to give effect to proposals in the White Paper.

The judge rightly held that the reservation of a unilateral power to amend the technical specifications on such short notice creates an unjustified obstacle to the opening up of public procurement to competition contrary to Regulation 9(4). But this applies equally to Regulation 4(3).

Contrary to the judge’s view, it does not matter that there has been no competitive bidding process, because the uncertainty involved will necessarily deter service providers and because there is still a risk of favouritism or arbitrariness or other abuse in the exercise of the power of amendment which the principle of transparency seeks to preclude by a clear definition of the rights and obligations of the parties under any contract at the outset.

The essence of the case for the LSC and the Secretary of State is that the Unified Contract is compatible with the principle of transparency because it clearly sets out the power of amendment and the procedures for its exercise. Their principal attack on the judgment is that Regulation 9 is concerned with the specifications in the contract and does not deal with the right to amend. In particular, Regulation 9(7) does not relate to a power to amend technical specifications, and consequently a general power of amendment is in no sense incompatible with Regulation 9(7).

More generally they argue that in the competitive context, the purpose of the principles of equal treatment and transparency is to ensure that one tenderer does not obtain an unfair advantage over another, and the purpose of transparency is not to enable a party to avoid the effect of amendments of which it does not approve. The solicitors have a right to terminate if the amendments are unacceptable.

Where there has been no competitive bidding, the mere existence of a wide power to amend does not disadvantage a particular tenderer because the power applies to all. What is required to prevent discrimination or favouritism in favour of certain tenderers in a competitive context is not the same as what was required in a context such as this.

Amendment clauses form part of almost every type of contract, whether for works, services or supplies, whether public or private and whether subject to EU law principles or not. Without such clauses, the contract terms would be immutable and the contract would frequently become unworkable. The precise content, nature and effect of every amendment during the life of a contract cannot be anticipated or identified before the parties enter into the contract.

The LSC and the Secretary of State accept that purported amendments which depart substantially from the subject-matter of the contract may amount to a new contract which should therefore be the subject of a new tender exercise in accordance with the Regulations. Whether an amendment is so substantial as to require a new tender exercise is a matter to be judged at the time the proposed amendment is made, is a matter of fact and degree and will depend on factors such as the type and subject-matter of the contract, its factual matrix, the nature of the change, the reasonable expectations of the industry and industry practice.

The principal questions which arise therefore on this appeal are these:

What relevant principles are laid down by the Directive and theRegulations?

Is it sufficient compliance with the principle of transparency for there to be an express power of amendment in the contract?

Does it make a difference that there is no competitive tendering process?

What is the effect of the contractual provisions as to termination?

Does the Unified Contract satisfy the requirements of Regulation 4?

Does the Unified Contract satisfy the requirements of Regulation 9?

The Directive and the Regulations are concerned with the award of contracts by public authorities. Their objective is to open up public procurement to competition. To this end the award of contracts must comply with the principles of equal treatment, non-discrimination and transparency. Technical specifications must clearly set out the requirements of the authority so that tenderers will be aware of what they will be required to do under the contract for which they are tendering. This is an application of the principle of transparency.

This court was referred to several cases, almost all in contexts very different from the present case, in which the European Court has applied, or emphasised the importance of, the principle of transparency in public procurement.

In Case C-340/02Commission v France [2004] ECR I-9845 the European Court said (at [34]) that “the principle of equal treatment of service providers, laid down in … the Directive, and the principle of transparency which flows from it … require the subject-matter of each contract and the criteria governing its award to be clearly defined.”

The rationale of the principle has been expressed in a number of different ways:

This case is concerned with the compatibility of a unilateral right of amendment in favour of the LSC with the principles underlying the Directive and the Regulations.

It is clear that, where amendments to the tender criteria or to the contract are made after an award to one party, such amendments are liable to infringe the principles in that, had the other tenderers been aware in advance of the terms of the contract actually put in place, this might have affected the terms of their tenders. Such amendments can violate the principle of transparency and of equality of treatment.

Thus in Case C-87/94Commission v Belgium [1996] ECR I-2043, a case concerning an invitation to tender in an open procedure for the supply of buses, the Belgian local authority took into account fuel consumption figures submitted by a tenderer after the opening of tenders, and awarded the contract to that tenderer on the basis of figures which were different from those stipulated in the contract documents. It was held that a unilateral departure from requirements in tender documents which were to be understood as unalterable which favoured one tenderer without giving all other tenderers an opportunity to revise their figures was a breach of Belgium’s equal treatment and transparency obligations.

So also in Case C-496/99Commission v CAS Succhi di Frutta SpA [2004] ECR I-3801 (a decision to which it will be necessary to revert) there was a material alteration in the terms of contracts with the European Commission for the supply of fruit juice as aid to the Caucasus after the award of the contracts by tender. This was held to be a breach of the principle of transparency. The Commission could not subsequently amend the conditions of the tendering procedure, and in particular those relating to the tender to be submitted, in a manner not laid down by the notice of invitation to tender itself, without offending against the principle of transparency.

We have already summarised the relevant provisions of the Unified Contract, the principal provisions of which are set out in Annex 1 to this judgment. The most important, but not the only, provision in the Unified Contract allowing for amendment is clause 13. The following features of the power of amendment are relevant for present purposes:

The LSC has the power to amend the Contract Documents “from time to time” if they “consider it necessary or desirable to do so in order to facilitate a Reform of the Legal Aid Scheme” (clause 13.1(i)), where “Reform of the Legal Aid Scheme” is defined in clause 1 to mean such reforms as the LSC might wish to implement in order better to comply with their statutory duties or fulfil their statutory functions including (a) such changes as they might wish to make to, or as are related to the Community Legal Service, Criminal Defence Service, or both, consequent on, or related to the White Paper Legal Aid Reform: The Way Ahead or (b) new approaches to procurement and contracting for the provision of publicly funded legal services.

Other provisions of the Unified Contract which contain a power of amendment include:

Clause 11A.2 and clause 11A.6, which authorise amendments to the Civil Office Schedule.

In each Category of Law, Contract Work must achieve a rating of 1, 2 or 3 as determined by “the Independent Peer Review Process”. The Independent Peer Review Process is defined as the process described in a named document “or any document adopted in its place following consultation”. A rating of 4 as so determined (if confirmed) is a breach of contract and a rating of 5 as so determined (if confirmed) constitutes a fundamental breach: clauses 10.4 to 10.7. Consequently standards to which Contract Work must be performed, what counts as a breach and a fundamental breach of the Unified Contract, and the process by which the assessment of compliance is made may be amended by the LSC by the adoption of a different document.

So also the Unified Contract provides for Key Performance Indicators (KPIs), defined as “such measure of your performance as [the LSC] may specify”: clause 1. The Standard Terms list five current KPIs and indicate that the Unified Contract may be amended to make failure to comply with them a breach after 31 March 2008: clauses 10.9 to 10.11. It is also provided that [the LSC] “may at any time amend any KPI(s) and/or introduce any additional KPI(s)”: Annex G. The Unified Contract may also be amended so that failure to achieve them is also a breach of contract: Annex G. Accordingly what counts as a KPI and what may involve a breach of contract if it is not complied with may be unilaterally amended by the LSC.

Compliance with any amendment is from the date specified for it, and in principle the date is to be not less than 28 days after notice of the amendment is given if the LSC considers there is an urgent need for compliance and not less than 40 days after notice in any other case: clause 13.8.

A firm has a right to terminate if it is unwilling to accept the amendments, but the effect is that the termination has to take effect at the same time as the amendments, and in principle the firm has to cease acting: clauses 13.13; 30.2 and 31.2 and 31.3.

The LSC argued that the principle of transparency could not be infringed by the Unified Contract inasmuch as the likelihood that the contract would be amended was spelled out to all in advance and such amendments as were subsequently made would apply to all. When dealing with Regulation 4 the judge accepted this submission. He held:

The judge said that the possibility of amendment was clearly stated in the contract documents. Any problems caused by the provisions concerning the position of a firm which wants to disengage from legally aided work after an amendment are also not the consequence of a lack of transparency because the provisions about that are in the contractual documents and their scope is reasonably clear.

The Law Society accepts that the principle of transparency does not preclude the reservation for a contracting authority of any right to amend any of the terms of the contract. But, if the contracting authority wishes to reserve such a right, not only must all those who may be interested in the contract be informed of that possibility, but they must also be informed of “the detailed rules” governing its exercise: Case C-496/99Commission v CAS Succhi di Frutta SpA [2004] ECR I-3801, at [111], [118].

The essence of the case for the LSC and the Secretary of State, who also rely on Case C-496/99Commission v CAS Succhi di Frutta SpA [2004] ECR I-3801, is that the Unified Contract is compatible with the principle of transparency because it clearly sets out the power of amendment and the procedures for its exercise. Amendment clauses form part of almost every type of contract, whether for works, services or supplies, whether public or private and whether subject to EU law principles or not. Without such clauses, the contract terms would be immutable and the contract would frequently become unworkable. The precise content, nature and effect of every amendment during the life of a contract cannot be anticipated or identified before the parties enter into the contract.

If the scope of the actual amendments had to be identified in the contract documents, then an amendment clause would serve no useful purpose. It would prevent a contracting authority from using the clause to make any amendments after the conclusion of the contract, unless such amendments had been identified and formulated prior to the contract being amended. Such a step would not amount to an “amendment” of the contract at all, but simply the incorporation of a contractual clause stipulating the provision of services (or supplies or works) complying with different technical specifications at a set time during the currency of the contract.

In the present case the Unified Contract provided the procedural rules for doing so. These rules included provisions about when and how amendments could be made, notification, consultation, extensions to consultation periods, approval by Consultative Bodies, including the Law Society (under clause 13(ii)) and gave a right to services providers to terminate, on notice, following an amendment.

The LSC and Interested Party accept that purported amendments which depart substantially from the subject-matter of the contract may amount to a new contract which should therefore be the subject of a new tender exercise in accordance with the Regulations. They say that whether an amendment is so substantial as to require a new tender exercise is a matter to be judged at the time the proposed amendment is made, is a matter of fact and degree and will depend on factors such as the type and subject-matter of the contract, its factual matrix, the nature of the change, the reasonable expectations of the industry and industry practice. It is a constraint on the operation of an amendment clause. It does not make unlawful the inclusion of an amendment clause in a contract subject to EU law.

We do not consider that the fact that the Unified Contract contains express provision for amendment, and also includes a consultation procedure, is of itself sufficient to satisfy the principle of transparency.

The only decision of the European Court which is of assistance is Case C-496/99 P Commission v CAS Succhi di Frutta SpA [2004] ECR I-3801, and since both parties rely on the decision, it is necessary to deal with it fully. The decision of the European Court was on appeal from the Court of First Instance and concerned an invitation to tender (pursuant to Commission Regulations) for the supply of fruit juice as aid to the Caucasus whereby the supplier was to be paid in apples or oranges (as the case might be) held in the Commission’s intervention stocks. The possibility of withdrawing other fruit was not mentioned in the Regulations or in the invitations to tender.

A successful bidder (Trento Frutta) stated that, in the event of there not being enough apples in intervention stocks, it would accept peaches. When its bid was accepted the Commission notified the Italian Intervention Agency of the fruits which Trento Frutta would be able to withdraw. Subsequently there were Commission Decisions allowing the successful tenderers to substitute other fruits, and setting quantities.

An unsuccessful bidder sought annulment of a Commission Decision relating to substitution of products. as the successful tenderer would receive a given quantity of apples or alternatively other fruit. Subsequently, the Commission fixed coefficients of equivalence between the different fruit. The Commission Decision was annulled by the Court of First Instance and an appeal was dismissed by the European Court.

The Court of First Instance held that, when a contracting entity had laid down prescriptive requirements in the contract documents, observance of the principle of equal treatment of tenderers required that all the tenders must comply with them so as to ensure objective comparison of the tenders; and that the procedure for comparing tenders had to comply at every stage with both the principle of the equal treatment of tenderers and the principle of transparency so as to afford equality of opportunity to all tenderers when formulating their tenders. The Commission was obliged to specify clearly in the notice of invitation to tender the subject-matter and the conditions of the tendering procedure, and to comply strictly with the conditions laid down, so as to afford equality of opportunity to all tenderers when formulating their tenders. In particular, the Commission could not subsequently amend the conditions of the tendering procedure, and in particular those relating to the tender to be submitted, in a manner not laid down by the notice of invitation to tender itself, without offending against the principle of transparency.

The European Court re-iterated (at [109]) that the principle that tenders should be treated equally implied an obligation of transparency in order to permit verification that it had been complied with.

The Court went on:

This was a case where the Commission had not reserved any right to amend the contract terms, and where it was plain that the right to accept different fruits from intervention stocks might have significantly altered the tendering process. It was also a case in which the failure to give all tenderers the same rights affected competition, and infringed the principles of transparency and equal treatment.

That was the context in which the Court said that, if the contracting authority wished to be able to amend some conditions of the invitation to tender, after the successful tenderer had been selected, it was required expressly to provide for that possibility, as well as for the relevant detailed rules.

It is plain, however, from the facts of the case, and the context, that (contrary to the submission of the LSC and the Secretary of State) in speaking of the “relevant detailed rules” the European Court was not speaking exclusively of procedural rules. The whole point in that case was that all tenderers needed to know the conditions under which they were entitled to withdraw other fruits. That was not a procedural matter.

We do not accept, therefore, the submission by the LSC and the Secretary of State that the effect of Succhi di Frutta is that the principle of transparency is satisfied by an amendment power, however wide, if it is included in the contract and provides detailed procedural rules. It is clear that in the circumstances of that case the European Court was concerned with the substantive changes to the contractual terms relating to what fruit could be withdrawn from intervention stocks.

What is also plain is that among the most important factors for compliance with the principle of transparency are the definition of the subject matter of the contract and need for certainty of terms. That is why both Article 2 of the Public Sector Directive and Regulation 4(3) require the contracting authority to “act in a transparent way” and why Regulation 9(7) requires technical specifications in terms of performance or functional requirements to be “sufficiently precise to allow an economic operator to determine the subject matter of the contract…”

We do not consider that transparency was achieved by the limitations on the express powers of amendment which the judge perceived. The first point on which he relied was that any exercise of the power of amendment by the LSC would have to comply with principles governing the exercise of discretionary powers by public authorities, including propriety of purposes and the consideration only of relevant factors.

It is true that the LSC could not make arbitrary or improper amendments. That would follow not only from general principles of public law, but also from the Regulations and no doubt also from an implied term to that effect in the Unified Contract or from the express term (clause 2.2 of Unified Contract) that the LSC will act as a “responsible public body”. But that would not achieve the transparency of the contractual terms, any more than it achieved the transparency of the Commission’s actions in Succhi di Frutta.

Nor is it achieved by the point that the parameters of the possible amendments had been published in Legal Aid Reform: the Way Ahead. The right reserved to amend the contract under clause 13.1(i) “to facilitate a Reform of the Legal Aid Scheme” is on its face not limited to amendments to give effect to proposals in the White Paper. The power to make amendments is better to comply with the LSC’s statutory duties or fulfil its statutory functions. Changes consequent on Legal Aid Reform: The Way Ahead are merely an example of the changes which may be made, and even those may be changes which are “related to” the White Paper. The power also includes changes consequent on “new approaches to procurement and contracting.”

It cannot therefore be said that there are any effective limitations, still less that the parameters of change will be known to the profession. The power of amendment is so wide in this case that it amounts to a power to rewrite the Contract.

In this case the context differs from that of the cases decided by the European Court. Most of those cases involved contracts awarded under competitive tenders in which claims were brought by unsuccessful tenderers who had been competing for the contract. The Unified Contract was not the subject of competition.

The LSC did not offer a contract to any solicitor who wanted one (or for any amount of work a solicitor might want) or give any solicitor an opportunity to obtain one without any competition: it simply offered contracts to existing service providers who had General Civil Contracts with the LSC, and the LSC had stated that new providers would have an opportunity of obtaining a contract in accordance with its rules.

The judge’s view was that it was relevant that the present case was not one in which there had been a competitive bidding process where a choice had been made between bidders, since the Unified Contract had been offered to all organisations that had General Civil Contracts with the LSC, and the evidence was that new providers had also been given an opportunity of obtaining a contract, depending upon the coverage in any particular area, in accordance with the LSC's bid rules. Where there has been no competitive bidding, the mere existence of a wide power to amend does not disadvantage a particular tenderer because the power applies to all. He said:

We consider that the principle of transparency will not be satisfied in the present context if uncertainty as to the nature of effect of the amendments that may be made deters, or is liable to deter, some potential service providers from entering into the contract. The reservation of such a unilateral power to amend the contractual terms on such short notice creates an unjustified obstacle to the opening up of public procurement to competition. The uncertainty involved will necessarily deter service providers.

We further consider that a power to amend will infringe the principle of equal treatment if it permits amendments that may favour some contractors but not others.

The LSC and the Secretary of State accept that the fact that a firm has a right to terminate the contract if the amendments are unacceptable does not affect the outcome. This is no doubt because the consequences of termination (involving stopping work on all existing matters) would be such that it would be practically impossible for a firm with a substantial legal aid practice to terminate.

Mr Paul Darling QC for the Secretary of State advanced the following argument in relation to the termination rights granted to both the LSC and suppliers of services under the Unified Contract. The LSC has the right to terminate the contract on 6 months notice in order to facilitate a reform of the legal aid scheme. Suppliers have a right to terminate on 3 months notice. Why, instead of terminating and offering new contracts, should the LSC not have a power to amend in circumstances where those suppliers who were not content with the amended terms could themselves terminate? Under the first alternative those content with the new terms would enter into new contracts. Under the second alternative, those not content with the amended terms would terminate.

This argument did not lie happily with the concession made by Mr Jay QC that the LSC’s power to amend did not extend to amendments that constituted a “new contract”. Furthermore, Mr Darling’s submissions were not realistic. Solicitors who have subscribed to the Unified Contract will not readily be able to contemplate withdrawing from it on three months notice and the implications to which we have referred if they do so will be severe. It is the prospect of being faced with such a choice, when the terms and effect of possible amendments are uncertain, that the Law Society and Dexter Montague contend constitutes a significant inhibition on entering into the Unified Contract.

Consequently we are satisfied that the LSC’s right to amend the terms of the Unified Contract does not cease to be objectionable simply because firms who are not content with the amended terms have a right to terminate their contracts.

We accept that changes may become necessary or desirable during the life of a contract; and that a contracting authority may need to reserve a power to amend terms. It is not necessary to decide in this case what level of detail (substantive or procedural) the principle of transparency would require, or when amendments create a “new contract” which would engage the public procurement process. The reason is that this is an extreme case where the contracting authority has reserved to itself a virtually unlimited power of amendment, subject only to some limited procedural conditions. Indeed, the power to amend is better characterised as a power to rewrite the contract.

The judge’s characterisation (at paragraph 100) in the context of Regulation 9(7) of one of these provisions is equally true in relation to Regulation 4(3): “The provision in Clause 13.1(i) is insufficiently precise. The parameters and criteria for amendment are not indicated beyond the broad statutory objects. A firm or organisation cannot determine with what performance or functional requirements it may in fact be obliged to comply during the contract period and thus may be unable to assess whether to present a bid”.

The judge said that the fact that there was clarity as to the technical specifications at any given moment did not provide sufficient precision within Regulation 9(7) and sufficient prospective clarity during the performance of the contract. In the case of technical specifications, what was required was a definition of the object of the contract in sufficiently precise terms to enable interested undertakings to assess whether to present a bid and (Regulation 9(4)) to prevent the technical specifications constituting an unjustified obstacle to the opening up of public procurement to competition.

The judge accepted that it would be possible to amend the technical specifications during the life of the contract to take emergent technology into account without going through a fresh procurement procedure. Where the effect of a change did not alter the economic balance of the contract, a power to amend might not violate Regulation 9(7). But a power to amend could only be narrow, and had to be based on objective criteria.

In our judgment the extreme and unusual features of the power in this case impel the conclusion that the Unified Contract does not comply with the requirement in Regulation 9(7) that technical specifications in terms of performance or functional requirements must be “sufficiently precise to allow an economic operator to determine the subject matter of the contract…”

Case C-174/03 Impresa Portuale di Cagliari Srl v Tirrenia di Navagazione SpA was a reference on Council Directive 93/38/EEC (on procurement procedures of entities in the water, energy, transport and telecommunications sectors) in which the European Court was asked (inter alia) (a) whether the Directive applied to an award of a port services contract by a company whose activity was the shipping of goods and persons; and (b) whether the technical specifications required by Article 18 of the Directive had to be laid down before the selection of the successful bidder and whether they had to be publicised. Article 18 required contracting entities to include the technical specifications in the general documents or the contract documents relating to each contract. The provision imposed no other publicity requirement prior to the award.

The reference was withdrawn before a ruling was made, but after Jacobs A-G had delivered his opinion. He considered that the award was not subject to the Directive but was nevertheless subject to the principles of equal treatment and non-discrimination which implied an obligation of transparency. His opinion on question (b) was on the hypothesis that the Directive applied. He said:

There is no doubt that the Unified Contract lays down performance or functional requirements for the purposes of Regulation 9(7).

We accept that amendments to technical specifications may become necessary during the life of a contract and that a contracting authority may reserve the right to make amendments. Again it is not necessary to decide on the degree of specificity which must be reserved in the contract, because this is such an extreme case that we accept that reserving a unilateral power to insert new technical specifications, and to amend any existing technical specification, without any restriction is incompatible with the requirement in Regulation 9(7) to specify any such requirements sufficiently precisely to allow a potential service provider to determine the subject matter of the contract. A solicitor cannot determine in advance with what performance and functional requirements he may in fact be obliged to comply during the contract period. Again we emphasise that the power is not simply to make technical modifications, but to rewrite the performance standards.

Consequently, we agree with Beatson J that the Unified Contract does not conform to the principle of transparency, but we consider that that result flows not only from Regulation 9 but also from Regulation 4(3). In the result, therefore, we allow the appeal by the Law Society and Dexter Montague, and dismiss the appeal by the Legal Services Commission and the Secretary of State.

Clause 1 includes these definitions:

The Supplier is required by clause 7.6 to comply with the Quality Assurance (QA) Standard specified in the Key Information Tables (which are part of the Contract for Signature: clause 11.3). If the Supplier’s QA Standard is not the Specialist Quality Mark (SQM) and it ceases to meet its QA Standard, the LSC may require it to comply with the SQM.

Clause 10 is headed “Approved Personnel and Supervisors, standard of Contract Work, Independent Peer Review and Key Performance Indicators”, and obliges the Supplier to perform all Contract Work in a timely manner and with all reasonable skill, care and diligence. It provides (clause 10.4) that in each Category of Law, Contract Work must receive either rating 1, 2 or 3 as determined by the Independent Peer Review Process. It goes on:

Clause 11.4, under the heading “What are Key Information Tables?” provides:

Clause 11B is headed “Office Schedules – Crime” and provides:

Clause 13 is headed Amendments to Contract Documents and provides:

By clause 30 the Supplier has the right to terminate on three months’ notice: clause 30.1. The LSC has the right to terminate on 6 months’ notice, but only if it considers it necessary to do so in order to facilitate a Reform of the Legal Aid Scheme: clauses 30.3 and 30.4.

By clause 30.2:

The consequences of termination are set out in clause 31. They include:

When this Contract ends or your right to perform Contract Work in any Category of Law, Class of Work, or from any Office, ends you must immediately send us such Contract Report as we may require and Claims for all matters and cases that are not transferring to another Supplier.

The recitals include:

Article 2 provides:

By Article 23: