Subsequent Change of Circumstances in Public IT Development Contracts

Abstract

This master’s Thesis studied the extent of which strategic contracting within the framework of the Danish Public Procurement Act ensures the most effective handling of subsequent circumstances in Danish public IT development contracts. Thus, strategic contracting is characterized by the use of flexible and proactive contracts. The legal analysis identifies shortcomings in existing law, supporting necessary contractual adjustments for unforeseen circumstances. Particularly, the Public Procurement Act’s prohibition of making fundamental changes restricts the parties in exercising strategic contracting. Based on the economic principles of strategic contracting, the thesis conducts a normative analysis on whether and under which circumstances an implementation of proactive provisions and contractual safeguards can result in more optimal handling of subsequent circumstances. The analysis finds that complex and long-term contracts such as the Public IT-development contract result in more optimal contracting when using proactive contractual adjustment mechanisms combined with free ex ante and ex post communication. The analysis suggests that proactive provisions reduce transaction costs, minimize opportunistic behavior, signal credible commitment, and promote incentive compatibility, ultimately facilitating the realization of relational rents. Thus, the study found that the parties should implement hardship and gain provision clauses combined with an obligation to renegotiate when burdensome unforeseen circumstances arise. Based on the above-mentioned findings, the thesis discussed the viability of incorporating hardship and gain provision clauses within the constraints of the Public Procurement Act. The discussion points to legal uncertainty but evaluates that a potential justification of such clauses can be found in paragraph 183 of the Danish Public Procurement Act. However, the thesis concludes that the Public Procurement Act does not adequately support the contractual flexibility needed by the parties and thus hinders optimal handling of subsequent circumstances. The author suggests the need for greater flexibility in the procurement rules.