Substantially modified or just 'recycled'?: High Court ruling on public contract modification
Summary
In the recent case of James Waste Management LLP v Essex County Council, the High Court considered whether an in-term modification to the defendant council’s integrated waste handling contract (the Contract) was permissible under Regulation 72 of the Public Contracts Regulations 2015 (PCR). A procurement challenge was brought by James Waste Management LLP (James Waste) against Essex County Council (the Council), claiming that the in-term amendment to the Contract amounted to a "substantial" modification and was therefore not permitted by Regulation 72.
The Court rejected the allegations brought by James Waste and held that the amendments did not amount to a substantial modification. Consequently, the modifications were lawful without conducting a new procurement.
What are the practical implications of this case?
The judgment provides useful clarification on a question that often arises in practice: whether and to what extent a public contract can be modified without a new procurement process. The Court clarified the overarching principle of interpretation surrounding the 'safe harbours' in Regulation 72(1) and offered specific guidance on determining when an in-term modification to a contract is "substantial" within the meaning of Regulation 72(8). This is welcome clarification on principles which have only previously been considered in part in Edenred and Gottlieb v Winchester County Council.
Cases concerning in-term modifications and in particular the application of the indicators in Regulation 72(8) are inherently fact specific. Nevertheless, the judgment provides useful guidance of general interest for contracting authorities, service providers and procurement lawyers when considering in-term modifications and the risk of challenges by competitor providers. The case confirms that the safe harbours should be interpreted narrowly, but even on a narrow interpretation there are numerous factors to render modifications insubstantial in terms of regulation 72(8) and therefore permissible. The Court adopted a commercial and common-sense approach to the modifications and considered the initial contract and modified contract in the whole context of the Council's obligations to the county and the economic environment in both 2013 and 2021.
What was the background?
In 2013, the Council awarded a contract for the integrated waste handling to Veolia Environmental Services UK Ltd (Veolia). Veolia was responsible for managing Council recycling centres, waste transfer stations and the transportation of waste to different sites. A competitor of Veolia, James Waste, brought two claims against the Council, one of which related to modifications made to the Contract. The modifications involved Veolia providing additional waste processing services at other transfer stations not covered in the Contract. As this site was not owned by the Council, a different fee structure was also required. The Council implemented this modification in June 2021, and a challenge was issued the same month.
What did the court decide?
The Court dismissed all claims brought by James Waste, and the judge concluded that the amendments did not amount to a substantial modification. This was primarily because the economic balance was not tipped in favour of Veolia and it was not proven that an alternative supplier would have won the original tender had it incorporated the terms of the modification. Below we consider the Court's findings:
Overriding principles underpinning Regulation 72(1):
Regulation 72(1) sets out six "safe harbours" in which a public contract can be modified without the need to re-advertise the contract. The Court first considered how these "safe harbours", referred to as "gateways" in the judgment, should be interpreted. The Court, for the first time, confirmed that the rule at Regulation 72(9), stating that modifications require a new procurement, is the overriding position and the safe harbours are exceptions to this rule and as such the principle of narrow interpretation applies. Additionally, in a short but significant paragraph 46, the Court also expressed, as obiter, that despite the safe harbours being derogations to a general rule, the contracting authority is not under a "reverse burden of proof" to demonstrate that the modification is lawful, it is for the Claimant challenger to show, on the balance of probabilities, that the modification falls outside of 72(1).
Consideration of the "substantial modifications" indicators in Regulation 72(8):
The Defendant Council sought to rely on Regulation 72(1)(e) and that the modifications in question were "not substantial" therefore do not require a new procurement process. The Court then went on to consider four of the five indicators of "substantial" as defined in Regulation 72(8). In finding that none of the elements of substantial applied the Court explored the following:
Regulation 72(8)(a) "materially different in character"
The judge found the contract was not “materially different in character” by comparing the original and modified contracts. The modifications included a new site not owned by the Council, a different fee structure and a different location in Essex. The Court concluded that since none of these modifications provided additional services, the modification was a short-term contingency measure (five months of an eight-year contract) and the increase in price was minor compared with the overall contractual value (0.81% of the total cost) there was no material difference caused by the modification. The Court also commented that the original contract provisions showed intention to be flexible in terms of the number of sites and this was significant to consider.
Regulation 72(8)(b)(ii) "conditions that would have allowed for the acceptance of a different tender"
The Court outlined that the test for this indicator is whether there is a realistic prospect, rather than a fanciful possibility, that an alternative tenderer would have won the modified contract. However, it is not necessary to demonstrate that the alternative bidder would have secured the contract. The Court carried out a hypothetical exercise considering what the outcome would have been had the Contract been procured in its modified form and concluded that since the modifications were so insignificant a realistic prospect could not be established.
Regulation 72(8)(c) "change in economic balance"
Regulation 72(8)(c) states that if a modification "changes the economic balance" of a contract in favour of the contractor, the modification will be substantial. To satisfy this limb, the test the Court applied was whether the modification constitutes “reasonable compensation”, which demonstrates that there is no change in economic balance. In this case, termination was possible with one month's notice, the modification was a short-term contingency measure and the increase in price was linked to an increase in services delivered, where the original fee rates could not be directly applied, therefore there was no change in economic balance.
Regulation 72(8)(d) "considerable extension of scope"
Regarding Regulation 72(8)(d) this was explored briefly and the Court expressed that although the safe harbours are to be interpreted narrowly, the test for a "considerable extension of scope" should be interpreted in a common-sense way. The Claimant also submitted that an extension of scope should be deemed "considerable" where any extension has a value more than the operative threshold for the engagement of the PCR (at the time £189,330). The court did not endorse an approach that applied the threshold values in Regulation 72(1)(f) to the question of whether a modification is substantial.
Change clauses and the gateway at Regulation 72(1)(a):
Finally, the judgment also provides guidance on the Regulation 72(1)(a) “clear, precise and unequivocal” review clause safe harbour. In obiter remarks the Court held that to disregard the contractual requirements of a change clause is to render the presence of the clause as irrelevant since Regulation 72(1)(i) requires the inclusion of conditions in the change clause and that there must be substantial adherence to such conditions.
Case details
- Court: Technology and Construction Court
- Judge: Mr Justice Waksman
- Date of Judgment: 19 May 2023
