The only waste is essex – new caselaw on contract modification

Contract modification under the public procurement rules has long been a hazardous area. The general position under Regulation 72 of the Public Contracts Regulations 2015 (PCR) is that in-life modifications require a fresh procurement process to be run, unless it can be demonstrated that the modification is not substantial or that one of the relevant safe harbours apply. The position is the same under the utilities and concessions regimes.

The recent case of James Waste Management LLP v Essex County Council [1]  examines the application of Regulation 72 in detail within the context of the variation of a waste contract by the Council.

There is limited UK caselaw on the application of Regulation 72 PCR. This case therefore provides welcome guidance on the law and expands upon the not-so-recent cases of Edenred [2] and Gottlieb [3].

FACTS

The case concerned a modification by the Council to an integrated waste handling contract signed in 2013 with Veolia, which was awarded following a competitive dialogue process. The modification – which amended various terms in relation to how Veolia's fees were calculated – was agreed in June 2021.

A claim was subsequently brought by James Waste Management LLP, alleging that the amendments to the contract amounted to a substantial (and therefore illegal) modification, under Regulation 72 PCR. The claimant argued that but for this breach, it would have been awarded an equivalent contract under a separate waste management framework.

DECISION  

The High Court rejected all of the claims. The judge held that the amendments did not amount to a substantial modification. Among other reasons, this was because the modification did not change the economic balance of the contract as a whole 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.  

While the findings in respect of the modifications to the contract are necessarily fact-specific, the judgment provides the following general guidance:

• The safe harbours under Reg 72(1) PCR (i.e. the circumstances where contract modifications are permissible) should be construed narrowly, as they "amount to derogations from the general rule" that such modifications are impermissible.
• However, notwithstanding this, a contracting authority is not under a "reverse burden of proof" to demonstrate that a modification falls within Reg 72(1).

More specifically, the judge said (in finding that none of the limbs of the substantial modification definition applied):

• Change in economic balance (Reg 72(8)(c)): the appropriate test for assessing this limb is whether the modification represents "reasonable compensation" – if it does, this indicates that there is no change in the economic balance.
• The modification introduces conditions that would have allowed for the acceptance of a different tender (72(8)(b)(ii)): the test is whether there is a "real" prospect (as opposed to a "fanciful" one) that an alternative tenderer would have won the modified contract. However, It does not need to be demonstrated that the alternative tenderer would definitely have won the contract.
• Considerable extension of scope (Reg 72(8)(d)): this test should be applied in a common-sense way; even when applied narrowly, application of these limbs must not deprive them of their real meaning. On this basis, the claimant's contention that any extension with a financial value in excess of the applicable PCR threshold should be classed as considerable, was rejected.

COMMENT

It comes as no surprise that this decision is concerned with variations to a waste contract. Many waste disposal and waste collection authorities are being forced to vary existing contracts whilst they wait for Defra to publish its response to the consultations on waste policy in England, which are now long overdue.  Without that strategic context it is difficult for both the public and private sectors to determine their future strategy and to begin to procure new contracts which will deliver that strategy.

More generally, the limited body of UK caselaw on substantial modifications is reflective of the lower number of procurement claims concerning contract modifications (compared to claims arising from losing bidders in competitions). One reason for this may be the generally limited amount of publicity around modifications. That will all change under the new Procurement Bill, which is now nearing the end of its long parliamentary journey. The new provisions make various procedural changes to the contract modification regime, including vastly expanded publicity requirements.

Contract modifications (except the most inconsequential) will have to be publicised in a new form of "Contract Change Notice", and contracting authorities must then observe a mandatory standstill period before implementing the modification.  As well as increasing the administrative burden for contracting authorities, this is likely to lead to greater scrutiny, and quite possibly, more claims.