Introduction
On 19 May 2023 sitting in the Technology and Construction Court, within the High Court of England and Wales, J Waksman handed down his judgement in James Waste Management LLP v Essex County Council.
The decision in question concerned whether a local authority had lawfully modified its contract with a waste management company under the Public Contracts Regulations 2015 (PCRs).
In terms of the facts, the Council had awarded a contract to Veolia, with an option to extend its term (the “Veolia Contract”). At the time this contract was entered into, it was envisaged that a mechanical biological treatment facility would be built and commissioned in the local area, but unfortunately that project ultimately did not proceed, which meant that the Council had to put alternative arrangements in place.
Around eight years into the term of the Veolia Contract, the parties agreed to a variation to the contract which allowed the Council to send waste to a new Waste Transfer Station for onward transfer to an alternative processing facility. This had a direct impact upon James Waste Management LLP, as they had been providing similar services under an alternative contract, which would no longer be continued. James Waste Management challenged the variation to the Veolia Contract on a number of grounds.
The default position under Regulation 72(9) of the PCRs is, when a modification is made to a public contract, a new procurement process should be instigated. That said, Regulation 72 provides a set of “gateways” (also known as “safe harbours”) to this general rule enabling modifications to be lawfully made in set circumstances.
The decision in James Waste Management addresses Regulations 72(1)(a) and 72(1)(e) which permit modifications where there is a review clause, or where the proposed modification is “not substantial”. We have looked at the court’s judgement in relation to these gateways below.
Regulation 72(1)(a): The Importance of Following a “Clear, Precise and Unequivocal Review Clause”
The Contract had a detailed and complex change mechanism. Interestingly, notwithstanding this, the court noted that although it made clear that certain types of change were not permitted, it did not specify exactly what types of change were permitted.
However, perhaps the most important lesson to take from this judgement is the court’s strict approach to Regulation 72(1)(a) of the PCRs. This “gateway” establishes that a modification may be lawfully made to a public contract where that modification is detailed within a “clear, precise and unequivocal review clause”.
In this dispute it was held that the local authority had, in practice, “disregarded” the steps outlined in the review clause. Instead, it was found that the parties arrived at a convenient commercial agreement.
The court noted that in order to use such a review clause you need to follow its terms, noting that making use of such a clause involves a strong element of overt transparency, which is the price to be paid for invoking it. As such, the court noted that had the Council needed to rely upon Regulation 72(1)(a), it would have been unable to do so.
The Court then went on to consider whether the modification was substantial.
Regulation 72(1)(e): When is a modification substantial?
The second “gateway” that the court considered is detailed in Regulation 72(1)(e). This gateway permits a modification where the modification is “not substantial”.
The question of when a modification is “substantial” is defined separately in Regulation 72(8) with the decision in James Waste Management further clarifying the interpretation of this regulation. The examined triggers for being “substantial” are discussed below.
Regulation 72(8)(a): Does the modification change the character of the contract?
According to the PCRs, if a modification changes the character of a contract, then it will be substantial. In this decision, J Waksman observed that changes made to the fee structure and location where waste was to be transported under the contract would not alter the character of the contract as it was still “concerned with the haulage and disposal of waste” and the contract didn’t specify one site only.
As the modification was only intended for a short period of time, it did not render the contract “materially different” to that which was originally agreed.
Regulation 72(8)(b)(ii): Would the modification, were it part of the initial tender, have led to a different result?
Regulation 72(8)(b)(ii) provides that a modification will be substantial where that modification introduces new conditions that, were they part of the initial procurement process, would have allowed for the acceptance of a different tender. Clarifying the scope of this Regulation, J Waksman held that this condition would apply where a “realistic” bidder could have come forward. A realistic bidder is one who can be said to have a prospect of success that is “not fanciful”.
For this regulation to apply the hypothetical bidder will not need to be destined to win but they should have a competitive chance of winning the tender. The Claimant could not demonstrate that one of the other bidders would have won if the modification was in the contract from day one.
Regulation 72(8)(c): Does the modification alter the economic balance of the contract?
Regulation 72(8)(c) was also clarified within the decision. This regulation provides that where a modification alters the “economic balance” of an agreement, then a modification will be substantial. The judge in this case noted that a mere change in the method of and amount of payment (provided the new amount was at a reasonable rate when contrasted with the original rate) in exchange for the modification would not alter an agreement’s economic balance.
In this case, the court felt that the change in remuneration was appropriate as it amounted to a “very short-term and a very small ‘one off’ addition, to the original contract”.
Regulation 72(8)(d): Did the modification lead to a significant extension in scope?
Regulation 72(8)(d) provides that a modification will be substantial where it “considerably” extends the scope of a contract. J Waksman held that the word “considerably” should be given its plain language meaning, providing much needed clarity as to the regulation’s meaning and the court did not consider that the addition of a further Waste Transfer Station extended the scope considerably.
An interesting point to note here is that the Judge made a comment that the waste being processed ultimately remains the same. He noted that it is not, for example, the case that a waste stream from a new authority was being included, which suggests that such a variation would extend the scope and perhaps be a substantial modification.
Conclusion
In summary, the case highlights the importance of carefully considering modifications to contracts and makes it clear that the courts will interpret the gateways in Regulation 72 narrowly. It is also clear that when relying on an existing review clause, one should ensure the procedural requirements of that clause are followed.
The James Waste Management decision is important both for contractors and procuring entities. For both, this case provides some much-needed clarity on how the court will interpret the gateways in Regulation 72 in relation to a contract modification.
Similar provisions will apply in the new Procurement Act 2023 which also sets out criteria for permitted modifications. It is worth noting that under the Procurement Act, set aside orders can be sought for breaches of the Act relating to modifications of contracts.