Procuring authorities and suppliers frequently consider whether changes to a contract awarded under the procurement regulations can be accommodated, or alternatively whether they give rise to a new contract that should be reprocured.
In the recent case of James Waste Management LLP v Essex County Council  EWHC 1157 (TCC), the High Court has considered the issue of when a modification to a public contract can be made without having to run a new procurement procedure.
As there has been very little consideration of Regulation 72 by the UK courts, the judgment offers welcome guidance on when a modification is likely to be considered sufficiently substantial under the Public Contracts Regulations 2015 (PCR) such as to constitute the award of a new contract in breach of the rules.
Waste services were provided to Essex County Council (Council) under a long-term Integrated Waste Handling Contract (IWHC). Those services included the processing and transfer of waste. In June 2021, the Council made an in-term modification to the IWHC to require its service provider to provide its waste processing and transfer service to waste from Basildon, Castle Point and Rochford District Councils (BCPR) for a relatively short period until October 2021 when the BCPR had procured its own contract for waste services.
From June 2020 to June 2021, James Waste Management LLP (James Waste) provided certain waste services to the Council under separate contractual arrangements. Those services included the processing and onward disposal of the BCPR waste.
James Waste brought a claim against the Council, alleging that by modifying the IWHC to include the BCPR waste the Council had acted in breach of the PCR, and as a consequence James Waste’s contract with the Council ended in June rather than October. The value to James Waste of a further 5 months of work was significant.
In terms of the modification, the issues for determination by the court were whether the modification of the IWHC was:
- a “substantial” modification within the meaning of Regulation 72(1)(e); and
- permitted by Regulation 72(1)(a).
The court concluded that, based on the specific facts and circumstances of the case, the modification of the IWHC was not a “substantial” modification and therefore the Council did not breach procurement law. In reaching that conclusion, the court helpfully clarified some important principles regarding the interpretation and application of Regulation 72 of the PCR.
1. Confirmation of strict interpretation
The court clarified that the “safe harbours” (or “gateways”) set out in Regulation 72 “should be interpreted narrowly because they amount to derogations from the general rule set out in Reg 72(9)”. The general rule in Regulation 72(9) is that a new procurement procedure is required for modifications to a public contract during its term (except where the modifications fall within a safe harbour). Procurement practitioners have long been advising clients that the court would likely take a strict interpretation of Regulation 72, so this confirmation is useful.
2. Application of Regulation 72(1)(e)
Material difference in character – when assessing whether there was a material difference in the character of the contract, caused by the modification, the court compared the IWHC without the modification and the IWHC with the modification. The court considered a number of factors, including the scope of services, the duration of the modification, the price and the estimated value of the modification relative to the overall value of the contract, and the fact that the modification did not lead to the delivery of additional services “in the overall scheme of things”.
Extended scope – when assessing whether the modification amounted to a considerable extension of scope, the court applied the same reasoning (and considered the same factors) from its consideration of “material difference in character”. The court rejected James Waste’s argument that any modification with a value more than (or not much more than) the PCR threshold is “considerable”. The court held that “considerable” should be interpreted in a “common-sense way”, notwithstanding that generally the gateways to modification are to be interpreted narrowly.
Different tender – the court held that the test in Regulation 72(8)(b)(ii) is whether there is a real (as opposed to fanciful) prospect that another bidder would have won in the counterfactual procurement. It is not necessary to show that the new conditions would have resulted in the acceptance of a different tender.
Change of economic balance – when assessing whether the modification changes the economic balance of the contract in favour of the contractor in a manner which was not provided for in the contract, the court considered two questions: 1. Was there a change to the economic balance of the contract in favour of the contractor? 2. If there was, was it such a change that was or was not provided for in the initial contract? When assessing the first question, the court held that the “appropriate yardstick” by which to judge a price increase is whether it constitutes “reasonable compensation”, irrespective of any change in the contract payment mechanism.
The court also held that when assessing economic balance of the contract, the contract must be looked at as a whole.
3. Application of Regulation 72(1)(a)
As the court concluded that the modification was not “substantial” under Regulation 72(1)(e), it did not need to decide whether the Council could rely on Regulation 72(1)(a). Nonetheless, guidance was given on the application of Regulation 72(1)(a).
Regulation 72(1)(a) permits a modification where those modifications have “been provided for in the initial procurement documents in clear, precise and unequivocal review clauses”. The IHWC contained provisions for changes in Schedule 21, including restrictions on types of changes that could be made and a process to make changes. These contractual provisions are common for this type of long-term contract. However, the court held that in the specific circumstances, Regulation 72(1)(a) could not be relied upon because the modification had not been made compliance with the prescribed process i.e. the process to agree changes set out in Schedule 21 had not been followed.
4. No reverse burden of proof
The judgment contains a detailed consideration of whether there is an evidential burden of proof on an authority seeking to rely on any of the grounds in Regulation 72. James Waste argued that the authority must bear the evidential burden of proof. The court did not need to decide the point, but said that had it been necessary, the court would have rejected James Waste’s argument and held that there is no reverse burden of proof (i.e. it is for the claimant to show that a variation has been made and that the variation is unlawful, it is not for the authority to demonstrate that there has been a lawful variation).
Waksman J’s judgment was published on 19 May 2023 and can be found here. The judgment is detailed and considers a number of issues in addition to those set out above.
Given current challenges facing both the public and private sector, including high inflation and challenging financial circumstances driven by factors including the war in Ukraine, procurers regularly find themselves needing to make changes to publicly procured contracts and consider whether those changes are permitted within the context of Regulation 72.
Contracting authorities and suppliers considering varying public contracts should be interested in the court’s interpretation of Regulation 72, particularly the factors the court took into consideration when assessing whether the modification was “substantial” under Regulation 72(1)(e).
The Utilities Contracts Regulations 2016, Concession Contracts Regulations 2016 and the public procurement regulations in Scotland all contain rules on contract modifications that are broadly the same as those contained in Regulation 72 of the PCR. The judgment is relevant to the interpretation of those regulations too.
For contracting authorities, utilities and suppliers operating under the UK procurement regime, the law relating to permitted contract modifications is soon going to change. The Procurement Bill (which is nearing the final stages of its passage through Parliament and getting closer to becoming law) once in force should result in a big increase in the amount of information in the public domain regarding contract modifications – and that could increase procurement challenges to modifications.
Watch out for our series of articles on the Procurement Act coming soon which will look at some of the main features of the new regime (including contract modifications) and how the Act will impact key sectors in the UK.