Valuable guidance on modifications made to public contracts

James Waste Management bought this claim against Essex County Council alleging the council breached the Public Contract Regulations 2015 (PCR) when it agreed to vary a contract with another supplier.

This High Court case provides welcome clarity on two aspects of the test for non-substantial modifications in regulation 72 of the PCRs. First, it sets out how the counterfactual required by regulation 72(8)(b) works in practice. Secondly, it clarifies that in the case of short-term additional services or suppliers, the economic balance test in regulation 72(8)(c) is met by demonstrating that the supplier received reasonable compensation for its additional activity.

Whilst not part of the binding decision, the case also highlights that where contracting authorities seek to rely on regulation 72(1)(a), the relevant changes should be made in “at least substantial adherence” with the contract change control mechanism.

 

Background

James Waste alleged that the council unlawfully changed its Integrated Waste Handling Contract (IWHC) with Veolia ES (UK) Ltd. The IWHC was a contract with a term of up to 15 years for the handing and transport of waste within the county. The change was agreed to the IWHC to provide for additional waste haulage services, and was valued at GBP775,000 at the time the change was made. The total value of the IWHC was c. GBP12 milion per year, or GBP96 milion over the first 8-year term.

To amend a public contract, contracting authorities must rely on one of the “safe harbours” in regulation 72 in the PCRs. This case focused on two of these:

• where the modification is provided for in clear, precise, and unequivocal terms in the original procurement documents (regulation 72(1)(a)); and
• where the changes are not substantial (regulation 72(1)(e) and (8)).

 

When will the court consider modifications to be “substantial” (regulation 72(1)(e))?

In concluding that the change was not substantial, the judge looked at each of the four tests in regulation 72(8):

1. Materially different in character: - the judge compared the IWHC without the modification and the IWHC with the modification and considered it relevant that the modified contract included a different fee structure and was in another part of Essex. However, he couldn’t see that the change in location was a material change and noted that the IWHC did not stipulate a particular disposal site. The judge concluded that the modification did not provide for additional services and that there was no material difference in the IWHC’s character.
2. Introduction of new conditions -. The court noted that a counterfactual was required. This looked at the question of whether there was a real prospect that another bidder would have been awarded the contract if the original contract had included the modification under challenge. In this case the modification was so insignificant that it would not have made any difference to the outcome of the original procurement.
3. Change in economic balance - James Waste maintained that Veolia gained financially from the modification and the new fee was inflated.. In this case, the original pricing mechanism in the contract could not be applied to the variation. The judge considered that so long as any additional charges offered no more than reasonable compensation to the supplier, this would not change the economic balance in the supplier’s favour.
4. Extended scope - the judge construed that a “considerable” extension should be interpreted in a common-sense way. The value of the extension (GBP775,000) was less than 1% of the total contract value (GBP96 milion).

 

When will a contract modification satisfy the requirements of regulation 72(1)(a)?

While not part of the binding decision of the court, the judge considered whether the change satisfied the requirement of regulation 72(1)(a).

First, the court considered whether the contract change provisions were sufficiently precise to satisfy the requirements of regulation 72(1)(a).

The judge noted that there was no real clarity on the scope of what constituted a “Change” under the IWHC. He also noted that the change mechanism did not prevent modifications that would alter the overall nature of the contract, a requirement of regulation 72(1)(a) - it would only prevent modifications that would materially and adversely change the nature of the project.

He then looked at whether the council’s failure to follow the change control process in the IWHC prevented the council relying on regulation 72(1)(a), concluding that it did. The court concluded, “had it been necessary for the Council to rely on Reg 72(1)(a) I would have found it was unable to do so”.