The recent landmark case of James Waste Management LLP v Essex County Council sheds light on the interpretation and application of Regulation 72 of the Public Contracts Regulations 2015 (PCR) concerning contract modifications. This judgment provides significant guidance on several crucial aspects of Regulation 72 and expands upon previous cases, offering valuable insights for both public authorities and contractors.
The case revolves around a modification made by Essex County Council to an integrated waste handling contract originally awarded to Veolia in 2013 through a competitive dialogue process. In June 2021, various amendments were agreed upon that altered the calculation of Veolia’s fees. James Waste Management LLP subsequently filed a claim, arguing that these amendments constituted a substantial and unlawful modification under Regulation 72 PCR.
The law cannot allow wholesale changes to awarded contracts, that would subvert procurement law, allowing for example, small contracts to be transformed into larger ones. Tenderers must know from the outlet what the project will be about, the value and the key terms of contract (such as those which relate to pricing, scope, risk allocation and time for delivery).
Regulation 72 of the PCRs sets out when a change to a public contract is permissible. It is not the easiest legal provision to navigate. For example, a modification will be permitted where:
- regardless of its value, the modification is made pursuant to a change mechanism (e.g. change control clause) included in the original contract which is sufficiently clear and precise and which lays down conditions for its use (Regulation 72(1)(a));
- its value is below certain thresholds. For service contracts, that includes changes whose value exceeds the applicable trigger threshold (£213,477 for non-central Government contracts) and 10% of the overall contract. For works contracts this includes changes below the works contract threshold (£5,336,937) and 15% of the overall value of the contract.
On the other hand, a modification will be substantial (and therefore impermissible) in the following cases:
- it renders the contract “materially different” in character (e.g. transforming a services contract into a large scale works project) (Regulation 72(8)(a))
- the modified contract would have attracted different bidders or a different winner had it been the basis of the original competition (Regulation 72(8)(b));
- it “considerably extends” the original scope or duration of the original contract (Regulation 72(8)(d));
- it changes the “economic balance” of the contract in favour of the contractor in a manner which was not provided for in the initial contract (Regulation 72(8)(c).
Where a substantial modification is made to a contract, the underlying project will need to be retendered. Failure to put the “new” contract back out to tender may lead to it being declared ineffective if challenged in Court. Financial penalties may also be issued against the public body which authorised the unlawful changes.
The High Court, in its ruling, dismissed all claims brought by James Waste Management LLP, several of which alleged violations of Regulation 72. The judge concluded that the amendments did not amount to a substantial modification, primarily because they did not tip the economic balance of the contract in favour of Veolia.
Furthermore, it was not proven that an alternative supplier would have won the original tender if it incorporated the modified terms.
On the other hand, the Court rejected the authority’s arguments that the changes would have been saved by the change mechanism provisions laid down in the contract. The Court noted that those had laid down a strict procedure for activation which had not been followed. Adhering to the procedure was not only required by the letter of the contract, but also by Regulation 72(1)(a), which states that any change clause must lay down conditions for its use.
Key Findings and Guidance
The judgment provides important guidance on the interpretation of Regulation 72 PCR and its various provisions. Some notable findings and guidance include:
1. Narrow interpretation of safe harbours: The safe harbours outlined in Regulation 72(1) PCR, which allow for contract modifications under certain circumstances, should be construed narrowly as exceptions to the general rule against modifications. This underscores the need for caution when relying on these safe harbours. A contemporaneous audit trail of the reasons for considering a safe harbour applies should be maintained.
2. Burden of proof: Although a contracting authority is not under a reverse burden of proof to demonstrate compliance with Regulation 72(1), it is essential to carefully assess and justify any modifications to ensure they fall within the permissible scope.
3. Evaluation of substantial modification elements:
a. Economic balance: The appropriate test for determining a change in economic balance is whether the modification represents “reasonable compensation” for additional or more costly works or services that must be provided as a result of the change in scope or circumstance. If it does, it suggests that there is no change in the economic balance of the contract.
b. Introduction of conditions for alternative tender acceptance: The test is whether there is a real prospect, rather than a fanciful one, that an alternative tenderer would have won the modified contract. However, it is not necessary to prove definitively that the alternative tenderer would have secured the contract.
c. Considerable extension of scope: This test should be applied in a common-sense manner, ensuring that its real meaning is not undermined. In this case, the contention that any extension exceeding the applicable PCR threshold should be deemed considerable was rejected.
d. Change clause was ineffective: Disregarding the formal requirements of a change clause (e.g. regarding service of notices) renders the presence of such clauses irrelevant, as Regulation 72(1)(a) mandates the inclusion of conditions governing their use.
As Heraclitus (540-475 BCE) once said, “nothing is permanent except change”. Contracts frequently need to be altered to adapt to changing circumstances. Recent times have seen forced changes have been necessary to adapt to the COVID crisis and subsequent price revisions caused by rising inflation.
Making changes to public contracts can be risky – no public body wants to risk an ineffectiveness declaration or a fine. The guidance provided on Regulation 72 will therefore be welcome to public bodies, contractors and advisers, particularly as it gives judicial insight into the meaning of terms like the “economic balance” used in Reg 72. Legal uncertainty regarding change may mean necessary modifications are avoided, perhaps leading to a suspension of works or a dispute between the parties as to how the actual terms should be construed in radically altered circumstances.
The judgment also helpfully clarifies that a change whose value is not within the de minimis thresholds of Reg 72(5) will not necessarily be a “considerable extension” to the contract under Reg 72(8). In other words, some (but not all) “above-threshold” changes will be allowed where their value relative to the overall contract is minor. Obviously the further the threshold is exceeded, the higher will be the risk.
While some of the guidance encourages some flexibility, there was another area the Court approached more strictly. It insisted that in order to be effective in relying on a change control clause, the parties would need to be able to demonstrate compliance with the procedural requirements of that clause. Where, for example, the clause demanded certain notices be served between the parties, failure to observe those provisions would mean the clause was inapplicable.
The Court also served a reminder that in order to be effective legally, the clause must demarcate clearly the type of change that is envisaged, and not serve as a carte blanche to allow the parties to rewrite any aspect of the project they chose, diminishing confidence that the original tender had selected the most appropriate contractor for the job.
Finally, the fact that this judgment is one of few addressing the question of contract modifications potentially reflects the fact that changes often do not need to be publicised which means claimants do not hear about them. However, the forthcoming Procurement Bill aims to address this by requiring many modifications to be advertised publicly. That is liable to subject them to increased scrutiny and potential legal challenges. The provisions of the Bill are expected to enter into force in the summer. This decision will help claimants assess the chances of success of contesting modifications they learn about: landfill sites have spawned a landmark ruling.