Guidance on modifying a contract during its term

Natasha Barlow and Shyann Sheehy consider the implications for contracting authorities modifying a contract during its term as a result of the judgment in James Waste Management LLP v Essex County Council [2023].

At a Glance

The High Court considered whether a variation to an Integrated Waste Handling Contract (the “IWHC”) for Essex County Council (the “Council”) amounted to a substantial modification under Regulation 72 of the Public Contracts Regulations 2015 (the “PCR”), triggering the need for a new procurement process. The case provides useful guidance to contracting authorities on the interpretation of the Regulation 72 “safe harbours”.

The Facts

The IWHC was with Veolia ES (UK) Ltd (“Veolia”) for the management of household waste recycling centres and five waste transfer stations (“WTS”) and waste haulage services. A separate contract was in place between the Council and James Waste Management LLP (“James Waste”) for services at James Waste’s own WTS. The Council modified the IWHC to direct waste to a sixth WTS and incorporated haulage services to a landfill site run by another company, Enovert, which James Waste argued resulted in waste being directed away from its own WTS. The modification was a short-term solution (to operate for five months), and the value was less than 1% of the overall value of the contract.

James Waste claimed that the Council had modified the IWHC in a way that was not permitted under the PCR, under which the general rule is that any modification to a contract governed by the PCR requires a new procurement procedure to take place, unless it falls within one of the “safe harbours” under Regulation 72. The High Court rejected the claims brought by James Waste on all counts but considered obiter the correct application of Regulation 72.

Implications

As an overarching observation, the judge noted that the Regulation 72 “safe harbours” should be interpreted narrowly as they are a derogation from the general rule. However, this does not mean that the contracting authority is under a “reverse burden of proof” to demonstrate that the variation is permitted.

The court considered the applicability of Regulation 72(1)(a) which allows a modification where there are clear, precise and unequivocal review clauses allowing variations that do not alter the overall nature of the contract. In this case the IWHC did contain such provisions in a change control procedure at Schedule 21 of the contract. However, the Council had not followed the prescribed process set out in the schedule and as such could not rely on the clauses to permit the modification. This is an important lesson for authorities to ensure that it follows any variation procedure contained in the contract.

Regulation 72(1)(e) allows a modification which, irrespective of its value, is not “substantial”. The judge provided guidance on various parts of the definition of “substantial” in Regulation 72(8):

• Change in bid pool (Regulation 72(8)(b)): the judge stated that the test to apply is whether there was a “real” as opposed to “fanciful” prospect that another tenderer would have won the procurement.
• Change in economic balance (Regulation 72(8)(c)): the judge stated that an increase in price does not automatically change the economic balance in favour of the contractor, provided any such increase constitutes “reasonable compensation”. Contracting authorities will therefore need to ensure that any change in contract price does not change the overall commercial position.
• Considerable extension in scope (Regulation 72(8)(d)): when determining what will be regarded as “considerable”, the court dismissed James Waste’s submission that this applies to any modification with a value above the relevant procurement threshold (currently £189,330 for services) and held that courts should interpret the regulation in a “common sense way”.

Key takeaways

This judgment builds on the limited case law of Pressetext and Edenred regarding modification of a contract during its term. Contracting authorities often face circumstances which require minor modifications to their contracts. For example, waste collection and disposal authorities considering modifications to their current contracts while waiting for the full regulations under the Environment Act 2021 to come into play, will find useful guidance in this case as to whether such modifications will be permitted under the PCR.

The Procurement Bill is due to replace the PCR as it comes to the end of its progress through Parliament. Contracting authorities will need to take note of the higher transparency obligations under the new Bill, meaning that modifications will be open to greater scrutiny and contracting authorities will need to be confident of any decisions made to modify contracts and to keep a robust record of their justifications for doing so.

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