In the recent case of James Waste Management LLP v Essex County Council [2023] EWHC 1157 (TCC), the High Court provided useful guidance on the application of Regulation 72 of the Public Contracts Regulations and the circumstances in which public contracts may be modified without the need for a new procurement.
The guidance provided by this case indicates that the Courts will adopt a "common-sense" approach when assessing whether contractual variations should be permitted without the need for a new procurement. Despite re-iterating that any exceptions to the general rule prohibiting the variation of public contracts without conducting a new procurement should be interpreted narrowly, the Court went on to find that all of the modifications involved in this case were permissible. The guidance provided by the Court will be of interest to contracting authorities, as well as private sector contractors, who are considering varying their existing public contracts.
Background
Essex County Council awarded an integrated waste handling contract ("IWH Contract") to Veolia ES. The contract had a term of 8 years and 5 months, with an option to extend for 7 years. The estimated value of the IWH Contract was £300 million, including the extension.
When the IWH Contract was entered into, it was envisaged that a mechanical biological treatment facility ("MBT") would be commissioned in the local area to process waste to produce solid fuel for generating electricity, thereby reducing the amount of waste sent to landfill. Unfortunately the MBT experienced major difficulties and the Council was unable to process waste at the facility as intended. This meant that alternative arrangements had to be put in place to process the significant amounts of waste that should have been processed at the MBT.
Approximately 8 years into the term of the IWH Contract, the parties agreed 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 for the remainder of the contract term (i.e. for about 5 months). This had a negative impact upon the Claimant in this claim (James Waste Management), who had been providing similar services under an alternative contract. As a result, James Waste Management issued a claim alleging that the modification to the IWH Contract was not permitted under Regulation 72 of the PCR without a new procurement being conducted on the grounds that:
- it rendered the Contract materially different in character from the contract initially concluded within the meaning of Regulation 72(8)(a);
- it introduced conditions which would have allowed for the acceptance of a tender for the Contract other than that originally accepted, within the meaning of Reg 72(8)(b)(ii);
- it changed the economic balance of the contract in favour of the contractor in a manner not provided for in the initial contract, within the meaning of Regulation 72(8)(c); and/or
- it extended the scope of the Contract considerably, within the meaning of Reg 72(8)(d).
After a detailed analysis of the variations in the context of the IWH Contract as a whole, the Judge concluded that the contract had not been materially varied and that the changes were permitted under Regulation 72 of the PCR without the need for a new procurement.
In reaching this conclusion, the Court made a number of points that are likely to be of interest to both Contracting Authorities and businesses contracting with them.
- Regulation 72(1) "Safe Harbours" should be interpreted narrowly
The Judge held that PCR 72(9) imposes a general rule that a new procurement procedure must be conducted for modifications to public contracts and framework agreements. The 'safe harbours' provided for under Regulation 72(1) are exceptions to this overarching rule and should therefore be interpreted narrowly.
- The burden of proof lies with the challenger
After stating that the Regulation 72(1) safe-harbours should be interpreted narrowly, the Judge went on to hold that the burden of proving whether or not the requirements of a particular safe-harbour have been met does not lie with Contracting Authorities. Instead it is up to the challenger to provide evidence that the safe harbours do not apply to the relevant modifications.
- The importance of a common sense approach
The Judge held that adopting a narrow approach to the interpretation of the safe-harbours "does not mean interpreting parts of them in a way which deprives them of real meaning". The safe-harbours should be interpreted in a "common sense" way, taking into account all of the surrounding circumstances.
In this case, the Judge disagreed with the challenger's argument that any modification with a value above the applicable threshold (currently £138,760 for central government authorities and £213,477 for sub-central authorities for services) would automatically render the contract materially different in character and/or would amend the scope of the contract considerably. The Judge emphasised that context is important and although the relevant safe-harbours have to be interpreted narrowly, common sense dictated that a relatively small variation (worth approximately £775k) in the context of a much larger contract (lasting over 8 years and having a value of well over £100 million) did not automatically render the contract materially different in character or extend the scope of the contract considerably.
Acceptance of a new tender?
The Judge was clear that challengers cannot simply assert that if a bidder had been aware of a future modification at the time of the original competition, it may have changed its tender and won the competition. In order for the modification to be substantial under Regulation 72(8)(b)(ii), a challenger must show, on the balance of probabilities, that a bidder in the original competition would have changed its bid and, as a result, would have had a "real prospect" of winning the contract. This is similar to the decisions in Edenred and Gottlieb, which looked at similar issues in the context of Regulations 78(2)(b)(i) and (iii). In those cases it was held that challengers had to prove that another bidder would (not might) have come forward if they had known about the future modifications, and would have had a real chance of winning the competition based upon a contract that included the relevant future modifications.
In this case, the challenger was unable to convince the Court that one of the original tenderers would have amended its tender had it known about the future modifications to the IWH Contract such that there was a realistic possibility that it would have won the contract. The changes were minor in the context of the IWH Contract as a whole and were unlikely to have had a significant impact upon technical or commercial submissions.
Changing the economic balance
When assessing whether the modifications had tipped the economic balance of the contract in favour of the contractor, the Judge stressed that it was important to consider whether the remuneration payable as a result of the modification was "reasonable" and/or "commercial". Even if, as here, the parties have opted to use a different payment mechanism as part of the modification, it is still appropriate for the Court to consider whether or not the change was justified and "reasonable compensation" would remain an appropriate yardstick to judge such a price increase. Surprisingly, in Paragraph 181 of the judgment, it is even suggested that the margin being earned by the contractor is of little relevance if the agreed price for the modification represents reasonable/commercial compensation for the modified services.
The Judge also held that when considering the effect of the moderation on the economic balance, it was important to consider the effect on the economic balance on the contract as a whole - i.e. across its entire term and scope. As such, a relatively small price increase in the context of a very large contract, particularly where the increase relates to a discrete modification, as opposed to a general price increase, may well be acceptable - particularly where the increased price represents a reasonable/commercial payment for the relevant services.
Clear, precise and unequivocal review clauses under Regulation 72(1)(a)
Although the case did not centre around Regulation 72(1)(a), the judgment referenced that if Contracting Authorities wish to rely on a "clear, precise and unequivocal" review clause in order to vary a contract without the need for a new procurement, it is essential that the relevant clause is complied with in full - including in relation to the process for agreeing contractual variations. If the contractual modification process is not followed, Contracting Authorities are unlikely to be able to rely on the clauses detailing that process in relation to arguments that the change has been made pursuant to a clear precise and unequivocal review clause as required under the Regulation 72(1)(a) safe-harbour.
Concluding remarks
Contracting Authorities and contractors should take some comfort from the pragmatic approach to the application of Regulation 72 in this case, particularly when agreeing modifications to long-term, high value contracts where they can demonstrate that the remuneration agreed for the modified element of the contract is commercially reasonable.
However, in this case the Judge was heavily influenced by the fact that the change was relatively low value and limited in duration when viewed in the context of the IWM Contract as a whole. In general, the underlying principle remains that modifications to public contracts should not be made without a new procurement and the "safe-harbours" in Regulation 72 will be interpreted narrowly. As such, care is needed to ensure that any changes are kept to the minimum required and are reasonable and commercial in all of the circumstances.
Even where such care is taken, there is no guarantee that a Court will find that particular changes are not substantial for the purposes of Regulation 72(8). In this case, the Judge had little difficulty in concluding that a short-term modification with a value of less than 1% of the value of the original contract was not substantial, particularly as the price for the modified element of the service was considered to be commercially reasonable. However, in earlier European cases, modifications that have increased the value of contracts by around 25% have been considered to be substantial, even in the context of large, high-value contracts where the economic balance of the contract was not considered to have been tipped in favour of the contractor. As such, there may be interesting debates to be had about precisely where the cut-off lies when considering whether a particular modification is substantial or not.
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