James Waste Management LLP v Essex County Council: judicial clarification on procurement rules regarding the modification of public contracts

The restrictions on the ability of contracting authorities to make changes to public contracts are well known to all procurement practitioners, but to date there has been relatively limited judicial time spent on the issue. The recent case of James Waste Management LLP v Essex County Council [2023] EWHC 1157 (TCC) deals with this issue and adds some more colour to the question of how the tests in Regulation 72 of the Public Contracts Regulations 2015 (‘PCR’) should be applied.

In this case, James Waste Management LLP (the ‘Claimant’) challenged the lawfulness of a modification to a contract between Essex County Council (the ‘Council’) and Veolia ES (UK) Ltd (‘Veolia’) concerning Integrated Waste Handling (the ‘Contract’). The judgment handed down by Mr Justice Waksman provides much-needed clarification in particular in relation to when modification of a contract will be “substantial” within the meaning of Regulation 72(8) of the PCR.

Background

The Council is a Waste Disposal Authority responsible for disposing of waste collected by and for the borough and district councils in its area which are known as Waste Collection Authorities (‘WCAs’). The Contract between the Council and Veolia required Veolia to manage domestic waste recycling centres, to haul waste between sites and to manage the Council’s waste transfer stations (‘WTS’) in five specific locations.

Separately, the Claimant held a call-off contract with the Council for the disposal of waste delivered into the Claimant’s own WTS in Rochford. The payments under the call-off contract were linked to a price per tonne of waste but there was no minimum commitment (ie. they could receive zero tonnes of waste). Despite that, the Claimant’s site in Rochford was very lucrative as it was well-placed to receive a substantial amount of waste from several WCAs.

The Council later compelled those WCAs to start taking their waste to a site run by Enovert (a competitor of the Claimant) in Bellhouse. However, this site was considerably further away and involved crossing council boundaries which triggered “tipping away payments”. The Council therefore amended its Contract with Veolia as a solution to these issues.

The modification to the Veolia Contract included establishing a further WTS location closer to those WCAs, and incorporating haulage services from the WTS to Bellhouse. The net result was that waste previously sent to the Claimant’s Rochford site would now be sent to Bellhouse (via the new WTS). The duration of this modification was five months, pending a procurement by the WCAs to appoint their own haulage contractor.

Allegations

The Claimant alleged that the Council breached the PCR firstly in modifying its Contract with Veolia; and secondly in awarding a contract to Enovert pursuant to a Service Order made on or about 25 Mach 2021. The Court did not uphold these allegations.

In relation to the modification of the Contract, the key issues to be determined were:

1. Was the modification of the Contract a “substantial” modification within the meaning of the PCR Reg 72(1)(e)?
2. If the modification of the Contract was substantial, was it permitted by PCR Reg 72(1)(a)?

Key Principles

The general rule is that a new procurement procedure is required for modifications of the provisions of a public contract (PCR 72(9)). However, Reg 72(1)(a)–(f) provides various ‘gateways’ or ‘safe harbours’ where modifications are permitted without running a new procurement procedure. Mr Justice Waksman confirmed the long-established principle that these gateways should be interpreted narrowly because they amount to derogations from the general rule set out in Reg 72(9). However, he added that they should not be interpreted so narrowly that they are rendered ineffective as an available derogation.

It was also held that a rule requiring narrow interpretation does not generate a rule about evidential burden of proof. The Court did not accept the Claimant’s argument that the Council had the evidential burden of proof to show that they were able to rely on one of the gateways in Reg 72(1)(a)–(f). Whilst an authority needs to raise the relevant sub-paragraph that it relies upon, once it does so, it is for the Claimant to establish on the balance of probabilities that the gateway relied upon does not apply.

Substantial Modification

The Council sought to rely on PCR 72(1)(e) as amounting to a relevant safe harbour as it contented that the modification was not substantial within the meaning of paragraph (8). PCR 72(1)(e) permits modification of a contract without running a new procurement procedure “where the modifications, irrespective of their value, are not substantial within the meaning of paragraph (8)”. Paragraph (8) then sets out the circumstances when a modification of a contract shall be considered substantial.

On the facts, the Court upheld the Council’s position and, in its analysis, provided the following useful guidance on the meaning of “substantial” in PCR 72 (8):

• On the facts, the Court concluded that the Contract was not “materially different in character” (Reg 72(8)(a)). It was relevant that the Contract did not stipulate only one or any particular disposal site and Veolia would always have to have taken the waste to wherever the relevant site was. It was also relevant that the modification was a short-term measure intended to operate for only five months and that the value of the modification, in terms of additional payment to Veolia, was less than 1% of the overall value of the Contract over its lifetime. Ultimately, the Contract remained for the same services but delivered in a slightly different manner with the Court noting that “it is not as if, for example, the waste from some other WCA was now added” – which, it appears, could well have made a difference.
• Whether a modification “extends the scope of the contract or framework agreement considerably” (Reg 72(8)(d)) should be interpreted in a “common-sense way”. The Court did not accept the Claimant’s submission that any extension worth more than the relevant PCR threshold was “considerable”.
• To rely on Reg 72(8)(b)(ii) being met (ie. that the modification would have allowed for the acceptance of a tender other than that originally accepted), the Claimant needed to show that there was a real prospect that another tenderer would have won the modified contract. Mr Justice Waksman considered that the relevant burden of proof was that the Claimant needed to show that there was a real as opposed to a fanciful prospect that another tenderer would have won. He also considered the point in time at which that analysis would have to be carried out. In two previous cases on the question of material change, Edenred[1]and Gottlieb[2], the Court confirmed that this hypothetical procurement (in which the modification is present) was to be assessed as at the time when the original contract was procured rather than at the time of the court case, and this approach was carried through to this case. On the facts, the Claimant could not show that the other bidders who participated in the original procurement – noting that the Claimant would never have bid because it is not in the same market – could have won if the modification had been included from the outset. Mr Justice Waksman found that there was no basis for assuming the quality scores of the other bidders would have been any different because the modified element was so insignificant, nor that the other bidders would have been able to decrease their price to the point of winning overall. He concluded that “it is simply impossible to predict a different result favouring [the other bidder] as being a realistic possibility”.
• Finally, the evidence submitted by the Council showed that the modification did not change the economic balance of the contract as a whole in favour of Veolia and as such, Reg 72(8)(c) was not satisfied. The judge found that increased payment did not shift the economic balance if it reflected simply “reasonable compensation” for the modification proposed, which he found to be the case on the facts. Again, the fact that the modification was for a very short period appeared to be relevant to the judge’s conclusion on this issue.

Clear, precise and unequivocal review clause

Given that Justice Waksman concluded that the modification was not “substantial”, it was not necessary for the Court to consider whether one of the gateways in Reg 72(1)(a)–(f) could be relied upon. However, as the Council had also sought to rely on Reg 72(1)(a), arguing that the modification was permissible as it had been “provided for in the initial procurement documents in clear, precise and unequivocal review clauses”, the Court also made obiter observations on this aspect as follows:

• The Court found that the schedule in the Contract which dealt with modifications (Schedule 21) did not state the scope of possible modifications nor did it exclude modifications which would change the nature of the overall contract; and
• In any event, Schedule 21 was not followed by the parties when making the modification.

Therefore, had it been necessary for the Council to rely on Reg 72(1)(a), it would have been unable to do so. Whilst these comments were obiter, they serve as a useful reminder of the importance of including very precise variation procedures in contracts to deal with changes that are anticipated to be required, and following such procedures when variations are requested.

Commentary

It is important for both contracting authorities and suppliers to consider whether any in-term contractual modifications are likely to fall foul of the procurement regulations. This case provides some useful insight into when a modification is likely to be considered “substantial” (and therefore impermissible) and the extent to which the gateways in Reg 72(a)–(f) can be relied upon to justify modifications to contracts. It will be important for contracting authorities to carefully consider their ability to rely on such gateways for making in-term modifications to relevant contracts.

This article was co-written by Madeleine Nankervis, Trainee Solicitor.

[1]              Edenred (UK Group) Ltd and another v HM Treasury [2015] UKSC 45

[2]              Gottlieb v Winchester City Council [2015] EWCA Civ 1369