In the Mills & Reeve procurement team, we are often asked to advise on whether a modification to an existing contract is permissible within Public Contracts Regulations 2015 ("PCR"). Regulation 72 sets out various ‘safe harbours’ that allow for an existing contact to be modified during its term, without risk of a challenge.
The recent judgment in the case of James Waste Management LLP and Essex County Council provides useful insight into the way these gateways are likely to be interpreted and also guidance on when a modification is likely to be considered ‘substantial’ and therefore not permitted.
Background
The claimant, James Waste Management LLP (“James Waste”) brought a claim against Essex Country Council (“the Authority”) on the basis that an Integrated Waste Haulage Contract (“IWHC”) between the Authority and a third party (“Veolia”) had been modified beyond the parameters allowed by the PCR. If so, the variation would have amounted to an impermissible direct award which should have been subject to a further competition.
The contract modification in question allowed Veolia to take waste to a new disposal unit that had not originally been provided for under the IWHC. James Waste felt that this modification was substantial under Regulation 72(1)(e), arguing that it rendered the IWHC materially different in nature, changed the economic basis of the IWHC and extended its scope.
Judgment
James Waste’s case failed as the court found that the modifications were not ‘substantial’ within the meaning of Regulation 72(8), which satisfied the ‘safe harbour’ gateway in Regulation 72(1)(e).
The court reviewed the original IWHC with the modified form and identified the key differences, namely:
- The new waste disposal unit was not a ‘Site’ under the definition in the contract.
- The new site was not owned by the authority.
- It was in a different part of Essex.
- A different fee structure was in place.
The court found that these changes were not materially different and that consequently the amended contract was not materially different in character from the original.
The court also considered the change in price and established that the additional fee did not constitute an increase that rendered the contract materially different. The variation amounted to 2% of the yearly income generated by the contract and only 0.26% of the income over 8 years (period of the contract).
The court also found that the scope had not been considerably extended. The judge found that ‘considerable’ should be interpreted in a common-sense way. The extended ambit of the services were not, in the judge’s view, “additional services in the overall scheme of things. As before, Veolia had to transport and process the waste from [Essex] along with the other [Waste Collection Authorities’] waste. This did not change.”
Supporting this finding was the fact that the original contract provided for potential additional sites being introduced, showing that some level of flexibility was foreseen. It also helped that the variation was only in place for a short period of time.
Narrow construction of ‘safe harbours’
One of the key findings of the case was confirmation from the court that the gateways within Regulation 72(1) should be construed narrowly. As these gateways allow for a derogation from the general rule that contracts cannot be modified during their term, they should be interpreted narrowly to prevent modification to contracts during their term becoming common.
However, the court made it clear that they should not be interpreted so narrowly as to make them effectively useless.
Key Takeaways:
This case provides some useful guidance to both contracting authorities and bidders as to what may constitute a ‘substantial modification’:
- Whilst these gateways are to be applied narrowly, they are certainly available to provide an authority with a safe harbour.
- It is only necessary for a contracting authority to show that one of the harbours applies.
- To show that the variation was not substantial with the meaning of Regulation 72(8) it will help if the following facts can be shown:
- If the variation is financially relatively minor compared to the overall budget of the contract, it will help to demonstrate that a material change has not taken place.
- Similarly, if the services are merely an extension to existing work, and not entirely new, then it will help demonstrate that a contracting authority is not procuring additional or new services.
- Lastly if the modification is for a shortened period of time, then this will go towards the fact that the modification is not substantial.
- As always, it will help an authority if they made some provision for change/extension in the original contract advertised throughout the procurement process, even if the change is not clear, precise and unequivocal enough to come within Regulation 72(1)(a).
If the changes do not create a material difference in the character of the varied contract and the previous contract, then the modification is likely to be a non-substantial and will be permitted.
With many thanks to Morwenna Hawkins (trainee solicitor) for her work on this blog post.