Modifications Of Contracts – The James Waste Case – Waste Management

The judgment in James Waste Management LLP v Essex
County Council provides insights into contract modifications
and how these may be considered against Regulation 72.

Introduction

On 19 May 2023 sitting in the Technology and Construction Court,
within the High Court of England and Wales, J Waksman handed down
his judgement in James Waste Management LLP v Essex County
Council.

The decision in question concerned whether a local authority had
lawfully modified its contract with a waste management company
under the Public Contracts Regulations 2015 (PCRs).

In terms of the facts, the Council had awarded a contract to
Veolia, with an option to extend its term (the “Veolia
Contract”). At the time this contract was entered into, it was
envisaged that a mechanical biological treatment facility would be
built and commissioned in the local area, but unfortunately that
project ultimately did not proceed, which meant that the Council
had to put alternative arrangements in place.

Around eight years into the term of the Veolia Contract, the
parties agreed to 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. This had a direct
impact upon James Waste Management LLP, as they had been providing
similar services under an alternative contract, which would no
longer be continued. James Waste Management challenged the
variation to the Veolia Contract on a number of grounds.

The default position under Regulation 72(9) of the PCRs is, when
a modification is made to a public contract, a new procurement
process should be instigated. That said, Regulation 72 provides a
set of “gateways” (also known as “safe
harbours”) to this general rule enabling modifications to be
lawfully made in set circumstances.

The decision in James Waste Management addresses
Regulations 72(1)(a) and 72(1)(e) which permit modifications where
there is a review clause, or where the proposed modification is
“not substantial”. We have looked at the court’s
judgement in relation to these gateways below.

Regulation 72(1)(a): The Importance of Following a “Clear,
Precise and Unequivocal Review Clause”

The Contract had a detailed and complex change mechanism.
Interestingly, notwithstanding this, the court noted that although
it made clear that certain types of change were not permitted, it
did not specify exactly what types of change were
permitted.

However, perhaps the most important lesson to take from this
judgement is the court’s strict approach to Regulation 72(1)(a)
of the PCRs. This “gateway” establishes that a
modification may be lawfully made to a public contract where that
modification is detailed within a “clear, precise and
unequivocal review clause”.

In this dispute it was held that the local authority had, in
practice, “disregarded” the steps outlined in the review
clause. Instead, it was found that the parties arrived at a
convenient commercial agreement.

The court noted that in order to use such a review clause you
need to follow its terms, noting that making use of such a clause
involves a strong element of overt transparency, which is the price
to be paid for invoking it. As such, the court noted that had the
Council needed to rely upon Regulation 72(1)(a), it would have been
unable to do so.

The Court then went on to consider whether the modification was
substantial.

Regulation 72(1)(e): When is a modification substantial?

The second “gateway” that the court considered is
detailed in Regulation 72(1)(e). This gateway permits a
modification where the modification is “not
substantial”.

The question of when a modification is “substantial”
is defined separately in Regulation 72(8) with the decision in
James Waste Management further clarifying the
interpretation of this regulation. The examined triggers for being
“substantial” are discussed below.

Regulation 72(8)(a): Does the modification change the character
of the contract?

According to the PCRs, if a modification changes the character
of a contract, then it will be substantial. In this decision, J
Waksman observed that changes made to the fee structure and
location where waste was to be transported under the contract would
not alter the character of the contract as it was still
“concerned with the haulage and disposal of waste” and
the contract didn’t specify one site only.

As the modification was only intended for a short period of
time, it did not render the contract “materially
different” to that which was originally agreed.

Regulation 72(8)(b)(ii): Would the modification, were it part
of the initial tender, have led to a different result?

Regulation 72(8)(b)(ii) provides that a modification will be
substantial where that modification introduces new conditions that,
were they part of the initial procurement process, would have
allowed for the acceptance of a different tender. Clarifying the
scope of this Regulation, J Waksman held that this condition would
apply where a “realistic” bidder could have come forward.
A realistic bidder is one who can be said to have a prospect of
success that is “not fanciful”.

For this regulation to apply the hypothetical bidder will not
need to be destined to win but they should have a competitive
chance of winning the tender. The Claimant could not demonstrate
that one of the other bidders would have won if the modification
was in the contract from day one.

Regulation 72(8)(c): Does the modification alter the economic
balance of the contract?

Regulation 72(8)(c) was also clarified within the decision. This
regulation provides that where a modification alters the
“economic balance” of an agreement, then a modification
will be substantial. The judge in this case noted that a mere
change in the method of and amount of payment (provided the new
amount was at a reasonable rate when contrasted with the original
rate) in exchange for the modification would not alter an
agreement’s economic balance.

In this case, the court felt that the change in remuneration was
appropriate as it amounted to a “very short-term and a very
small ‘one off’ addition, to the original
contract”.

Regulation 72(8)(d): Did the modification lead to a significant
extension in scope?

Regulation 72(8)(d) provides that a modification will be
substantial where it “considerably” extends the scope of
a contract. J Waksman held that the word “considerably”
should be given its plain language meaning, providing much needed
clarity as to the regulation’s meaning and the court did not
consider that the addition of a further Waste Transfer Station
extended the scope considerably.

An interesting point to note here is that the Judge made a
comment that the waste being processed ultimately remains the same.
He noted that it is not, for example, the case that a waste stream
from a new authority was being included, which suggests that such a
variation would extend the scope and perhaps be a substantial
modification.

Conclusion

In summary, the case highlights the importance of carefully
considering modifications to contracts and makes it clear that the
courts will interpret the gateways in Regulation 72 narrowly. It is
also clear that when relying on an existing review clause, one
should ensure the procedural requirements of that clause are
followed.

The James Waste Management decision is important both
for contractors and procuring entities. For both, this case
provides some much-needed clarity on how the court will interpret
the gateways in Regulation 72 in relation to a contract
modification.

Similar provisions will apply in the new Procurement Act 2023
which also sets out criteria for permitted modifications. It is
worth noting that under the Procurement Act, set aside orders can
be sought for breaches of the Act relating to modifications of
contracts.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.