Whether, and to what extent, a public contract can be modified, is a question that comes up frequently in practice.

Contracting parties understand that they must exercise caution, since when a “substantial” variation is made to a public contract during its term, it can be considered a new contract which should be subject to a fresh procurement and which could result in the contract being rendered ineffective or terminated by the authority. However, since the principles of Pressetext v Ostereich [2008] ECR 1-4401 (applied most clearly in the UK by Edenred (UK Group) Ltd and another v HM Treasury and others [2015] UKSC 45, judgment of 1 July 2015)were encoded in law in the EU’s 2014 directive on public procurement (and the derivative domestic regulations), caselaw in this area has been less frequent than it once was, with contracting parties getting familiar with the ambit of the Regulation 72 so-called “safe harbours”.

On Friday 19 May 2023, the High Court of Justice published its judgment in the case of James Waste Management LLP v Essex County Council [2023] EWHC 1157 (TCC).

James Waste Management LLP (“James”) brought two claims against Essex County Council (the “Council”), one relating to Regulation 72 of the Public Contracts Regulations 2015. The chronology of the facts is complex and has numerous layers, but in essence, James argued that the Council unlawfully modified its 2013 Integrated Waste Handling Contract with Veolia ES (UK) Ltd (“Veolia”) by making arrangements that Veolia would provide additional waste processing services at a waste transfer station not owned by the Council to enable the convenient transportation of processed waste from the applicable district council areas to the landfill site.

The judgment (available here) takes a close look at Regulation 72 of the Public Contracts Regulations 2015 (the “Regulations”). There are valuable lessons to learn for contracting authorities and suppliers to the public sector alike. In no particular order, here are three take-homes from the judgment.

1- Narrow is the Way

Permitted modifications to contracts are exceptions, not the rule, and so should be interpreted narrowly.

Reg. 72(1) provides six “gateways”, through which a contracting authority can drive a contract modification. These are (in summary):

a) where the modification is provided for in a clear, precise and unequivocal review clause;

b) where a change of contractor cannot be made or would cause significant inconvenience;

c) where the modification has been brought about by unforeseeable circumstances;

d) where a contractor is replaced due to a corporate restructuring;

e) where the modifications are not substantial, as defined in Reg. 72(8); and

f) where the value of the modification is below the threshold for the Regulations and 10% of the initial contract value for service and supply contracts or 15% for works contracts.

Mr Justice Waksman, at para. 44 of the James judgment helpfully clarifies that these gateways “should be interpreted narrowly because they amount to derogations from the general rule set out in Reg 72 (9)”.

This short paragraph is significant, in that it shapes the approach that contracting authorities seeking to vary a contract should take. The rule is, per Reg 72(9), that modifications require a new procurement procedure to be carried out. The Reg 72(1) gateways are exceptions to the rule – and should be interpreted narrowly. Neither Pressetext nor Edenred (UK Group) Ltd and another v HM Treasury and others [2015] UKSC 45, judgment of 1 July 2015 state this explicitly (although Lord Hodge does refer to narrow interpretation of derogations as a general principle at para. 28 of Edenred, the judgment preceded the coming into force of the Regulations and does not explicitly apply that to Reg 72(1)).

2- The Sum and Substance

Even interpreted narrowly, a broad range of changes to a contract can still be considered insubstantial.

The sum and substance of this case came down to whether the derogation found in Reg 72(1)(e) applied. The Council argued, successfully, that the modification to the contract in question was not substantial, as defined in Reg 72(8). While the details of the decision are specific to the contract at hand, the factors considered serve as a helpful guide in considering almost any commercial contract. Reg 72(1)(e) provides a list of five indicators that a modification is substantial, the judgment in this case considered four of them:

• Reg 72(8)(a) – Material Difference in Character
  • In considering whether the modification “renders the contract… materially different in character from the one initially concluded”, Waksman J compared the contract with and without the modification. Although the conclusion was that none of the differences were “material”, the judgment considered various factors as potentially relevant, including a change in fee structure, a change in location of the performance of aspects of the contract, the duration of the modification, the price of the contract and the similarity of the services provided to those provided prior to the modification.
• Reg 72(8)(d) – Extended Scope
• The extension to the scope of this contract was worth an estimated £775,000. The claimant sought to argue that this was a considerable extension to the scope on the basis that it is higher than the threshold for the application of the Regulations (at the time, £189,330 for services). However, this extension was held not to be “considerable” on the same basis that it was not “material” for the purposes of Reg 72(8)(a) – £775,000 was only 2% of the supplier’s yearly income under the contract. This serves as a helpful reminder that the separate gateways cannot be used to interpret each other. The financial thresholds under Reg 72(1)(f) are specific to that gateway, and do not affect the meaning of the word “considerable” for the purposes of the separate gateway at Reg 72(1)(e).

• Reg 72(8)(b)(ii) – A Different Tender
  • Reg 72(8)(b)(ii) concerns the hypothetical acceptance of a different tender that was submitted, had the contract been procured in its modified form. In other words, if a modification could have changed the outcome of a procurement process, it is substantial. This case serves as a helpful reminder of what exactly needs to be proved here. It was not sufficient for the claimant to show that there was a real prospect that the Council may have offered a new contract rather than modifying the existing contract – the hypothetical scenario had to relate to the specific (and real) contract and the procurement process that led to its original award.
• Reg 72(8)(c) - Change of Economic Balance
  • This judgment provides helpful clarity as to what a constitutes the “economic balance” of a contract. This does not simply refer to the value of the contract (considered as part of the “scope” of the contract under Reg 72(8)(d)), but to the position of the contractual payment mechanisms against a concept of “reasonable compensation”. In this instance, this came down to an analysis of the commerciality of the arrangements, of profit margins, and of the significance (or in this case, insignificance) of the relevant figures in the context of the overall value of the contract.

3 - The Narrowest Gate

Relying on a “clear, precise and unequivocal review clause” remains a very difficult thing to do.

Fortunately for the Council, getting a modification through one gateway is all that is needed. As the modification in this case was not substantial, the analysis of Reg 72(1)(a) was merely academic. It does, however, serve to underline how difficult this particular gateway is to get through. Para. 197 of the judgment formulates the requirements of this gateway as follows:

1. "There are clear, precise and unequivocal clauses which provide for the making of modification;
2. They state the scope and nature of possible modifications as well as the conditions under which they may be used, and
3. They do not provide for modifications that would alter the overall nature of the contract.”

In addition, the judgment says that the modification agreed in practice must be at least substantially adhere to the relevant clauses, both in terms of the nature of the modification and the procedure of its implementation.

Contract drafters, procurers and operational managers alike should be aware that the usual wording around varying the contract if the parties agree to do so is not sufficient to open this gateway. Such a variation would have to rely on one of the other gateways – otherwise Reg 72(1)(a) would serve no purpose at all. As para. 215 of the judgment puts it

“of course, the parties to the IWHC, as with any other contract, could agree any variations they wanted. But the fact that they do so does not without more mean that it is a variation covered by and made pursuant to [the relevant review clause] for the purposes of the Reg 72 (1) (a) gateway”.

Finally, as an aside, the reference to Regulation 72 “gateways” was a point of interest for our team, who have been merrily referring to “safe harbours” since 2014. After a bit of discussion, we agreed that “gateways” is a more suitable term: it implies progress, the point that gives access to the next bit of the journey, rather than the safe harbour notion of taking refuge from challenge. If our team can assist you in making progress in your procurement activities, please get in touch.

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