There have been recent developments on the rules relating to contract modification which provide guidance on the application of regulation 72 of the Public Contracts Regulations 2015 (PCR). The recent case of James Waste Management LLP v Essex County Council (James Waste) considers the issues in applying the rules on in-term modifications in detail expanding on previous cases such as the Edenred litigation and Gottlieb v Winchester County Council.
The James Waste case concerned an integrated waste handling contract between Essex County Council (Council) and Veolia which was awarded in 2013 following a competitive dialogue process. The Council made an in-term modification to the contract in June 2021 which amended terms in relation to the calculation of Veolia's fees.
James Waste brought a claim against the Council on the grounds that the modifications to the contract were substantial and therefore impermissible under reg. 72 of the PCR. The general position under reg. 72 is that in-term modifications require a new procurement process. There are exceptions to the general position which also apply to both utilities' contracts and concessions contracts, these are:
- If the modification is not substantial, or
- One of the so-called "safe harbours" applies.
In this case, the court decided that the modifications were not substantial so the claim by James Waste was rejected. This decision was made on the basis that the modification did not change the economic balance of the contract so that it was in favour of Veolia and James Waste did not prove that an alternative supplier would have won the original tender if the original tender had included the modification.
The judgment provides guidance on the application of the safe harbours which is of importance to all contracting authorities:
- The safe harbours to modification detailed in reg. 72(1) should be interpreted narrowly. This is because the safe harbours are a derogation from the general rule that in-term modifications are not permitted.
- Obiter guidance stated that the defending authority (in this case, the Council) invoking a safe harbour does not bear any reverse burden of proof in relation to it, therefore it is not required to provide any evidence to counter the claimant's allegation that the modification was impermissible. Albeit if the defending authority fails to disclose documents as required or could have produced evidence but did not, it is likely that the court will take this into account. It was for James Waste to show, in this case, that an alternative tenderer would have had a reasonable prospect of winning the modified contract had it been the subject of the original procurement. In this case the judge was unable to say, on the facts and a balance of probabilities, that there was a real prospect that another bidder would have won the modified contract.
- The extension of scope test (reg. 72(8)(d)) should be interpreted in a common sense way even though the safe harbours should be interpreted narrowly. James Waste argued that any extension of scope with a value of more than the operative threshold for engagement of the PCR was 'considerable' but this was rejected by the court. The court made clear that a 'considerable extension of scope' should be interpreted in a common sense way.
- When relying on the 'unforeseeable circumstances' safe harbour (reg. 72(8)(c)) the court considered the limb where a change alters the economic balance of the contract in favour of the supplier. The court said that a two fold test should be applied:
- was there a change to the economic balance of the contract in favour of the contractor? This question should be interpreted by considering if the price increase/decrease constitutes 'reasonable consideration'; and
- if there was, was it such a change that was or was not provided for in the initial contract?
In this case the court said that the economic balance had not changed – whilst the fees to Veolia had increased those new fees offered a similar economic balance as that set in the original contract.
The court has provided long awaited guidance on the operation of the safe harbours in reg.72. This is a claim that is particularly scarce in terms of caselaw. Most procurement claim judgments are from losing bidders in a competitive process. It is generally thought that the lack of claims in this area stems from a lack of knowledge about when such changes are made to existing contracts. Under the PCR there is no absolute requirement to publish modifications – the publicity requirements only relate to a couple of the safe harbours. The Procurement Bill (the Bill) addresses this issue and also proposes reforms to the current law on in-term modifications.
Changes in the Procurement Bill
The Bill proposes several changes to the PCR on in-term modifications contained in sections 74 to 77. The first is the introduction of the concept of a 'convertible contract'. A convertible contract is a non-public contract which would become a public contract as a result of the proposed modification. This widens the scope for when procurement law needs to be considered and by whom as a contract which was not subject to regulated procurement when originally awarded may become subject to section 74 of the Bill (once enacted) during the life of the contract.
The safe harbours have been separated with the 'substantial' safe harbour and the 'below-threshold' safe harbour contained in section 74 the remaining safe harbours set out in Schedule 8 of the Bill. The safe harbours in Schedule 8 are named the 'permitted modifications', these are:
- Provided for in the contract (para 1) – This permitted modification broadly reflects the current safe harbour in reg. 72(1)(a) of the PCR however, the Bill replaces the requirement for the contract to state the "scope and nature of possible modifications as well as the conditions under which they may be used" with the requirement that the modification is "unambiguously provided for in the contract as awarded and the tender or transparency notice".
- Urgency and the protection of life (para 2 and 3) - This paragraph cross-references to a direct award under section 41 (direct award in special cases), section 42 (direct award to protect life) and para 13 of Schedule 5 (extreme and unavoidable emergency) to permit any modifications which would be able to be awarded under any of these provisions. This aims to avoid the situation where a contracting authority needs to determine whether a modification falls within reg. 72 or if it would be a direct award (and reflects the fall-out from the changes made to contracts during the COVID pandemic).
- Unforeseeable circumstances (para 4) - This permitted modification is similar to the reg. 72(1)(c) safe harbour however, it replaces the requirement for the contracting authority to be 'diligent' with 'reasonable' and requires that foreseeability is considered "before the award of the contract". The wording of this suggests that the scope to rely on this permitted modification may be wider. For example, in longer-term contracts it may be difficult to foresee circumstances which occur well into the term of the contract.
- Materialisation of a known risk (para 5, 6 and 7) - This permitted modification is a new concept under the Bill. The test to determine if the modification is permitted is:
- A known risk has materialised otherwise than as a result of any act or omission of the contracting authority or the supplier
- Because of that fact, the contract cannot be performed to the satisfaction of the contracting authority
- The modification goes no further than necessary to remedy that fact
- Awarding a further contract under Part 3 (instead of modifying the contract) would not be in the public interest in the circumstances – to determine this point, a contracting authority must consider whether a new contract could provide more value for money, and they may also consider technical and operational matters, and
- The modification would not increase the estimated value of the contract by more than 50% ignoring, for the purpose of estimating the value of the contract, the fact that the risk has materialised (this part of the test does not apply to utilities contracts).
A 'known risk' is classed as a risk which the contracting authority considered could jeopardise the satisfactory performance of the contract but because of its nature could not be addressed in the contract as awarded. The known risk must have been identified in the tender or transparency notice including reference to how it meets the description of a 'known risk' and the possibility of modification under this permitted modification – if the contracting authority does not do this the risk will not be classed as a known risk and the modification will be impermissible.
- Additional goods, services or works (para 8) - This permitted modification reflects the current safe harbour in reg. 72(1)(b) except for the fact that there is no longer a requirement to show that the additional services are 'necessary', it is enough that the contracting authority thinks that obtaining the goods, services or works from a different supplier would cause disproportionate difficulties and substantial duplication of costs.
- Transfer on corporate restructuring (para 9) - This permitted modification simplifies the current safe harbour in reg. 72(1)(d) to allow a new supplier to replace an old supplier following corporate restructuring or similar circumstances.
- Defence authority contracts (para 10 and 11) - There are two grounds where a modification is permitted for defence contracts only, these are:
- Where the modification is necessary to take advantage of developments in technology or to prevent or mitigate any adverse effect of those developments, and
- Where the continuous supply of the goods, services or works supplied under the contract is necessary to ensure the ability of the Armed Forces to maintain their operational capabilities, effectiveness, readiness for action, safety, security, or logistical capabilities, and the modification is necessary to ensure there is a continuous supply of those goods, services or works.
The proposed amendments to the 'substantial' safe harbour (reg. 72(1)(e) and reg. 72(8)) have broadly the same effect as the current rule however with some amended wording. Under the Bill, a modification will be substantial if it:
- Increases or decreases the term of the contract by more than 10% of the maximum term provided for on award (this is new)
- Materially changes the scope of the contract as opposed to a "considerable extension of scope" under the PCR. Changing the scope relates to modifying the supply of goods, services or works of a kind which was not already provided for in the contract, or
- Materially changes the economic balance of the contract in favour of the supplier. This test is the same as in the PCR except there is no requirement for the change to be "in a manner which was not provided for in the initial contract". This potentially makes the test more difficult to rely on as the modification will be substantial if the economic balance materially shifts to be in favour of the supplier regardless of whether the manner of the change was provided for in the initial contract.
The 'below-threshold' safe harbour mirrors the current regulation under reg. 72(1)(f) and reg. 72(5) with only a minor amendment to the test. The requirement that the modification does not "alter the overall nature of the contract or framework agreement" has been replaced by the test that it does not "materially change the scope of the contract". However, we predict this amendment will have little impact on the application of the test as the change simply keeps the test in line with the new terminology in the Bill.
There is a new publicity requirement in the Bill relating to modifications – before modifying a public contract or a convertible contract the contracting authority must publish a 'contract change notice' (s.75(1)). This extends the current publicity requirements under the PCR which only apply to the 'provided for in the contract' safe harbour and the 'unforeseeable circumstances' safe harbour. The publicity requirement now applies to all of the safe harbours except the below-threshold safe harbour or where the modification increases/decreases the term of the contract by 10% or less. The contract change notice should set out that the contracting authority intends to modify the contract and any other information which is specified in section 95 of the Bill (notices, documents and information: regulations and online system). The contracting authority can include a voluntary standstill period of no less than 8 working days in the contract change notice if they wish. After the modification is made, the contracting authority must publish either a copy of the modified contract or the modification itself within 90 days. The modification only needs to be published if a contracting authority was required to publish a contract change notice and the modified contract is worth more than £5,000,000.
The Procurement Bill is due to enter report stage this month therefore the proposed changes under the Bill are subject to change. We await the final form to be passed as legislation and any accompanying guidance and statutory instruments to be issued for consultation. We will comment on those as they are available. Please keep an eye on our website and social media channels for further commentary.
If our expert procurement lawyers can be of assistance in the meantime, please do not hesitate to get in touch.