Summary
This case is an example of a comparatively rare type of procurement challenge, not to a competition, but to the variation of an existing awarded contract, alleged to have been varied beyond the narrow boundaries permitted by the Public Contracts Regulation 2015 (“PCR”). The crux of the argument is that variation of a contract beyond the limits permitted by Regulation 72 PCR (‘Modification of contracts during their terms’) is effectively an impermissible direct award, to the authority’s contracting counterparty, of a contract which ought instead to have been subject to further competition.
That was the essence of the claim brought by James Waste Management LLP (“James Waste”) against Essex County Council (“the Authority”). This claim was unsuccessful as James Waste was not able to establish that the modification was sufficiently “substantial” within the meaning of Regulation 72(8). The judge held that “safe-harbour” tests in Reg 72(1)(a)-(f) should be interpreted narrowly as they amount to derogations from the general rule in Reg 72(9). However he found that there was no material variation on the facts of this case, applying those tests.
The case is of practical significance to suppliers and contracting authorities alike who may be operating under, or contemplating, a modification to an awarded contract, or competitors looking at such modifications with an eye to a procurement challenge. It is relevant in considering where the boundaries of “substantial” may lie, and the considerations the Court will take into account when assessing whether a modification is “substantial”.
Outline of the case
Such so-called ‘material variation’ claims are necessarily fact specific, in particular in light of the open textured wording of some of the ‘safe-harbour tests’ (i.e. the tests for the extent of variation which is permissible within the terms of the PCR), which use language like “substantial modification”, “significant inconvenience”, “materially different in character”, and “substantial duplication”. This analysis therefore contains a more detailed summary of the facts to add context to the Court’s conclusions as to why the Authority’s contractual variations were permissible and James Waste’s claim was unsuccessful.
As further explained below, James Waste argued (unsuccessfully) in particular that:
- The modification of the Authority’s Integrated Waste Haulage Contract (“IWHC”) with Veolia and the Authority’s award of a call-off contract to Enovert under a related Framework Agreement were unlawful.
- The contractual modification to the IWHC was a "substantial" modification under Reg 72(1)(e), as it rendered the IWHC materially different in character, changed the economic balance of the contract, and extended the scope of the IWHC.
- Additionally, the modification was not permitted by Reg 72(1)(a). James Waste also questioned whether the provisions of Schedule 21 of the IWHC satisfied the requirements of Reg 72(1)(a).
- The Authority’s conduct in its related award to Enovert under the Framework Agreement, lacked transparency, contrary to the general principles in Regulation 18 PCR.
On the specific facts, these arguments were unsuccessful.
Relevant context for the Modification and Framework call-off
The Authority is responsible for the disposal of waste collected by, and for, the borough and district councils in its area. The boroughs and district councils are known as Waste Collection Authorities (“WCAs”). The Authority provides directions to the WCAs as to where waste must be delivered.
The Authority sought to discharge its waste disposal obligations via an IWHC awarded to Veolia following a competitive dialogue procurement process. The IWHC concerned the running of recycling centres, and the haulage of waste, as well as the management of waste transfer stations (“WTSs”). It is important detail that those WTSs were in five specific locations. The duration of the IWHC was 8½ years but included an option to extend the contract by a further seven years.
Separately, the Authority established a Framework Waste Agreement split into Lots (the “Framework”) for services including haulage, transfer and disposal of waste. The Framework was to complement the IWHC.
- James Waste was a party to two of the Framework Lots and had, prior to its legal challenge, won mini-competitions for call off orders under the Framework which had been very lucrative. In particular, James Waste’s site in Rochford was proximate to, and therefore well placed to receive waste from, four of the WCAs.
- It is relevant that the call-off contract payments were linked to a price per tonne for processing and disposal of the waste, but they were also ‘zero-tonne’ (i.e. no minimum tonnage commitment) contracts. However, prior to the developments described below, the WCAs brought many thousands of tons of waste to that site, generating over £10M in fees in a single year for James Waste.
- The call-off contracts under the Framework were of limited duration (18 months). When they came up for renewal, further 18 month zero-tonne call-off contracts were placed with James Waste under those same Lots. However, at the same time, further 18 month zero-tonne contracts were also placed with Enovert under the three Lots of the Framework to which James Waste was not a party.
It is relevant that Enovert’s landfill site at Bellhouse, near Colchester, was far less proximate (in fact some considerable distance) from those four WCAs who had been bringing their waste to James Waste’s site. However, the Authority had powers to (and did) compel the WCAs to start taking their waste to Enovert’s Bellhouse site, rather than James Waste’s more proximate Rochford site.
That direction to start taking waste to this less proximate location caused problems for the WCAs both because the time taken to travel that addition distance was time when the WCAs’ waste vehicles would not then be available for other work, and also because it involved crossing council boundaries which triggers so-called “tipping away payments” which were expensive.
The Authority’s solution to this was to agree a modification to the IWHC awarded to Veolia, to include both a further (sixth) WTS location more proximate to the four WTAs, and to include haulage services from that 6th site to Bellhouse. This modification was captured in an Authorised Change Request (“ACR”) to the IWHC signed by Veolia and the Authority on 25 June 2021.
This sixth WTS was conveniently closer to the WCAs than Bellhouse and delivery there would both take less travel time and avoid the tipping away payments. Veolia would process the waste there and then (as part of the new haulage services) transport the waste to Bellhouse. The sixth WTS would be operated by Waste-A-Way (“WAW”) which would be a subcontractor to Veolia.
Several days prior to the ACR being executed, on 18 June 2021, James Waste issued a claim challenging (i) the modification and (ii) the Enovert Service Order, as both being unlawful.
Overarching issues
As an important overarching finding, Mr Justice Waksman held that ‘safe-harbour’ tests in Regulation 72 (1) (a)-(f) should be interpreted narrowly because they amount to derogations from the general rule set out in Regulation 72 (9) that a new procurement procedure is required for all modifications of the provisions of a public contract or a framework agreement during its term other than those which fall within the safe-harbours.
A further very interesting overarching, but ultimately obiter (i.e. non-binding), part of Mr Justice Waksman’s judgment was his assessment that:
“…had it been necessary for me to decide the point I would hold that a defendant authority wishing to invoke one or more of the gateways does not bear an evidential (or any other) burden of proof in relation to it. In any particular case, if a defendant could have adduced evidence on a particular point but chose not to, or is found to have given inadequate disclosure of documents which are essentially in its possession, of course, the Court will take account of such matters when assessing where the facts lie; but a reverse burden of proof is not needed in order to assist it.”
In other words, it is for the Claimant alleging an unlawful variation to show on the balance of probabilities – and the evidence available to it (albeit some of that evidence may be obtained from the Authority as part of court mandated disclosure) – that such a variation has been made and is unlawful. It is not the law that, once alleged, the burden shifts to the Authority to show there was no unlawful variation.
Consideration of the specific safe-harbour tests
Not a “substantial” modification” (Reg 72(1)(e))
Modifications are permitted where irrespective of their value, they are not substantial within the meaning of Regulation 72(8). However, a modification will be considered “substantial” under paragraph (8) if the modification “renders the contract or the framework agreement materially different in character from the one initially concluded” (Reg 72(8)(a)) and/or the modification “extends the scope of the contract or framework agreement considerably” (Reg 72(8)(d)) (emphasis added)
The judge found the contract was not “materially different in character”. The Court’s method of assessment of this factor was to compare the IWHC in its initial form with the modified IWHC. By that comparative exercise, the key differences concerned the introduction of the additional (6th) WTS. The Court considered it relevant that:
- it was not a “Site” under the definition given in the IWHC;
- The new site was not owned by the Authority;
- A different fee structure was in place; and
- It was in different part of Essex as compared to the other WTSs.
The judge decided that these differences did not amount to the IWHC being materially different – whether looked at collectively or individually.
Waksman J held that the “considerably” should be interpreted in a “common-sense way” and therefore found that the scope had not been considerably extended. In particular:
“In terms of value increase, the £775,000 estimated additional income for Veolia as a result of the modification was not considerable. Nor, in fact was the actual additional income of £800k, although for the avoidance of doubt the Court confirmed the relevant point of assessment was the date of the modification (i.e. the estimated increase in value at that time). The estimated value of the IWHC as a whole was £300 million, based on an annual cost per year of £37.5 million. £775,000 is 2% of that yearly income and 0.26% of that income over eight years.”
In terms of the scope of services, the extended ambit of the services were not, in the Court’s view, “additional services in the overall scheme of things. As before, Veolia had to transport and process the waste from BCPR along with the other WCAs’ waste. This did not change.”
Acceptance of a different tender (Reg 72(8)(b)(ii))
A modification will be considered “substantial” under paragraph (8) – and therefore not permitted – if the modification introduces conditions which, had they been part of the initial procurement procedure, would have allowed for the acceptance of a tender other than that originally accepted.
The Authority argued that it is for James Waste to establish that the conditions brought about by the modification would have resulted in the acceptance of a different tender. James Waste, contended that all that needed to be established was a real possibility or prospect that another tenderer would have won.
The Court held that “… the hypothesis or counterfactual required is an initial procurement where the contract contains the actual modifications at issue and in this case, that must mean the modifications during the life of the contract when they actually occurred.” On the basis of that counterfactual, and the factual information before the Court about who would have been interested in such a procurement, Waksman J considered he was unable to say, on the balance of probabilities, that that there was a real prospect that another bidder would have won the procurement in the counterfactual scenario.
Economic balance (Reg 72(8)(c))
A modification will be considered “substantial” under paragraph (8) – and therefore not permitted – if the modification changes the economic balance of the contract in favour of the contractor in a manner which was not already provided for in the contract. The Court considered that this should be analysed in two stages:
- Was there a change to the economic balance of the contract in favour of the contractor?
- If there was, was it such a change that was or was not provided for in the initial contract?
James Waste argued that Veolia gained financially as a result of the modification. In particular, it argued that, when compared with the fees which were fixed at the outset of the IWHC in 2012/13, the new fee payable as part of the modification (a redacted figure in the judgment) appeared to be substantially better for Veolia. The Court dismissed this argument, in essence on the basis that the new fee offered a similar economic balance as the fixed fees would have done at the outset of the contract:
“the high inflationary pressure experienced by 2021 was unlikely to have been considered back in 2012 - 2013. There was no indexation applied to the fixed fee across the duration of the contract and by 2021, near the end of its fixed term, the actual cost was likely to have been under-represented by a fixed figure, compared with costs as at 2013, and the early years when it would probably have been over-represented.”
James Waste had not advanced positive evidence of uncompetitive in Veolia’s prices and the Court did not see that the economic balance of the IHWC had moved toward Veolia.
In light of the above, the modification was not “substantial” and therefore did not breach procurement law.
Alternative consideration: If the modification had been substantial, then could it have fallen within Reg 72(1)(a)?
This safe-harbour provides that a modification is permissible where, irrespective of its monetary value, it has “been provided for in the initial procurement documents in clear, precise and unequivocal review clause”. The IHWC contained a procedure for modifications to be made. However, the Court held (obiter; as it was not necessary for it to decide this point in light of the above) that this safe-harbour was unavailable, even on an initial review, because parts of the modification procedure had not been followed when making that change.
Was there an improper use of the Framework per Reg 33 (‘Framework Agreements’) or had it been operated contrary to the general principle of transparency (Reg 18)?
James Waste contended that there had been an improper use of the Lot under which the call-off contract with Enovert had been placed. This was because (it argued) this Lot was reserved for waste from a specific Mechanical Biological Treatment facility when that facility was operating. However, the facility was not in operation. As such, the waste did not come from the facility, and so no call-off should have been placed under that Lot.
However, Waksman J concluded that – as a matter of construction – when the facility was not operating the scope of the Lot was wider than the receipt of waste from the facility, and therefore did not prevent the award of a call-off contract in the event that the facility is not producing waste.
In light of the above, the Framework was also not been operated with a lack of transparency. The Authority had been entitled to operate it in the way that it had.
Case: James Waste Management LLP v Essex County Council [2023] EWHC 1157 (TCC)
This article was written by Chris Jackson and Lloyd Nail who are lawyers in Burges Salmon’s Band 1 Ranked Procurement Team.