High Court rules on substantial modification test in the UK Public Contract Regulations

In the recent case of James Waste Management LLP v Essex County Council, the High Court considered whether a modification to the council's integrated waste handling contract was a substantial modification resulting in a potential breach of the Public Contract Regulations (PCR) 2015.

Regulation 72(8) sets out a list of factors which, if any one of them is satisfied, will render a modification to the public contract as substantial and therefore require that it falls within one of the statutory "safe harbours" to proceed without a further competition.

Since the seminal cases of Pressetext and Edenred in this area, there has been little judicial consideration of the principles of Regulation 72 in England and Wales. While the application of the factors in Regulation 72(8), which lead to a modification being substantial, is specific to the integrated waste handling contract in question, the judgment provides a detailed discussion of those factors that will be of general interest for parties considering a potential modification to a public contract.

Materially different in character

The change to the contract related to transporting waste to a different site in Essex, which the judge held there was not a change to the overall nature of the contract so as to render it "materially different in character". When assessing this, the judge took into account the duration of the modification (which was only five months of an eight-year contract), its value relative to the contract overall, and the fact that the modification did not lead to the delivery of additional services. These facts supported the conclusion that no material difference was caused by the modification.

Extended scope

The second element briefly explored was whether the modification "considerably" extended the scope of the contract. It was held that when looking at extensions to scope, the fact that the change resulted in an above threshold increase in overall value does not itself render the extension "considerable", with the judge commenting that "considerable" should be interpreted "in a common-sense way".

This was in part because reference to the threshold for this purpose could cut across the safe harbours for additional services (which enables substantial amendments with a potential increase in value of up to 50% of the initial contract) or the de minimis safe harbour for low-value modifications (under 10% of the initial contract value or 15% for works contracts) provided these are also under threshold. Application of the threshold values to the question of whether a modification is substantial is therefore not the approach the court endorsed. In this case, the proposed extension was held not to considerably extend the scope of the contract.

A different tender outcome

The judgment contains a detailed discussion of Regulation 72(8)(b)(ii) on the application of the "different tender" criteria. The court considered that for this factor to point to the modification being substantial, there needed to be a realistic prospect of another bidder or a different outcome in light of the modified contract, not a fanciful possibility of such a bidder or outcome.

The judge explored the hypothetical exercise of whether the change would have resulted in a different supplier winning the contract, as has been considered in previous case law, but applying this to these facts, the judge concluded that this would not be the outcome in this case noting: "It cannot be enough to say that there is a real prospect of a different result, simply on the basis that one assumes a slightly different contract offered. What is surely required is a real prospect of a different outcome because the contract now contains the modification."

In this case, the close scores of first and second placed bidders in the original competition did not itself lead to the conclusion that another outcome was a realistic prospect had the modified contract been the subject of the competition and as the modification was not considered substantial on this basis.

Change of economic balance

The final discussion was on whether the modification was substantial due to changing the economic balance in favour of the contractor, which the judge was satisfied was not the case. In summary, when looking at the overall context of the contract and taking into account "reasonable compensation" where an increase in price also linked to an increase in services delivered, the modification did not lead to a change in economic balance.

Osborne Clarke comment

To date, the application of Regulation 72 has been before the courts on comparatively few occasions and as such this decision provides welcome further clarity as to when a modification will be substantial under the PCR 2015. The approach of the court to consider the proposed modification in the round and with close reference to the terms of the existing contract provides helpful guidance for assessment of whether a proposed modification will be substantial. This is an area which is important for both contracting authorities and suppliers to ensure that modifications agreed during the life of a public contract are within the scope of changes permitted by the PCR 2015.

Charlie Henig, Knowledge Executive at Osborne Clarke, assisted with this Insight.