Substantial change? Complete rubbish!

It concerned a change to a waste transport contract that involved Veolia providing waste processing at a new waste transfer station for a five-month period. In this ebriefing, we summarise the court’s findings on whether the modification was ‘substantial’ under one of the safe harbours provided for in the PCR. We will explore the other aspects of the case in subsequent briefings.

The contract modification

Veolia was responsible for managing the council’s recycling centres for household waste, the council’s waste transfer stations and the haulage of waste to various treatment and disposal points, including landfill sites.

In late 2020, the council identified a transport solution in respect of three of its district councils that would involve Veolia providing a processing service at a new waste transfer station other than the existing ones owned by the council for a five-month period. Once Veolia processed the waste there, it would transport it to the relevant landfill site. This arrangement could only be undertaken following a modification to the contract which was signed in June 2021. The modification provided for a new waste transfer station to be operated by a subcontractor to Veolia. Veolia would charge a gate fee on a per tonne basis for processing the waste at the waste transfer station and a rate per mile for its haulage services following the existing contract rate but with a minimum guaranteed mileage rate.

Was the modification a substantial one?

There are several exhaustive safe harbours set out in Regulation 72 of the PCR that permit certain contract modifications. The court highlighted that the principle of narrow interpretation applies to each safe harbour subject to them not being interpreted so narrowly that they are rendered ineffective. It also clarified that it is for the contracting authority to decide which safe harbour to invoke but for the claimant to establish on the balance of probabilities that the safe harbour does not apply. The court rejected the argument that the contracting authority bears any evidential (or other) burden of proof in this regard. First of all, it considered Regulation 72(1)(e) of the PCR.

Regulation 72(1)(e)

This applies where the modifications, irrespective of their value, are not ‘substantial’ the meaning of which is set out in Regulation 72(8) which codifies the principles established in the Pressetext² case. Where any of these principles apply, the modification is rendered substantial. The court pragmatically interpreted each relevant principle and held:

The modification did not render the contract materially different in character. 

Whilst the new waste transfer station was in a different area and was not owned by the council like the others used for the contract, the modification was still concerned with the haulage and disposal of waste from the district councils for which the council was responsible, and the change only affected the three district councils concerned. The modification was not providing for additional services and it was clear from the contract that some flexibility in terms of the introduction of new sites was intended throughout its term. Also, the modification was a relatively short-term contingency measure to operate for only five months in the context of an overall contract term of eight years and five months with the option for another seven years. The increase in price (0.81% of the total cost) did not render the contract materially different in character either.

The modification did not extend the scope of the contract considerably.

For all the reasons given above that led to the conclusion that the modification did not render the contract materially different in character, it was held that there was no basis for concluding that the modification considerably extended the scope of the contract either. The court indicated that ‘considerable’ should be construed in a common-sense way. It also rejected the argument that any extension which has a value of more than or not much more than the applicable financial threshold for the engagement of the PCR is sufficient to be ‘considerable’.

The modification did not introduce conditions which, had they been part of the initial procurement procedure, would have allowed for the acceptance of a different tender. 

The court rejected the notion that ‘allowed for’ means ‘would have entailed’. It is only necessary to demonstrate that there was a real prospect that another tenderer would have won had the modification been included in the original procurement, thereby protecting against real not hypothetical distortions of competition without creating too high a burden. The court held on the balance of probabilities that there was no real prospect that another tenderer would have won the procurement had the modification been included in the original contract, particularly given that the modification was so insignificant compared to the contract as a whole. 

The modification did not change the economic balance of the contract in favour of Veolia in a manner which was not provided for in the initial contract. 

The court acknowledged that sometimes a modification may be such that the original remunerative scheme under the contract cannot simply be applied (as with the gate fees here) or it could have been applied but altered in some way (as with the guaranteed mileage here). It endorsed Professor Sue Arrowsmith’s view that ‘reasonable compensation’ is the appropriate yardstick by which to judge a price increase and considered that the economic balance of the contract should be looked at as a whole. The court also noted Arrowsmith’s point that there might be a ‘de minimis rule’ that means that some small price changes are acceptable even if they alter the balance of the contract slightly in favour of the contractor, at least where there is good reason to make such change.

The court rejected the argument that Veolia had obtained a particularly favourable deal on the modification or any ‘uncommercial sweetener’. It took into account the very short-term nature of the modification with no guaranteed tonnage and the ability to be terminated on one month’s notice. About the gate fees, it held that if the additional services are rewarded by reasonable compensation in circumstances where, as here, the original rate of remuneration cannot be directly applied, there is no shift in the economic balance favourable to the contractor. As for the guaranteed mileage element, the court also failed to see how the modification was such as to change the economic balance of the contract as a whole in favour of Veolia. As the court decided that there was no change in economic balance, it did not need to then go on to consider whether any such changes were ‘provided for in the initial contract’. 

Will a similar analysis be applied under the Procurement Bill?

The definition of a ‘substantial modification’ in the Procurement Bill is different to and appears less stringent to that used in Regulation 72(1)(e) of the PCR. It refers to a modification that will ‘materially change the scope of the contract’ or ‘materially change the economic balance of the contract in favour of the supplier’. However, it is striking that it does not include any limb relating to conditions which, had they been included in the original procurement would have attracted a different pool of bidders, the admission of other bidders or a different tender result. This appears to be a significant relaxation. The Bill is still making its way through the House of Commons so we will have to see if the above drafting remains in the final version. Look out for further briefings on other aspects of this case.

¹James Waste Management LLP v Essex County Council [2023] EWHC 1157 (TCC)

² Pressetext v Ostereich [2008] ECR 1-4401

For more information on waste procurement, please contact Steven Brunning or Andrew Millross

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