In Edenred (UK Group) Ltd v (1) Her Majesty’s Treasury (2) Her Majesty’s Commissioners for Revenue and Customs (3) National Savings and Investments [2015] UKSC 45, the Supreme Court unanimously dismissed Edenred’s challenge to Her Majesty Treasury’s (“HMT”) decision to award the administration of its new flagship tax free childcare scheme (“TFC”) to National Savings and Investments (“NSI”). 

This judgment approved the decisions of the High Court and the Court of Appeal and is significant in that it deals with the important issue of the circumstances in which post-contract award amendments to a public contract are acceptable under public procurement law.

BACKGROUND

The TFC scheme will replace the government's existing employer-supported childcare scheme.  Edenred provides services to employers who operate the existing scheme and the award of the administration of the TFC scheme to NSI will have a very substantial impact on its business.

NSI is a non-ministerial government department which is accountable to Parliament through HMT.  Following consultation by HMT and Her Majesty's Commissioners for Revenue and Customs (“HMRC”) (another non-ministerial government department), it was resolved that HMRC would collaborate with NSI to deliver the TFC scheme.

The demarcation of NSI's and HMRC's roles and responsibilities were set out in a Memorandum of Understanding (“MOU”).  The use of an MOU is normal practice when arrangements are made between two government departments to work together to implement a specific policy.

NSI was to administer the TFC scheme via Atos IT Services Ltd (“Atos”), to which it had outsourced its operational functions following the carrying out of a tender process under the Public Contracts Regulations 2006 (the “2006 Regulations") and the conclusion of a contract between the parties in May 2013 (the “Atos Contract").  No challenge was made to the contract award, which was stated to have a value at that time of £660m, but with the expectation that this would increase as a result of the intended expansion of NSI's business to business (“B2B”) services.  B2B services involved NSI providing certain type of operational services such as bank accounts and payment services "to other public sector organisations". The TFC scheme was a B2B service. 

It was common ground that the Atos Contract (the term of which is eight years extendable to up to 11 years in total) would need to be amended to take account of the requirements for administering the TFC scheme ("the Amendment Agreement").  Atos would derive additional revenue of nearly £133m over an initial five-year period for its administration of the TFC scheme.

As confirmed in our earlier briefing, Edenred initially advanced claims under the 2006 Regulations  on two grounds:

  • The MOU between HMRC and NSI was a public services contract and therefore caught by the 2006 Regulations (or Article 56 TFEU in the alternative); and
  • The Amendment Agreement was a material variation to the Atos Contract, such that it would be necessary to run a new tender process in accordance with the 2006 Regulations (and subsequently the Public Contracts Regulations 2015 (the “2015 Regulations").

Although only the second ground was taken forward to the Supreme Court, there are noteworthy points from the lower courts' determination on the first ground.  Edenred also advanced an alternative ground before the Supreme Court, namely that the proposed arrangements amounted to the award of a public services contract between HMRC and Atos (not NSI).

Judgment was handed down by the High Court on 22 January 2015, by the Court of Appeal on 31 March 2015 and by the Supreme Court on 1 July 2015.

Was the MOU between HMRC and NSI a public services contract?

A public services contract is a matter of Community law.  It must be a legally binding agreement made in writing with a "person" who has a distinct legal personality from the contracting authority.    Although the High Court did not need to express a final view on this, it was not convinced that HMRC and NSI were able to contract with each other due to the doctrine of Crown indivisibility.

The fact that each of NSI, HMRC and HMT are denoted as contracting authorities under the 2006 Regulations does not mean that any arrangements made between them will necessarily constitute a public contract (or a contract at all).  

The High Court and Court of Appeal emphasised that the application of public procurement rules should not interfere with the freedom of public authorities to perform the public service tasks conferred on them by using their own resources, which includes the possibility of co-operation with other public authorities.  

The MOU stated on its face that it was not legally binding.  Notwithstanding that fact, the MOU resembled a detailed commercial contract in many respects (which included reflecting provisions of the Amendment Agreement).  Edenred therefore submitted to the Court of Appeal that it should resolve matters by looking at the "substance" of the arrangement rather than its form.  However, it was held that the "substance and reality" of the MOU was "a classic example of the distribution of public work between different departments or entities within central government."

It was held that the MOU was not a contract; it was a non-legally binding agreement which reflected internal arrangements made between government departments to deliver the TFC scheme.  Accordingly, neither the Regulations nor Article 56 of the TFEU were engaged. 

Was there a public services contract between HMRC and Atos?

As noted above, this was Edenred's alternative argument before the Supreme Court.  It was rejected.  It was held that the MOU between HMRC and NSI was entirely distinct to the Atos Contract.  The reasons for this conclusion included the fact that it was NSI and not HMRC that could enforce the Atos contract.  It was also the case that under any B2B scheme, the service recipient would receive the services from NSI - the fact that the service recipient would discuss those services with Atos as the outsourced provider did not alter this.  

Was the Amendment Agreement a material variation to the Atos Contract which necessitated a new tender process?

The Supreme Court approached this in a different manner to the High Court and Court of Appeal.  The lower courts did not consider that the claim engaged the 2015 Regulations.  The High Court heard the matter before the 2015 Regulations were in force and the Court of Appeal considered that the correct approach in the context of material variation was to apply the Pressetext test rather than Regulation 72 of the 2015 Regulations because the procurement process was commenced prior to 26 February 2015. Pressetext has, of course, largely been codified within Regulation 72 and the Court of Appeal and Supreme Court did arrive at the same conclusion although by different routes.  They respectively held that the proposed amendments to the Atos Contract were not material (under Pressetext) or substantial (under the 2015 Regulations).

The Court of Appeal found as a matter of fact that:

  • had the modifications been included as part of the initial procurement procedure, it would not have allowed for other candidates to be admitted.  Edenred itself would not have met the PQQ financial threshold (and nor would its Group company); and
  • the modifications had not changed the economic balance in favour of Atos in a manner which was not provided for in the initial contract.  The Atos Contract included a fixed price formula for future B2B services and Atos did not stand to make a return under the Amendment Agreement above and beyond the profit margin it received on its core services.

In its appeal to the Supreme Court, Edenred did not seek to disprove these conclusions and focused instead on the argument that the modifications amounted to a considerable expansion of the scope of the contract to encompass services not initially covered (a Pressetext criterion now codified in a simplified form in Regulation 72(8)(d)). In its decision the Supreme Court found that:

  • The OJEU notice expressly catered for contract changes to include the provision of future B2B services up to a financial ceiling of £2 billion.  The value of the additional services was comfortably within that ceiling; and
  • The related procurement documents including the draft contract envisaged such expansion of services, committed the economic operator to undertake them and required it to have the resources to do so.

Accordingly, the modifications were not substantial and did not require a new tender process.  Although that was sufficient to determine the appeal, the Supreme Court also considered whether the modifications were provided for in clear, precise and unequivocal review clauses (Regulation 72(1)(a)). It was inclined to agree with the Court of Appeal's finding that the variation clauses within the draft contract and the Atos Contract were sufficiently clear, precise and unequivocal when construed in their context.  However, the Supreme Court ultimately accepted that the correct interpretation of this specific provision was open to debate. 

The effect of this judgment is that the previous prohibition on the parties' ability to conclude the Amendment Agreement has been lifted and the parties can now implement the TFC Scheme.

COMMENT

This eagerly awaited judgment will be welcomed by UK contracting authorities which are regularly faced with challenging decisions on the lawfulness of contract modifications.  The Supreme Court's decision essentially provides for a more liberal interpretation of the circumstances in which a modification to an existing contract would not be deemed to extend the scope of that contract "considerably".   However, the decision should be treated with some caution, principally for two reasons: 

  • first, each case will turn on its specific facts and the Edenred cases refer, but do not describe in sufficient detail, the type of clauses, conditions and terms that were deemed to be acceptable by the court;
  • separately, there is also an argument that certain parts of the court's analysis and conclusions are not entirely consistent with EU law principles.  Broad vs narrow interpretation of EU law requirements

It is perhaps surprising that the Supreme Court was prepared to place such weight on the broad nature of the OJEU notice and related procurement documents, despite there being no real specificity as to the future B2B services which may become part of the Atos Contract. It was comfortable that the scale and nature of NSI's aspirations for the provision of B2B services, which the Atos contract was designed to support, were "within a reasonable compass".

What also seems to be missing from the court's analysis in this context, is fuller consideration of the extent to which the terms and conditions on the basis of which additional future services might be provided need to be set out clearly in the procurement documents and agreed in the context of the original tender procedure, or whether it is sufficient to agree the principles on the basis of which such additional services would be provided in the future, leaving the detailed terms and conditions to be agreed at some point after contract award when the additional services are required.  The court's decision suggests that the latter approach is acceptable, although it should be noted that this was in circumstances where NSI could require Atos to undertake future B2B services.  Whether such an approach is consistent with EU Court authorities such as Succhi di Frutta (Case C-469/99) is open to question.  

Separately, there is an argument that the meaning of extending the scope of the contract "considerably" after award is an issue of EU law which has yet to be clarified by the EU court and which should have, therefore, been referred to the EU Court for determination.

Applicability of the 2015 Regulations

It is also surprising that the Supreme Court relied on Regulation 72 when determining whether the proposed modifications were substantial.  It is likely that it did so as a matter of public interest, but this is inconsistent with the transitional arrangements in Regulation 118 which provide that the 2015 Regulations are only engaged when the procurement process is started on 26 February 2015 or later (even where the modification is to take place after that date).

We do consider that the Supreme Court's approach in this regard is a sensible one (and was what we had advocated when responding to the consultation on the EU directive) but it goes against what is provided for in the legislation. The approach is also consistent with the CCS guidance on amendments to contracts during their term, which may have also influenced the Supreme Court's decision, although of course such guidance has no legal standing.

However, on the findings of fact, it is likely that the Supreme Court would have still arrived at the same conclusion had it applied the Pressetext test.

Clear, precise and unequivocal

Although the Supreme Court did not have to decide whether the variation clauses within the Atos Contract were clear, precise and unequivocal (the Court of Appeal found it to be so), it accepted that the position was not clear in this area and intimated that it may be an issue for consideration by the EU Court.

This case is to be contrasted with Gottlieb v Winchester City Council where the Court found that the variation clause was so broad and unspecific that it did not comply with the principle of transparency.  

Given, the uncertainty as to the correct interpretation of this requirement, contracting authorities should exercise caution when seeking to rely on "clear precise and unequivocal" review clauses for making post-contract award modifications.

Non-binding arrangements between contracting authorities

The judgments contain a useful summary of the factors to be considered when making a determination on whether arrangements between contracting authorities constitute a binding contract, which is in principle subject to procurement regulation.  Government bodies and other contracting authorities can be reassured that genuine MOU-type of arrangements, which are capable of "being torn up and replaced at a moment's notice with no legal repercussions" should not engage the 2015 Regulations or Article 56 of the TFEU.  Care should, of course, be taken to consider each arrangement on its individual facts.

The judgments can be found at the following links:

High Court

Court of Appeal

Supreme Court