On 1 July 2015, the Supreme Court dismissed an appeal by Edenred (UK Group) Limited (“Edenred”) against HM Treasury’s (“HMT”) decision that the government’s new tax free childcare scheme would be administered by National Savings and Investments (NS&I) via its existing outsourced services contract with a private company.

Edenred & anr v HMT and others: The Facts

As part of its 2013 budget, the government announced a tax-free childcare scheme whereby monies allocated to HM Revenue and Customs (“HMRC”) by HMT would be delivered through “childcare accounts” held by eligible parents (the “Scheme”). The Scheme is due to be introduced in autumn 2015.

Rather than putting the provision of such childcare accounts out to tender, the government decided to use NS&I to administer the accounts and supporting services, essentially keeping the work “in- house”.

However, NS&I had, since 2009, outsourced its back office functions to a private sector provider and its current outsourcing contract had been awarded to Atos IT Services UK Limited (“Atos”) in 2013 (the “Atos Contract”) following a competitive procurement process. That procurement complied with the Public Contracts Regulations 2006 (the “2006 Regulations”) and there was no challenge to the original contract award.

In order to implement the Scheme, it was intended that HMRC would enter into a memorandum of understanding with NS&I (the “MOU”) which would outline the requirements of the Scheme and, at the same time, the Atos Contract would be amended to address the specific requirements of delivering the Scheme. It should also be noted that the Atos Contract contained within it certain contractual change provisions which  envisaged the extension of the operational services to be provided by Atos so as to enable NS&I to extend its business to  business offering to other public bodies.

Edenred contended that the proposed amendment to the Atos Contract was contrary to EU procurement law and, as a result, that the decision to use NS&I to deliver the Scheme was unlawful. Edenred claimed that the arrangements (a) involved the conclusion of a public services contract or economic opportunity (within the meaning of the 2006 Regulations and Article 56 of the Treaty on  the Functioning of the European Union (“TFEU”) respectively) between either or both of HMT and HMRC on the one hand and NS&I on the other; and (b) would involve a material variation to the existing public services contract between NS&I and Atos. Edenred argued that, in either case, there should have been an open, clear, transparent and competitive procurement exercise before a contract was awarded to administer the Scheme.

The Legal Background

The principle purpose of EU procurement law is to develop effective competition in the field of public contracts. Should a public body wish to obtain services by a public contract and the contract exceeds a prescribed threshold, the public body must advertise the opportunity and follow fair and transparent procedures ensuring equality of treatment, to enable potential service providers to compete for the work.

Amendments to an existing public contract will fall within the procurement regime and be treated, in substance, as the award of a new contract if they involve a material variation to the contract.

The 2006 Regulations were replaced by the Public Contracts Regulations 2015 (the “2015 Regulations”) on 26 February 2015 and, although Edenred’s challenge was brought under the 2006 Regulations, the Supreme Court held that it was appropriate to test the validity of the proposed amendment by reference to the 2015 Regulations as it is those Regulations which would govern the amendment to the Atos Contract.

Regulation 72 sets out six circumstances in which a contracting authority may modify a public contract without a new procurement, including, inter alia, where the modifications, irrespective of monetary value, have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses (Regulation 72(1)(a)) and where the modifications, irrespective of their value, are not substantial (Regulation 72(1)(e).

Regulation 72(8) sets out conditions which, if one or more apply, would result in a modification to a contract being considered substantial. The conditions include a modification which would render the contract or framework materially different in character from the one initially concluded, extends the scope of the contract or framework considerably or which, if it had been part of the initial procurement procedure, would have allowed for the admission of other candidates than those initially selected, the acceptance of a tender other than that originally accepted or attracted additional participants in the procurement procedure.

The Decision

On 22 January 2015, the High Court  dismissed Edenred’s claim holding that (a) the MOU did not amount to a services contract for the purposes of the Regulation; in particular,  it found that the MOU was not legally binding or enforceable but rather, merely reflected the internal arrangements between government departments to deliver a policy set by HMT; and (b) the amendments to the Atos Contract did not amount to the award of a new contract nor was it a material variation. It was also noted that the services needed to deliver the Scheme were covered by the original tender, although it did not expressly refer to the provision of childcare vouchers.

Edenred appealed to the Court of Appeal. Dismissing the appeal, the Court of Appeal found that, amongst other things, the proposed changes to the Atos Contract fell within the scope of the contractual variation provisions and that such variations did not materially alter the character of the original contract or extend its scope to such an extent that a new contract should have been tendered.

Edenred appealed to the Supreme Court. Edenred argued (unsuccessfully) that the proposed amendments to the Atos Contract extended the scope of the contract considerably, including services not originally covered and were therefore substantial.

The Supreme Court found that the original contract covered operational services to support NS&I's existing functions and the expansion of its business to business services up to a maximum value of £2 billion. This had been clearly set out in the original OJEU notice. As the original contract value was £660 million, it was clear that both the procurement and contract anticipated the expansion of NS&I’s business and that the successful bidder (Atos) would be expected to provide the operational services to achieve that expansion.

The Court also found that the prohibition on modifying a contract so as to extend to services not initially covered should not be read as a ban on such modification, provided the initial contract and procurement documents envisaged such expansion and obliged the successful bidder to undertake the expanded services; if it were otherwise, it would be difficult for government departments to outsource essential support services while also accommodating changes in events and policy.

The Court noted that there could be circumstances in which a court could conclude that a public authority had designed a contract as a means of avoiding its obligations under EU law and such a contract could be challenged as an abuse of right. However, in this case there was no challenge to the validity of the Atos Contract itself.

The Court emphasised the importance of looking at the particular contract at issue and the accompanying procurement documents and OJEU notice in order to ascertain the scope of the services to be provided. In this case, the Court concluded that the expansion provided for was within a reasonable compass. In particular, the modification was within the terms of the OJEU notice and economic operators would have been in no doubt as to the extent of the services they might have to provide to NS&I, albeit they would not have been aware of the specific public bodies to whom NS&I would provide business to business services in the future or the public policies the business to business services might support.

It was also found that the essential nature of the operational services to be provided by Atos would not be altered and that the contract included restrictions to maintain the economic balance of the contract and Atos' profit margin.

The Supreme Court also stated that it was inclined to the view that, in relation to Regulation 72(1)(a), the contract amendment provisions in the Atos contract were sufficiently defined to meet the "clear, precise and unequivocal" criterion. However, the Court did give some consideration to the  nature of the review clauses which the 2015 Regulations cover and concluded that it was a matter that was open to debate.

Comment

This decision provides some useful guidance on the application of Regulation 72 of the 2015 Regulations. In particular, although public contracts should not be designed so as to avoid public procurement obligations, it is useful for contracting authorities to know that they can put out for tender, a contract, the scope of which could be expanded in the future, so long as such expansion is envisaged and provided for in the initial procurement process.