The importance of future proofing contracts
Last week, the Supreme Court handed down judgment on an appeal against a proposed £132.8 million variation of a public sector outsourcing contract between National Savings & Investment (NS&I) and Atos IT Services Ltd. (Edenred (UK Group) Ltd v HM Treasury  UKSC 45). The judgment highlights the importance of public sector bodies building flexibility both into their procurement processes and to their contracts. It contains useful guidance for authorities and contractors on how to approach longer term strategic IT and infrastructure contracts.
In 2014, following a consultation on delivery options for a new policy to replace employer-supported childcare, the previous Government announced its decision that new childcare accounts would be provided and administered by NS&I. To perform that task NS&I proposed a variation to its existing IT outsourcing contract with Atos. The variation was to have an initial term of five years and had an estimated contract value of £132.8 million. The contract had been awarded to Atos in 2013 following an OJEU tender process conducted under a competitive dialogue procedure.
Edenred, a provider of services to employers who operated the previous childcare scheme, and the Childcare Voucher Providers Association, a trade association, brought proceedings to prevent the implementation of the Government’s decision to use NS&I. Specifically to prevent the proposed variation of NS&I’s contract with Atos. Those proceedings were brought separately as actions under the EU procurement rules (the Public Contracts Regulations 2006) and for judicial review. Both the High Court (Andrews J) and the Court of Appeal dismissed the grounds of claim. On appeal, the central issue for the Supreme Court was whether the proposed variation of the Atos contract amounted to a ‘material variation’ such as to constitute the illegal direct award of a new contract for the purposes of the EU procurement rules.
In a unanimous judgment delivered by Lord Hodge the Court dismissed the appeal. Applying the provisions on material variations now contained in the new 2015 Public Contracts Regulations, the Court was satisfied that the proposed variation did not considerably extend the scope of the services procured under the Atos contract such as to involve ‘substantial modifications’ for the purposes of Regulation 72(1)(e) of the 2015 Regulations.
As Lord Hodge explained at paragraph 36 of the judgment:
“I do not accept that one should read the prohibition from modifying a contract to encompass services not initially covered as banning the modification of a public contract which extends the contracted services beyond the level of services provided at the time of the initial contract if the advertised initial contract and related procurement documents envisaged such expansion of services, committed the economic operator to undertake them and required it to have the resources to do so. The court must look to the OJEU notice and the other procurement documents, including the contract contained in the ITT, to ascertain the nature, scale and scope of the operational services that the Atos contract was set up to provide. […]. There may 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. In such cases the contract might be open to challenge under EU law as an abuse of right. But here there is no challenge to the validity of the Atos contract itself.”
Further, the Court considered the separate basis provided for in Regulation 72 for permitting variations: “where the modifications, irrespective of their monetary value, have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses” (Regulation 72(1)(a)). Whilst technically obiter, as Lord Hodge founded on the modifications not being ‘substantial’ for the purposes of Regulation 72(1)(e), he went on to comment on the separate provision in Regulation 72(1)(a).
Placing particular weight on the degree of specificity in both the initial procurement documents presented as part of the original competitive dialogue procedure and the variations provisions in the contract itself, Lord Hodge concluded at paragraph 43 that:
“The Court of Appeal held that the contract amendment provisions in the draft contract which NS&I gave the three bidders and which ultimately appeared in the Atos contract were sufficiently clear, precise and unequivocal when construed in their context. The contract envisaged the extension of the operational services which Atos provides to NS&I to enable it to expand its B2B services to other public bodies. The restrictions in Schedule 2.11 of the Atos contract (a) confined the B2B opportunities to those within the scope of the OJEU notice and (b) set out the principles that governed the incorporation of a new B2B service into the agreement, inter alia restricting any increase in Atos’ profit margin and prohibiting the alteration of the allocation of risk. […]. I incline to the view that these restrictions, in their contractual context were sufficiently defined to meet this regulation 72(1)(a) criterion.”
The Edenred judgment provides helpful guidance for authorities and contractors on the application of the new contract variation provisions, now codified in Regulation 72 of the 2015 Public Contracts Regulations (applying to authorities in England, Wales and NI). It also confirms that the test set out in Regulation 72 is the relevant test even where the original contract was procured under the previous 2006 Public Contracts Regulations.
NS&I went to considerable efforts to ‘future proof’ the contract in dispute, foreseeing that it might be necessary to deliver additional services over the period of the contract. That foresight and careful procurement planning and contract drafting paid off when it came to a challenge to the £132 million variation.