Supreme Court rejects procurement challenge in first ‘material variation’ ruling

The Supreme Court has rejected a claim that the way the Government allocated £132.8m in services to a pre-existing outsourcing contract breached domestic and EU procurement law.

The case of Edenred (UK Group) Limited and another v Her Majesty’s Treasury and others [2015] UKSC 45 centred on the delivery of childcare accounts and services under the Tax Free Childcare (TFC) Scheme.

The Government allocated provision of the services to National Savings and Investments (NS&I), a non-ministerial Government department offering retail savings and investments to UK customers. NS&I also provides support functions to other public bodies, referred to as “business to business services” or “B2B services”.

NS&I has outsourced its own operational services. In 2013 it entered into a contract with Atos IT Services Limited to purchase support services including transaction management, printing, accounting, IT and customer services.

The award of the Atos contract followed a competitive tender process which complied with EU law on public procurement, as implemented in domestic law by the Public Contract Regulations 2006.

It was envisaged in the tender documents and in the Atos contract that it could be extended to support new B2B services provided by NS&I.

The Government then announced it would replace tax-relief for employers who contribute to their employees’ child-care costs with the new TFC scheme. This involves parents setting up “childcare accounts” into which HMRC contributes a 20% top-up, capped at £2,000 per year.

On 29 July 2014 HM Treasury decided that NS&I would deliver the new TFC policy for HMRC by providing and administering the childcare accounts and supporting services.

The arrangements between HMRC and NS&I were to be set out in a memorandum of understanding.

NS&I proposed to modify its contract with Atos to include services related to TFC, without any government body undertaking a public procurement process in relation to this work.

The appellants – Edenred (UK Group) Limited, a provider under the existing scheme, and the Childcare Voucher Providers Association – argued that the arrangements amounted to a material variation and that EU procurement law required a new tender process.

They commenced proceedings seeking declarations that the proposed TFC arrangements were unlawful under the 2006 Regulations and an order restraining the modification of the Atos contract.

On 27 October 2014 they were granted an interim order preventing the implementation of TFC.

Their claims were subsequently dismissed in both the High Court (Mrs Justice Andrews) and the Court of Appeal.

The Supreme Court today granted the appellants permission to appeal but unanimously dismissed their appeal. The interim order preventing the implementation of TFC has been set aside.

Lord Hodge, with whom Lord Neuberger, Lord Mance, Lord Sumption, Lord Carnwath agreed, gave the judgment.

The Supreme Court rejected the appellants’ argument that the proposed amendments to the Atos contract were substantial because they extended the scope of the contract considerably (reg.72(8)(d) of the Public Contracts Regulations 2015), encompassing services not initially covered.

Lord Hodge said: “The contract which NS&I entered into with Atos under the procurement which commenced in 2011 was to provide NS&I with the operational services that would enable it both to perform its established retail banking and investment functions and also to expand its B2B services up to the £2 billion maximum envisaged in the OJEU notice…..That is the contract which the economic operators competed with each other to win.

“The respondents required bidders to have the financial strength and other capabilities to achieve that role. While the initial value of the contract which was stated in the award of contract notice was £660,000,000…., the procurement process and the contract envisaged the expansion of NS&I’s business and required the outsource partner to provide the operational services to achieve that expansion.”

The judge said that had been the object of the contract; and it had been clearly stated in the OJEU notice.

“Economic operators can have been in no doubt as to the extent of the services they might have to provide to NS&I, albeit that they would not know the public bodies to whom NS&I would provide B2B services or the public policies which the future B2B services would support,” Lord Hodge found.

The Supreme Court judge said he could 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,” he said.

“In short, the question is whether the services were covered by the contract resulting from the procurement between 2011 and 2013, including its provisions for amendment of the contract. Were it otherwise, it is difficult to see how a Government department or other public body could outsource services that were essential to support its own operations and accommodate the occurrence of events and the changes of policy that are part of public life.”

Lord Hodge suggested that there might 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,” he said.

He added that the scale and nature of NS&I’s stated aspirations for the use of its infrastructure and other resources in providing B2B services to public sector bodies as well as its own retail financial services, which the Atos contract was designed to support, appeared “to be within a reasonable compass”.

Lord Hodge said the essential nature of the operational services that Atos provided was not altered by the proposed modification. There were also provisions in the Atos contract that restricted the scope of amendment to ensure that such modification did not alter the economic balance of the contract or increase the profit margin available to Atos.

The judge said that in these circumstances he was satisfied that the proposed amendment of the Atos contract to enable NS&I to provide the TFC services would not considerably extend the scope of that contract in terms of regulation 72(8) of the Public Contracts Regulations 2015 and that it therefore did not involve substantial modifications under regulation 72(1)(e). The applicants’ challenge therefore failed.

Lord Hodge said he was also "inclined to the view" that a criterion that a new tendering process may also be dispensed with if the proposed contractual variation has been provided for in the initial procurement documents in clear, precise and unequivocal review clauses (reg.72(1)(a)), was also satisfied.

But the judge added that the nature of the review clauses covered by the regulation was open to debate. “I am not persuaded that the nature of the review clauses was ‘acte clair’,” he said.

However, he said it was not necessary to decide these matters in order to determine the appeal.

Lord Hodge also rejected an alternative argument advanced by the appellants that there was in substance a public service contract between HMRC and Atos.

This was said to be on the basis that provisions in the memorandum of understanding between HMRC and NS&I were legally binding and were repeated in the proposed modification to the Atos contract, and that HMRC was the service recipient of B2B services provided by, and discussed with, Atos.

However, Lord Hodge said he was satisfied that there was “nothing in this alternative argument”.

“First and foremost, it ignores the background that NS&I is an existing public body with an extensive and established remit, which is quite separate from the TFC scheme, and that it is seeking to use its outsourced resources to provide B2B services to other public bodies,” he suggested.

“That context is part of the substance of the proposed arrangement and there is no legal basis for airbrushing NS&I out of the picture.”

Lord Hodge said he agreed with the Court of Appeal that the memorandum of understanding between HMRC and NS&I and the contract between NS&I and Atos were legally distinct. It was NS&I, not HMRC, that could enforce the Atos contract, he added.

The appellants’ contention that NS&I would be under a statutory legal obligation to comply with the memorandum of understanding (which was not in itself an enforceable contract) by virtue of s.16 of the Childcare Payments Act 2014 meanwhile misinterpreted the effect of that section, he ruled.

Lord Hodge added that under any B2B scheme a public body would be the service recipient but it would receive the services from NS&I; “the fact that the service recipient discussed those services with Atos as the outsourced provider of operational services to NS&I does not alter the substance of the transaction”.

A statement on the 11KBW site, a number of whose barristers appeared for the appellants in this case, said: “The case has potentially significant implications for contracting authorities, giving them much greater freedom of action in relation both to contractual variation generally, and to awarding contracts for services of indeterminate size.

“It also raises, but does not answer, the important question whether contract change clauses can be utilised to make fundamental changes to public contracts and if so how detailed must be the provision which they make in advance for such changes.”