Edenred (UK Group) Ltd & Anor v HM Treasury & Ors [2015] UKSC 45

Childcare voucher providers challenged HM Treasury's decision to use NS&I (and its outsourcing contractor Atos) to deliver Tax-free Childcare, alleging breach of EU procurement law. The Supreme Court dismissed the appeal, holding the proposed contract modification was not substantial.

Facts

HM Treasury (HMT) decided on 29 July 2014 to use National Savings and Investments (NS&I) to deliver the Government’s Tax-free Childcare (TFC) policy, which replaces employer-supported childcare. TFC enables parents to open childcare accounts into which they, family, or employers can pay funds, with the Government contributing 20% (up to £2,000 per child per year).

NS&I is a non-ministerial Government department whose operational services have, since 1999, been outsourced. Its current outsourcing contract, awarded in 2013 following a competitive dialogue procurement commenced in 2011, is with Atos IT Services Ltd. The OJEU notice for that procurement (22 November 2011) expressly contemplated expansion of NS&I’s business-to-business (B2B) services to other public bodies, with a contract range of £1.25–2 billion. The contract included provisions (Schedules 2.11 and 9.4) governing the addition of further B2B services, limiting profit margin increases and preserving the allocation of risk.

To deliver TFC, the Atos contract would be amended by adding a new Schedule 2.16 (estimated value approximately £132.8m over five years), alongside a memorandum of understanding between HMRC and NS&I. Edenred (a provider of childcare voucher services) and the Childcare Voucher Providers Association challenged the decision, contending the proposed amendment amounted to the direct award of a public contract without a tender, contrary to EU procurement law.

Issues

The principal issues were:

• Whether the proposed amendment of the Atos contract constituted a material/substantial variation requiring a new procurement under the Public Contracts Regulations 2015 (implementing Directive 2014/24/EU), particularly regulation 72(1)(e) read with regulation 72(8)(d) (whether modifications considerably extended the scope of the contract).
• Whether the modification was permitted under regulation 72(1)(a) as having been provided for in clear, precise and unequivocal review clauses in the initial procurement documents.
• Whether, in substance, there was a public service contract between HMRC and Atos that required separate procurement.
• Whether article 56 TFEU was breached.

Arguments

Appellants

Edenred and the CVPA argued that the amendments amounted to a considerable extension of the scope of the Atos contract, encompassing services not initially covered, relying on CJEU authorities including Commission v Germany (C-160/08), Commission v France (C-340/02) and Commission v Spain (C-423/07). They also argued that, in substance, there was a public services contract between HMRC and Atos, given that most provisions of the HMRC/NS&I memorandum of understanding were replicated in the Atos amendment, that Atos staff and equipment would deliver TFC services, that HMRC was the service recipient and that section 16 of the Childcare Payments Act 2014 created a legal obligation on NS&I.

Respondents

The respondents contended that the Atos contract, procured through a competitive dialogue process advertised in the OJEU, expressly contemplated the expansion of NS&I’s B2B services to other public bodies; that the modification fell within the scope of the contract originally tendered; and that the memorandum of understanding between HMRC and NS&I was not a contract in domestic law but an internal administrative arrangement.

Judgment

Lord Hodge (with whom Lord Neuberger, Lord Mance, Lord Sumption and Lord Carnwath agreed) dismissed the appeal.

Substantial modification (regulation 72(1)(e) and 72(8)(d))

The Court examined the OJEU notice, the prospectus, and the procurement documents. The notice clearly stated that NS&I intended to expand its B2B services during the lifetime of the contract to deliver to other organisations, with a contract range up to approximately £2 billion. Economic operators bidding for the contract knew the scope and scale of services NS&I might require, even if specific future B2B clients were unknown. The contract required bidders to have the financial strength and capability to deliver that potentially expanded role.

The CJEU authorities relied on by the appellants were distinguishable: in those cases (Germany, France, Spain) the initial contracts had defined and limited subject-matter that did not contemplate the additional services later added. Here, by contrast, the Atos contract’s subject-matter was defined from the outset to include expanded B2B services. Andrews J had found as fact that the nature of the operational services Atos would provide for TFC was essentially the same as services it already supplied to NS&I. The contract also restricted profit margin increases and preserved risk allocation.

Lord Hodge concluded the proposed amendment did not considerably extend the scope of the contract and was therefore not a substantial modification under regulation 72(8). He observed that a different conclusion would make it difficult for Government departments to outsource services in a way that accommodates changes in public policy.

Review clauses (regulation 72(1)(a))

Although it was unnecessary to decide the point, Lord Hodge commented on the Court of Appeal’s alternative basis that the amendments were authorised by clear, precise and unequivocal review clauses in the initial procurement documents. He inclined to the view that Schedules 2.11 and 9.4 of the contract, read in context, were sufficiently defined, but considered the precise scope of regulation 72(1)(a) (and recital 111 of the 2014 Directive, which gives examples such as price indexation and technological change) not to be acte clair.

Alternative argument: HMRC/Atos contract

The Court rejected the contention that there was, in substance, a public service contract between HMRC and Atos. NS&I was an existing public body with its own remit and could not be airbrushed out of the arrangement. The HMRC/NS&I memorandum of understanding and the NS&I/Atos contract were legally distinct, and only NS&I could enforce the Atos contract. Section 16(2) of the Childcare Payments Act 2014 limited NS&I’s power to provide childcare accounts but did not give legal effect to the memorandum of understanding; such memoranda between public bodies must be capable of being torn up at a moment’s notice in response to policy changes.

Article 56 TFEU and remedies

As there was no breach of EU procurement law, no question under article 56 TFEU arose, and questions of remedy did not need to be addressed. The interim order preventing implementation of TFC was set aside.

Implications

The decision clarifies the application of regulation 72 of the Public Contracts Regulations 2015 (implementing Directive 2014/24/EU) and the underlying CJEU jurisprudence (notably Pressetext) on modification of public contracts. Key points emerging from the reasoning are:

• Where an OJEU notice and procurement documents clearly contemplate future expansion of services to other public bodies, set out the scale and nature of that potential expansion, and require bidders to have capacity to deliver it, later modifications giving effect to such expansion will not necessarily constitute a substantial modification or considerably extend the scope of the contract.
• The court must examine the OJEU notice and procurement documents (including the draft contract) to ascertain the nature, scale and scope of services for which the contract was set up.
• The judgment acknowledges that public authorities could potentially design contracts as a device to avoid procurement obligations, in which case challenge under EU law as an abuse of right might be possible — but no such challenge arose here.
• Memoranda of understanding between public bodies are administrative instruments, not contracts giving rise to enforceable rights, and section 16 of the Childcare Payments Act 2014 does not change that.
• The precise scope of regulation 72(1)(a) (clear, precise and unequivocal review clauses) was left open and is not acte clair.

The decision is significant for public bodies seeking to enter into long-term outsourcing arrangements which contemplate future expansion of services. It permits a degree of flexibility provided the contemplation is clearly advertised at the outset and the contract contains appropriate financial and risk constraints. It is also important to private sector competitors, indicating that challenges to such expansions will likely fail where the original procurement openly anticipated growth of that kind. The court’s cautious treatment of the review clause point indicates that the boundary between permissible modification and unlawful direct award remains fact-sensitive.

Verdict: Permission to appeal granted; appeal dismissed. The proposed amendment to the Atos contract to enable NS&I to deliver Tax-free Childcare did not breach EU procurement law and the interim order preventing implementation of TFC was set aside.

Source: Edenred (UK Group) Ltd & Anor v HM Treasury & Ors [2015] UKSC 45