Supreme Court rules on substantial modifications to contracts under the Public Contracts Regulations 2015

07 August 2015

Jeremy Sharman, Jenna Rennie

Bird & Bird & First for Disputes

The Supreme Court has delivered judgment on the Government’s decision not to run a new public procurement for a provider of the new Tax-Free Childcare ("TFC") scheme, in the case Edenred (UK Group) Ltd v HM Treasury [2015] UKSC 45.

Background

In 2013 the government decided to replace the policy of employer-supported childcare (“ESC”), under which employers provided employees with support for the cost of childcare in return for tax and national insurance contribution relief. While the ESC scheme required the involvement of childcare voucher providers, the new TFC scheme instead requires parents to open a ‘childcare account’. Parents and others can pay into the childcare account, and the government will pay in 20p for every 80p paid in, up to a maximum of £2,000 per child per year.

After two rounds of consultation, HMRC decided that these accounts should be provided by National Savings and Investments (NS&I). NS&I is a non-ministerial government department and executive agency of the Chancellor of the Exchequer. As well as providing a retail savings and investment service, NS&I also provides services to other public bodies, including processing payments, managing accounts and providing associated support functions. NS&I outsourced its operational services in 1999, and in 2013 entered into an outsourcing contract with Atos IT Services Ltd (“Atos”), which included provision for the extension of the outsourcing services to other public bodies.

HMRC and NS&I entered into a Memorandum of Understanding (MoU) for NS&I to provide the accounts required under the TFC scheme. NS&I and Atos then proposed to amend their outsourcing contract so that NS&I could administer the TFC scheme.

Edenred, a company that had provided childcare vouchers under the ESC policy, brought a challenge to the proposed modification, alleging that the modification was a material, or substantial, change to the contract and as such  it was effectively a direct award of a new public contract which should be subject to a new procurement procedure. Edenred lost before the High Court and the Court of Appeal.  By the time the case reached the Supreme Court, the case focussed on two key issues:

  • Whether, by reference to the original tender documentation or contract, the proposed amendment amounted to a "substantial modification", under the test set out in regulation 72(1)(e) and (8) of the Public Contracts Regulations ("PCR") 2015; and
  • whether the ability to amend the contract between Atos and NS&I to enable the provision of the TFC scheme had been provided for in the initial procurement documents in "clear, precise and unequivocal review clauses" meaning that the modifications were therefore permitted (regulation 72(1)(a) PCR 2015).
Substantial modification under regulation 72(1)(e) and (8)?

Regulation 72(1)(e) permits modifications without the need for a new procurement where the modifications, irrespective of their value, are not 'substantial' within the meaning of regulation 72(8). This is essentially a codification of the current case law, often referred to as the Pressetext test.

Edenred claimed that the proposed modification was substantial under 72(8) on the basis that it extended the scope of the contract considerably. This claim was rejected. In conducting its assessment, the Court considered the key question to be whether the services the modification was providing for were covered by the contract that resulted from the original procurement, including its provisions for the amendment of the contract. It concluded that they were, noting:

  • the procurement process and the contract entered into with Atos specifically contemplated that Atos would support NS&I to expand its provision of services to other public bodies. While the initial contract value was £660,000,000, the OJEU notice and contract made it clear that the contract value could be up to £2 billion, depending on the uptake of services. The contract also allowed for amendments to the contract in order to incorporate additional B2B services without altering the economic balance of the contract of increasing Atos' profit margins;
  • There had also been a finding of fact by Andrews J in the High Court that "the nature of the operational services that Atos will be providing to support the delivery of childcare accounts is essentially the same as the nature of the services which are supplied by it to NS&I for existing banking, accounting and payment products".

Edenred expressed concern that this approach could mean future contracts could be worded in such a way as to allow for the provision of additional unspecified services for a much greater value, and in doing so enable an authority to circumvent its obligations under EU law. While the Court noted that 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", that was not alleged by Edenred to be the case here. The Court expressed the view that should an authority have designed a contract as a means of avoiding its obligations under EU law, the contract might be open to challenge under EU law as an abuse of right. No such challenge had been brought to the Atos contract.

Clear, precise and unequivocal review clauses

Although it was not necessary, given the Court's findings that the proposed amendment was not a substantial modification, the Court also considered the issue of whether the amendment was permitted by regulation 72(1)(a). This allows for modifications to a Contract without a new procurement procedure where the modifications (irrespective of their monetary value) were provided for in the initial procurement contracts in "clear precise and unequivocal review clauses". A 'review clause' is essentially a provision in a contract governing how changes can be made to the contract. Under regulation 72(1)(a) the clauses must also state the scope and nature of possible modifications and conditions of use, and cannot provide for modifications which would alter the overall nature of the contract.

The Court considered that the most significant restriction in regulation 72(1)(a) was the requirement that the review clause be "clear precise and unequivocal". The Court did not reach a definitive position on whether the review clause in the Atos contract met this requirement, although it "inclined to the view" that it did.

However, the Court also considered that it was unclear what nature of 'review clause' was meant to be covered by the regulation. In particular, it observed that the recitals to the Directive implemented by the PCR 2015 gave (non-exclusive) examples of review clauses providing for price indexation or adjustments for technological change and maintenance.  This could indicate that regulation 72(1)(a) was intended to permit only changes of a nature consistent with the examples set out in the recitals, although this was not clear.

Bird & Bird comment

This case highlights the importance of the provisions contained in procurement documents to assessing whether a modification is substantial under the PCR 2015. In this case, the provisions referring to the potential expansion of NS&I's services were a key part of the court's assessment as to why the modification was not considered to be 'substantial'. It is not clear from the case how much the potential extended scope of the contract was the subject of real assessment during the decision to award the tender, or whether it was simply mentioned for information and to support the minimum pre-qualification requirements of potential bidders. However the prominent role of the provisions regarding the potential expansion of NS&I's services in assessing the validity of the proposed modifications gives rise to the prospect that other authorities will be tempted to include vague descriptions of scope in procurement processes, in order to provide themselves with maximum flexibility to expand contracts without having to undertake a further procurement process. The Court's judgment acknowledges the risk of abuse, but does not give it much consideration other than to say that, in such circumstances, a challenge could be brought to the primary contract under EU law as an abuse of right.

However this suggestion appears to give rise to very real practical difficulties. For many potential tenderers, as in this case, it is only when a future procurement is not held for additional services, and an existing contract modified, that attention will turn to what was provided for in the initial procurement documents for the existing contract. At this point, even if it appears that there may be some basis for challenging the vague descriptions of scope used in the initial procurement documents, there is a significant risk that any challenge would be time-barred by the strict time limits that apply under the procurement regime. While consideration could be given to other potential remedies under EU law, it is by no means clear that these would be available.

The judgment also highlights that the Court considers the scope of the provision enabling an Authority to rely on "review clauses" when modifying a contract to be uncertain. While it is clear that such clauses can be used in situations referred to in the recitals to the Directive, or previous case law, the Court raised the possibility that there could be limits to the ability to rely on a review clause. In practice, it therefore seems advisable for those seeking to make a modification to an existing contract to seek to justify the change on the basis of one of the other grounds set out in regulation 72, unless the modification and review clause are of a nature clearly contemplated in one of the examples in the recitals, or accepted in previous case law.

Finally, the decision provides some further guidance on transition between the PCR 2006 and the PCR 2015. The original Atos contract, and the decision to modify the Atos contract, were both made prior to the coming into force of the PCR 2015 and the Court of Appeal certainly thought that the matter should accordingly be decided under the PCR 2006. However the parties in the case, and the Supreme Court, took the view that regulation 72 of the PCR 2015 should apply, although the basis for this view is not completely clear. The approach does however indicate that the courts will look to the 2015 PCR when considering proposed modifications to contracts entered into prior to 26 February 2015.