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Ben Williams - profile photoThe Supreme Court has held that the extension of an outsourcing contract by a government agency, the substance of which had not been put to a public tender, was not a breach of EU procurement law. Lord Hodge, giving the leading judgment on behalf of the court, found that the extension did not involve a substantial modification of the original contract and therefore did not require a new procurement process.

Background

National Savings and Investments is an executive agency of the Chancellor of the Exchequer. It is a retail savings and investments organisation established to enable the Government to borrow at a reasonable cost. It partly funds its running costs by using its infrastructure to process payments, manage accounts and provide associated support functions to other public bodies.

NS&I outsources its operational services. It entered into its current outsourcing contract with Atos IT Services Ltd in 2013 following an extensive procurement process. In its original published notice, NS&I described the nature of the contract as “computer and related services” and referred to its business to business services as follows:

“In addition NS&I now delivers similar operational services (so called B2B services) to other public sector organisations. We intend to expand this B2B service during the lifetime of the contract to deliver to other organisations, potentially resulting in significant growth of the outsourced operational services. NS&I intends to structure the contract so that it may be used by other central government departments (including their executive agencies and non-departmental public bodies) and by local authorities.”

The value of the contract was estimated to be between £1.25-£1.5 billion with an upper limit of £2 billion. Atos beat nine other organisations which submitted initial tenders to secure the contract.

In 2014, Her Majesty’s Treasury (“HMT”), together with HMRC decided to use NS&I to deliver the Government’s new tax-free childcare policy which gives parents the opportunity to open a bank account into which they can make payments to be used towards childcare costs, with those deposits being supplemented by a Government payment. NS&I estimated that the policy could give rise to around 1.6 million bank accounts after the first five years of its operation.

The Government proposed to introduce the policy by way of a memorandum of understanding between HMRC and NS&I and a modification of the existing outsourcing contract between NS&I and Atos to accommodate the expanded scope of the services. The expanded services were to include the provision of bank accounts, the development of a web portal, calculating the payments from HMRC to parents and the provision of support for parents, through call centres, among other things. NS&I proposed to use a modified version of its existing savings account product to provide the online childcare accounts.

The appellants’ case is that the extension of the contract between NS&I and Atos constitutes the award of a public contract without conducting a tender procedure, in contravention of the EU procurement regime.

The trial judge, Mrs Justice Andrews DBE, dismissed the claim, finding that the services required to deliver the tax-free childcare policy fell within the original contract and that, even if they did not, the contract variation was not material and thus was not contrary to EU procurement law. The Court of Appeal also dismissed the appeal, finding that the modification to the contract was provided for in the initial procurement documents and contract in clear, precise and unequivocal review clauses and therefore was exempt from the requirement to conduct a further procurement process.

Supreme Court judgment

Somewhat unusually, the Supreme Court heard the appellants’ application for permission to appeal at the same time as the substantive appeal in order to provide prompt judgment. Lord Hodge delivered the unanimous judgment, granting permission to appeal but dismissing the appellants’ substantive case, although the decision was based on a different ground to the Court of Appeal.

Lord Hodge referred to the purpose of EU procurement law as being to “develop effective competition in the field of public contracts”. Where a public body decides to obtain services by a contract (and the value of the contract exceeds €134,000 for a central government authority) it must put that contract to a public tender process. He explained that “[a]mendments to a 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 of the contract”.

Regulation 72 of the Public Contracts Regulations 2015 (SI 2015/102) provides that contracts and framework agreements may be modified without a new procurement procedure in a number of circumstances including, relevantly to this case, where the modifications:

  1. are not substantial, irrespective of value; or
  2. the modifications have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses.

As to whether the modifications are substantial, the appellants submitted that the extension was substantial because it “extends the scope of the contract or framework considerably” to “encompass services not initially covered”.

Lord Hodge disagreed with that characterisation. He noted that the original contract was to provide operational services both to perform NS&I’s established banking and investment functions and also to expand its B2B services, up to a limit of £2 billion. That is, the procurement notice and contract specifically contemplated an expansion of NS&I’s business and required the contracting party to be able to achieve that.

He distinguished the case from three decisions of the Court of Justice of the European Union in which contracts had been expanded because in none of those cases had the expansion of services been explicitly contemplated in the original contract.

Lord Hodge found that the essential nature of the services provided by Atos under the contract would not be altered, because the provision of bank accounts for the tax-free childcare policy was essentially the same service as the existing products that it provided to NS&I and the same as any other new account that it might be required provide under the contract. The size of the contract would be expanded beyond the £660 million set out in the initial contract but would still be within the initial estimated range of £1.25-2 billion referred to in the procurement process. Further, although the modification would be worth approximately £132.8 million to Atos, there were provisions in the contract to ensure that the modification would not alter the economic balance of the contract or increase the profit margin available to Atos.

Having found that the modification was not substantial, Lord Hodge was not required to consider whether the modification was provided for in the initial procurement documents in a clear, precise and unequivocal review clause, which was the basis of the Court of Appeal’s decision. However, after some consideration, Lord Hodge said that, whilst he was not persuaded that that was the case, it was not necessary for him to decide that matter.

Finally, Lord Hodge also dismissed an argument that in substance a public service contract existed between HMRC and Atos and that it was subject to the procurement rules. The appellants argued that most of the provisions of the memorandum of understanding were repeated in the contract variation, that HMRC would be the service recipient of the B2B services and that NS&I was obliged by legislation to comply with the memorandum of understanding.

Lord Hodge was quick to dismiss the argument, explaining that it ignores the fact that NS&I is an existing public body with an extensive remit quite apart from the tax free childcare scheme. He upheld the Court of Appeal’s finding that the memorandum of understanding was legally distinct from the contract between NS&I and Atos.

Comment

The Supreme Court’s decision does not mean that any modification of a public contract is permissible without a public procurement process. In each case the court must consider the procurement documents, including the initial contract, and assess the nature of the variation. Where the modification is a material variation, a procurement process is required.

However, it is essential for the efficient outsourcing of government functions that some level of modification of outsourcing contracts be permitted without the need for a further tender process. This is therefore a welcome decision for government agencies and companies that provide services on behalf of government under outsourcing contracts.