Article(s) in Directive 2014/24/EU: 72
Topic: Modification of contracts during their term
Member State: UK
Court/rev. board: The Supreme Court of the United Kingdom
1. IMPLEMENTATION / RELEVANT NATIONAL LEGISLATION
Article 72 of the 2014 Directive relates to the modification of contracts during their term. The article spelt out the possibilities where contracts and framework agreements may be modified without a new procurement procedure in accordance with this Directive. The relevant subsection concerning this case is subsection(a) whereby “the modifications, irrespective of their monetary value, have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses, which may include price revision clauses or options. Such clauses shall state the scope and nature of possible modifications or options as well as the conditions under which they may be used. They shall not provide for modifications or options that would alter the overall nature of the contract or the framework agreement”
Regulation 72(1) of the Public Contracts Regulations 2015 (SI 2015/102) (“2015 Regulations”) provides six circumstances where contracts or framework agreements may be modified and the relevant clause on this case is as follows
“contracts and framework agreements may be modified without a new procurement procedure in accordance with this Part in any of the following case: –
(a)where the modifications, irrespective of their monetary value, have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses, which may include price revision clauses or options, provided that such clauses—
(i)state the scope and nature of possible modifications or options as well as the conditions under which they may be used, and
(ii)do not provide for modifications or options that would alter the overall nature of the contract or the framework agreement;
….(e) where the modifications, irrespective of their value, are not substantial within the meaning of para (8).”
Regulation 72(8) of 2015 PCR provides: –
“A modification of a contract or a framework agreement during its term shall be considered substantial for the purposes of paragraph (1)(e) where one or more of the following conditions is met:
(a) the modification renders the contract or framework agreement materially different in character from the one initially concluded;
(b) the modification introduces conditions which, had they been part of the initial procurement procedure, would have –
(i) allowed for the admission of other candidates than those initially selected, (ii) allowed for the acceptance of a tender other than that originally accepted, or (iii) attracted additional participants in the procurement procedure;
(c) the modification changes the economic balance of the contract or the framework agreement in favour of the contractor in a manner which was not provided for in the initial contract or framework agreement;
(d) the modification extends the scope of the contract or framework agreement considerably; …”
Two of those cases under regulation 72(1) are relevant in this case. These two situations are regulation 72(1)(e), which states the case of modifications, irrespective of their value, are not substantial and regulation 72(1)(a), whereby, the Court of Appeal decided upon, the modifications, irrespective of their monetary value, had been provided for in the initial procurement documents in clear, precise and unequivocal review clauses.
The National Savings and Investments (“NSI”) is a non-ministerial government department and an executive agency of the Chancellor of the Exchequer. It is established as retail savings and investments organisation to facilitate the Government to borrow at a reasonable cost and it had invested assets of £105 billion since 2011. Since then, the running costs are partly fund using its substantial infrastructure to process payment, managing account and provide associated support functions to public bodies. NSI outsourced its operational services and since 1999, NSI transferred its operational staff to a private-sector provider. The current outsourcing contract is with Atos IT Services Ltd (Atos) in 2013 and has operated since April 2014. The original published notice described the nature of the contract as “computer and related services” and referred to its business-to-business services. The value of the contract was estimated to be between £1.25-£1.5 billion with an upper limit of £2 billion.
In 2014, Her Majesty’s Treasury (“HMT”), together with HMRC decided to use NSI to deliver the Government’s new tax-free childcare policy (“TFC”) which allows parents 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. NSI estimated that the policy could give rise to around 1.6 million bank accounts after the first five years of its operation. NSI wished to provide these services on behalf of HMT and HMRC.
In enabling NSI to administer the policy, a memorandum of understanding between NSI and HMRC and a variation of the contract between the NSI and a private company is needed to modify the existing outsourcing contract between NSI and Atos to accommodate the expanded scope of the services. These expansions of 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. NSI proposed to use a modified version of its existing savings account product to provide online childcare accounts.
The proposed modification to the public service contract was challenged as contrary to EU procurement law and reg.72(1)(e) PCR 2015 on the basis that the modification was substantial. The summary of the challenge, in this case, is that (i) the proposed amendment to the Atos contract would be contrary to European Union procurement law, and (ii) that as a result, the decision to use NSI to deliver TFC is unlawful.
The appellants/applicants, in this case, are Edenred (UK Group) Ltd (“Edenred”) which provides services to employers who operate the ESC scheme on behalf of their employees and
(ii) the Childcare Voucher Providers Association (“CVPA”) which is a trade association for providers of childcare voucher. In August 2014, the applicants seek relief in the form of declarations that the respondents’ decisions regarding the delivery of TFC are unlawful and an order restraining the respondents from giving effect to the modification of the Atos contract if their challenge is successful. In the meantime, the respondents are barred by interim order from implementing the provision of services under TFC until further order.
The trial judge, Andrews J, dismissed the claim, finding amongst others, that the amendment to the Atos contract was not contrary to the EU procurement law. The applicants appealed and the Court of Appeal also dismissed the appeal, finding that the modification to the contract was provided for in the initial procurement documents and the contract is clear, precise and unequivocal review clauses and therefore was exempt from the requirement to conduct further procurement process.
In 2015, the Supreme Court heard the appellants’ application for permission to appeal and the substantive appeal at the same time, in order to provide swift 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. The purpose of EU procurement law is to “to develop effective competition in the field of public contracts” is relevant and His Lordship discussed that “amendments to an existing 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”, hence the central question in the challenge is whether the proposed amendments of the Atos contract amount to a material variation.
The Supreme Court held that the proposed amendment would not considerably extend the scope of the contract in terms of regulation 72(8) of the 2015 Regulations and did not involve a substantial modification under Regulation 72(1)(e) of 2015 Regulations. 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, under the challenge of the applicants on regulation 72(1)(a) which follows the wording of Article 72(1)(a), 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.
In regard to the appellant’s alternative argument relating to the variation to the contract between NSI and the private company amounted to a new public service contract between the HMRC and the private company, His Lordship held that there was no new public service contract. The Government had decided to provide a particular scheme internally, rather than through an external provider. Hence, the arrangements between NSI and HMRC did not constitute a public contract and there was no opportunity required to be offered to the market. The implementation of that decision was not limited to HMRC, but concerned HMRC making use of NSI, which was part of HM Treasury, to establish and administer the childcare accounts, did not change the character or the substance of what was planned from an essentially in-house implementation of policy into the sort of external arrangement that would attract the requirements of the PCR. The public body who obtaining B2B services from NSI may examine those services with the outsourced provider, but that does not alter the substance of the transaction.