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Look Before You Leap - Procurement Challenge on Changes to Contracts

on Monday, 13 July 2015.

This challenge was brought by Edenred, against HM Treasury, HMRC and National Savings & Investments and has been upheld by the Supreme Court.

Currently parents can take advantage of a government initiative which allows tax relief for employers in providing childcare vouchers. Many employers use a 'commercial Childcare Voucher Provider', such as Edenred, a major supplier of these services. The government announced in the 2013 budget that a new tax-free childcare (TFC) scheme would be introduced beginning in Autumn 2015. The likely impact being that employer-supported childcare vouchers would be phased out by employers following the uptake by parents of the TFC scheme.

The idea behind the TFC scheme is that the government will provide a subsidy of up to a maximum of £2,000 per child per year. The subsidy will operate on the basis of such that parents and the HMRC would deposit funds into a special TFC bank account a ratio 80% (parents or relatives) to 20% (HMRC). The government decided to use NS&I, which has an established banking infrastructure, to supply TFC accounts thereby allowing the provision of subsidies to be without a private sector contractor and without therefore the need for a procurement process.

NS&I outsourced all of its back-office functions to ATOS following the award of a contract in March 2014. This contract was awarded after NS&I having followed an extensive process to select ATOS procurement.

The operation of the TFC scheme was to be set out in a Memorandum of Understanding (MOU).

Edenred challenged on the basis that the award of the contract to NS&I to administer the TFC scheme was unlawful on two grounds:

  • The award involved the conclusion of a 'public services contract' within the meaning of the Public Contracts Regulations 2006 (the Regulations) which applied at the time and/or that it was an 'economic opportunity' and so the failure to advertise amounted to a breach of Article 56 of the Treaty on the Functioning of the European Union (TFEU) as there was a tendering process; or
  • The arrangements involving a material variation of an existing public services contract, that is, the outsourcing arrangement between NS&I and ATOS so as to require the renegotiation of its key terms.


First Ground of Challenge

In a detailed judgment, the judge stated that he did not think it was possible for the defendants to contract with one another in light of the doctrine of Crown indivisibility. It was made clear that they exercised a particular function of state, in effect, that of the executive and did not possess legal personality as required for a contract.

The judge stated that while the fact that the defendants were public authorities did not rule out application of the procurement rules, the application of the procurement rules should not restrict the freedom of public authorities to perform the public service tasks by using their own resources, including where this involved cooperation with other public authorities.

The Court also did not interpret the MOU as a contract, let alone a public services contract. It was apparently plain for the judge to see that the HMRC had decided to use NS&I for the TFC scheme administration and that NS&I had no choice but to do so. Though payment arrangements were catered for in the MOU this was customary between government departments which had to reflect work to be performed in their departmental budgets. HMRC also determined how much profit NS&I should keep.

This ground of challenge was dismissed.

Second Ground of Challenge

The Outsourcing Contract between NS&I and ATOS would clearly have needed some form of amendment to cater for the TFC scheme integration. The Court considered whether the changes required would involve a material variation of the Outsourcing Contract.

The High Court findings included:

  • that the Outsourcing Contract spending ceiling was not breached
  • that the support services for administering the TFC scheme were still within the original scope
  • ATOS did not stand to make a significant profit and so any financial advantage over and above the Outsourcing Contract beyond providing the original services
  • the lack of evidence that had the provision of TFC accounts been included in the original Outsourcing Contract it would have provided any different bidders

The High Court concluded that there was no material variation of the Outsourcing Contract and the second challenge was dismissed.

The High Court Judge then went on to consider the 'hypothetical' situation in which there had been a breach of the Regulations or Article 56 TFEU. The High Court Judge stated that the notion that Edenred (even at the claimant's suggestion that it could have formed a consortium of like-minded service providers) could have bid for the Outsourcing Contract was 'fanciful'. Consequently, the High Court noted that Edenred had failed to discharge the burden of establishing that any loss incurred and so the High Court would not have exercised its discretion to grant declaratory relief or to set aside the decision to award the TFC contract to NS&I.


This case serves as a useful reminder of the scope of application of the EU procurement rules.

The High Court considered that the addition of administrative support, in this case for TFC bank accounts management, was not a new service but one of the same kind originally catered for in the original Outsourcing Contract.

The interpretation of 'material' change in the contract may also give some comfort to public bodies faced with wholly similar changes.

For more information or advice on any procurement issue you may be facing please contact Stephanie Rickard on 0117 314 5675.