New Zealand: Lab Tests Wins Back Lab Services Contract

Last Updated: 3 November 2008
Article by Brian Bray

The recent decision of the Court of Appeal has quashed the decision of the High Court which invalidated not only the decision of the Auckland Regional District Health Boards (ARDHBs) to award the contract to provide primary referred pathology services to Lab Tests but also the contract itself which was due to commence on 1 July 2007.

The Court of Appeal has ruled that Lab Tests' contract be reinstated and that it commence to supply services under its contract for the remainder of the term. Having said that, Diagnostic Medlab Limited (DML) has indicated that it is considering seeking leave to appeal to the Supreme Court.

The decision is a rejection of what the Court of Appeal described as a broad based 'probity in public decision-making approach' and is a return to the more traditional approach to judicial review. It will provide board members of public sector organisations, procurement managers and their advisers with a greater degree of certainty around their procurement and tendering processes where commercial contracts are involved, and will hopefully reduce the ability of an unsuccessful tenderer to challenge the award of a commercial contract using the judicial review process.

We briefly highlight the important aspects of the case.

JUDICIAL REVIEW

One thing that the Court of Appeal makes very clear is its unease that the Courts are not well equipped in judicial review proceedings to deal with the range of issues that tendering processes for commercial contracts raise and what in the Lab Tests case ultimately involved a competition for the laboratory services market in the Auckland region. The extent of the Court's concern is best highlighted by the concurring judgment of Hammond J who has written an intriguing dissertation which he called the four P's of judicial review, which are: the point of entry of judicial review, the purpose of judicial review, the principles of judicial review, and the place of judicial review in New Zealand today.

Although the New Zealand Public Health and Disability Act (NZPHD Act) may have effected 'something of a sea change in the management of public health services in New Zealand', the Court of Appeal was not convinced that it swept away all elements of the previous legislation by removing the commercial aspects of a DHB's functions and powers. They found that under the NZPHD Act, the DHBs are still required to make commercial decisions and in respect of those decisions the authorities support a relatively limited role for judicial review, subject always to the statutory context.

In the present case the Court considered that the High Court judge did not give proper weight to the commercial context within which the DHBs were operating, or to the relevant statutory provisions.

The view expressed by the Court of Appeal is that judicial review should only be available in limited circumstances such as where there is fraud, corruption or bad faith, although the Court did accept that it may also be available in analogous situations. The example given was where an insider with significant inside information and a conflict of interest had used that information to further their interests and to the disadvantage of their rivals to the tender so as to undermine the integrity of the contracting process. Having identified these elements, which were an integral part of the High Court's decision, the Court of Appeal went on to determine that it did not consider the facts of the Lab Tests case fell within those circumstances.

The Court drew on examples in the NZPHD Act to highlight its concern that disputes of this sort were better addressed through non-judicial accountability mechanisms rather than through the judicial review procedure. Examples included the appointment of a crown monitor to sit on the board to observe decision making processes and advise the Minister of the board's performance, the removal provisions relating to board members in the NZPHD Act if the Minister was 'seriously dissatisfied' with the board's performance and the appointment of a commissioner.

CONFLICTS OF INTEREST

After a lengthy analysis of the facts and the applicable legislation, the Court of Appeal came to the view that the High Court judge was wrong to conclude that Dr Bierre was in a relevant conflict situation from the time he became a board member of the Auckland DHB in December 2004 through to the day he took leave of absence in December 2005. The Court interpreted 'transaction' to mean that a person could only have a conflict of interest while a transaction or potential transaction existed. They took the view that there were periods where Dr Bierre had two separate conflicts of interest.

The first period where Dr Bierre had a conflict was when he was advocating a boutique laboratory proposal. The Court of Appeal considered that this conflict of interest ceased when it was clear that the Auckland DHB were not interested in that option and that in any event it had no relevance to the request for proposal (RFP) process for the regional approach which was eventually adopted by the ARDHBs.

The next period that Dr Bierre had a conflict of interest was when he decided to put together the consortium and respond to the ARDHBs' RFP. The Court of Appeal accepted that there was a potential conflict of interest, but found this was not problematic because the conflict had been appropriately managed by Dr Bierre taking leave of absence. Hammond J identified what we believe is an important point to remember when dealing with conflicts of interest where he stated, 'Conflicts of interest are not in themselves unethical. The ethical challenge resides in the recognition and management of them'.

MISUSE OF INFORMATION

Fundamental to the High Court decision was the judge's view that not only did Dr Bierre have conflicts of interest, but he was in possession of confidential information or inside information, which was available to him in his capacity as a board member and which he used to procure a material advantage for Lab Tests to win the RFP to the disadvantage of DML.

The Court, after analysing the legislation and careful consideration of the particular information identified in the case, came to the view that the evidence did not justify a conclusion that Dr Bierre had inside information that was not available to the incumbent provider DML when it made its final bid or that DML was irretrievably prejudiced from the time of its initial tender. It concluded that the information was either not confidential at all because it was of a kind described as 'soft' information or that the information was already within the knowledge or possession of the incumbent DML as part of the RFP process. By 'soft' information the Court was referring to the type of information that is sufficiently general in its nature or may evolve over time and would include such information that practising health professionals may become aware of because of their expertise and role being involved with the DHB. This was something the NZPHD Act not only encouraged but is considered essential to the way DHBs function.

The Court also considered that the somewhat nebulous nature of this type of information would provide significant opportunities for disappointed rivals to disrupt the contracting process by making colourful but ultimately unjustified allegations of wrongful use of information.

In summary the Court could not see any informational disadvantage to DML and went on to observe that, as the incumbent, DML itself would have been in possession of information that would not have been available to other bidders, which meant that as the incumbent it had an advantage over other bidders.

CONSULTATION

While recognising that DHBs have a variety of obligations to consult arising from statute, contract, legitimate expectation or 'best practice' the Court confirmed that the mere existence of an obligation will not always be enforceable by way of a judicial review process. Where it is claimed in judicial review proceedings that consultation obligations have been breached, it is necessary to identify the source and nature of the relevant obligation. In the present case, if there was any obligation to consult it would have been to the resident populations of each of the DHBs. The Court found that the obligation to consult with public health organisations in the region had not been triggered. It also took into account the nature of the contractual framework which did contemplate further consultation with GPs after the contract was agreed.

The Court also expressed some concern that the obligation to consult must depend on whether the DHB was proposing significant change to a service, viewed objectively (as required by the NZPHD Act), rather than on the fears of a particular group or groups within the DHB's resident population that a service reduction may result. What was proposed was not analogous to the closure of a hospital in a particular locality, which would in all likelihood require consultation.

The Court also considered and dismissed the claim of legitimate expectation of consultation primarily because it considered that the RFP and the Lab Tests contract was not significantly different to the original DML contract. The service specifications to provide the services were very similar. The fact that the services were to be delivered at a reduced price and that there was doubt among GPs that this could be achieved did not mean there was an obligation to consult. The Court observed that if public bodies have public law consultation obligations they cannot avoid them by establishing tendering or similar processes that make it difficult to meet those obligations.

Having said that they considered that it was not realistic to expect DHBs or similar organisations to break off negotiations in the middle of a tender process to undertake further consultation as was being suggested by the High Court.

The Court of Appeal did not accept the claim that the ARDHBs' crown funding agreement or any other Government documents created any additional consultation obligations that were enforceable by way of judicial review. The Court focused on the statutory framework and what was the purpose of consultation.

APPEAL

DML have indicated that the case will be appealed to the Supreme Court. If leave is granted to allow an appeal, DML may find it difficult to convince the Supreme Court to overturn the decision of the Court of Appeal given the extent of the analysis of fact and law by the Court of Appeal.

Whatever the outcome, Hammond J was right when he began his concurring judgment with the observation that, 'This is a case in which, as Benjamin Franklin once famously observed, there has been the murder of a beautiful theory by a gang of brutal facts'.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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