Introduction

The Court of Appeal recently reversed, on appeal, a High Court judgment setting aside the Ministry of Health's decision to award problem gambling services contracts to parties other than the applicant, the Problem Gambling Foundation (PGF), a major incumbent provider.(1)

The decision is important because it significantly decreases the likelihood of unsuccessful bidders being able to use the government procurement rules to set aside procurement decisions.

Background

The High Court decision under appeal, the first consideration of the effect of non-compliance with the government's Mandatory Rules for Procurement by Departments,(2) was the subject of a previous update.(3) The Ministry of Health had awarded contracts to the Salvation Army in preference to the PGF following a request for proposals process. The request for proposals, issued in July 2013 for services to be provided between January 2014 and June 2016, was the first nationwide contestable procurement process in the 10 years for which the Ministry of Health had been responsible for problem gambling treatment services. The challenged procurement decisions were made in March 2014, but, because of the legal challenge, the intended contracts were not concluded and instead the contracts of the incumbent providers were extended to 2017.

In considering the PGF's challenge to the decision, the High Court distinguished the earlier Court of Appeal decision in Lab Tests (Auckland) v Auckland District Health Board,(4) which had expressly limited the available scope of judicial review of government procurement decisions, on the basis of numerous contextual differences. As a result, the High Court found that the decision to award the contracts was reviewable on all grounds raised by the PGF. It went on to find that all grounds were established, including:

• process errors (departing from the process set out in the request for proposals, the procurement rules and some internally agreed processes);
• factual error (or lack of probative evidence); and
• conflict of interest or bias.

The Ministry of Health appealed.

The Court of Appeal noted that the request for proposals documentation contained express statements that it did not constitute an offer and that submitting a proposal would not confer contractual rights. Accordingly, it was common ground that the request for proposals did not give rise to a process contract. It was also common ground that the request for proposals process was subject to the mandatory rules.

Scope of judicial review

The first ground of appeal challenged the High Court's determination that the first three causes of action (breach of natural justice, process expectation and mistake of fact or lack of probative evidence) came within the permissible scope of judicial review of decisions of that type. The ministry argued for a narrow scope of review, comprising only fraud, corruption or bad faith, based on:

• the Privy Council's decisions in Mercury Energy Ltd v Electricity Corporation of New Zealand Ltd;(5)
• the Court of Appeal's decision in Lab Tests; and
• the absence of any contextual factors justifying a departure from a limited scope of judicial review.

The PGF supported the High Court's analysis, arguing that not all procurement decisions were ordinary commercial decisions and that, because the procurement was for the provision of public health services, a broad scope of review was appropriate.

The Court of Appeal held that the narrow scope of review was appropriate, primarily because:

• the reviewed decision was a decision to enter into a contract for services following a procurement process; and
• the PGF was a disappointed party in that process and had agreed that participation in the process would not create contractual relations.

In reaching its conclusion, the Court of Appeal expressly rejected a number of important aspects of the High Court's analysis and made the following observations:

• The narrow scope of review will prima facie be appropriate for procurement decisions made by the crown in a commercial context.
• In addition to confirming the contextual matters noted in Lab Tests (none of which were relevantly distinguishable in the present case), the court added a further matter – the nature of the interest which the applicant sought to protect. The PGF was seeking to protect its private interests, not broader public interests. It is only when the latter are properly engaged that broad range review may be appropriate.(6)
• Neither the proportion of the total services being contracted out nor the absence of a statutory direction to act commercially were relevant to the scope of review. The absence of a statutorily stipulated process and contractual obligations did not have the effect of expanding the scope of review (but rather tended to support the opposite result).

The discussion of the effect of the mandatory rules is particularly significant bearing in mind that far more procurement decisions are now subject to the successor rules than were subject to the mandatory rules. By way of preliminary observation, the court considered that the very subject matter of the rules, namely procurement, supported the conclusion that they applied to a process within a commercial context.

The court held that the mandatory rules were "the executive government's non-legal directive to its agencies as to standards and conduct required to be observed to ensure fairness, quality and integrity in procurement processes".(7) While binding on the agency, they did not create "a procedural obligation enforceable by… disappointed potential contractors".(8) Rather, the protection of the public interest in the quality and integrity of procurement processes is met by the availability of mechanisms involving ministerial control and parliamentary oversight, such as auditor-general inquiries or complaints to the Ombudsman.

Although none of the grounds for review came within the scope of judicial review that applied in the circumstances, the Court of Appeal nonetheless addressed the substance of the remaining grounds of appeal and made a series of important observations for future guidance on those matters.

Bias

The Court of Appeal accepted that a conflict of interest may lead to judicial review, even within "narrow-scope" cases, if it is analogous to fraud, corruption or bad faith. However, such a conflict would need to involve financial interests, genuine insider knowledge or clear personal interests.

In this case, the High Court had been wrong to apply the standard for apparent bias used in judicial proceedings. The PGF did not allege any conflict of interest analogous to bad faith or corruption and disappointed prospective providers could not hold agencies to any higher standard of conduct. Specifically, procurement decision makers are permitted to hold strong positive or adverse views about the proposal, even in the case of a process contract. In the latter case, fairness and good faith only require honesty and a willingness to consider information which might challenge the existing view.

Even if a broad scope of judicial review had been appropriate, the judicial standard of conduct would not apply. Even that standard had not been correctly applied by the High Court – the test does not involve an attempt to predict or inquire into the actual thought processes of a judge and prior knowledge or dealing does not exclude the application of an impartial mind. The standard imposed by the High Court was higher than that actually imposed on those fulfilling a judicial function. It was both unworkable and contrary to the wider public interest to insist on evaluation only by those with no prior involvement in the relevant sector.

The court also held that the expert evidence about the process, including the selection of the panel, the training of its members, the scoring methods at various stages and the quality of the recommendations, was inadmissible in a judicial review proceeding. One witness expressed views on the issues for determination by the court in circumstances in which it was equally well equipped to reach a view on those matters. The expert evidence extended to expression of views on the merits of the decision, a matter clearly beyond the scope of the judicial review.

Lack of probative evidence

Although not an available ground for review, the Court of Appeal commented on the High Court's analysis in reaching the conclusion that the decision lacked probative evidence. The Court of Appeal rejected the fundamental proposition – that the decision was a statistical process, the quality of which could be assessed by a statistician. The mere use of a number-based scoring system does not mandate the use of a statistically defensible analysis. The request for proposals did not stipulate a means of evaluation other than that it was to be made "against the criteria and weightings" as "judged by the Ministry in its sole discretion". The use of a scoring system to encourage focused and consistent analysis by panel members is common and does not lead to a conclusion that what follows will be a strictly statistical analysis.

Procurement rules and legitimate expectation

Finally, the Court of Appeal held that the High Court had misconstrued the request for proposals, including by failing to appreciate its non-contractual nature and the explicit reservation of discretion of evaluation and waiver of irregularity. The actions at issue were not inconsistent with the request for proposals, properly construed. The mandatory rules were imposed on agencies by Cabinet, but did not have the force of law (in that they were neither legislation nor subordinate legislation). Even a material breach does not automatically give rise to an illegality so as to vitiate the decision, as the High Court had assumed to be the case. In particular, the moderation stage, which had involved looking objectively at the scores, checking to see if the result made sense and re-ranking, was not inconsistent with the request for proposals and was not in breach of the mandatory rules.

Comment

The Court of Appeal decision is an important one, as it fully restores the effect of the decision in Lab Tests, the effect and application of which had been questioned in the decision under appeal and in another High Court decision.(9) However, it does not merely confirm the approach to the scope of judicial review in Lab Tests; it also closes some of the potential exceptions which the earlier decision had arguably left open:

• It concludes that the usual request for proposals wording, which excludes any contractual effect arising from the submission of proposals, will exclude the possibility of a process contract (and consequent relief).
• It confirms the limited grounds for review for commercial procurement decisions and the limited nature of the circumstances required to expand them. Protection of the interests of disappointed bidders is not one of them.
• It confirms that the existence of prior knowledge and strong views by decision makers is not a basis for judicial review. The public interest requires informed and knowledgeable evaluators who are likely to hold prior views on the bidders.
• It confirms that judicial review does not entail critical analysis of either the process design or its results on a merits basis. In particular, the use of a numerical scoring system in evaluation does not preclude the exercise of human qualitative judgement in reaching the final decision.

The most significant new development was the conclusion that the procurement rules imposed by Cabinet on state agencies do not have the force of law, such that breaches of the mandatory rules would result in illegality (the first available ground of review identified in Lab Tests). Neither do the rules provide a basis for judicial review as a matter of legitimate expectation (as that is not an available ground in "narrow-scope" judicial review) nor breach of a process contract (if the usual exclusionary request for proposals wording is adopted). Remedies for breach of the rules are non-judicial, being limited to ministerial or parliamentary oversight. The result may come as a surprise to readers of the Government Rules of Sourcing, which include a commentary which refers to the possibility of disgruntled bidders "taking the agency to court".(10)

Procuring agencies should now be much less anxious about their vulnerability to challenges of their procurement decisions than was the case following the High Court decision, especially if they adopt the common number-based system of panel scoring in an endeavour to improve the focus and consistency of their assessment of proposals. However, the limitation of narrow-scope review to fraud, corruption and bad faith should mean that future judicial review challenges of procurement decisions will focus on those more inherently contentious grounds.

For further information on this topic please contact Chris Browne at Wilson Harle by telephone (+64 9 915 5700) or email ([email protected]). The Wilson Harle website can be accessed at www.wilsonharle.com.

Endnotes

(1) Attorney General v Problem Gambling Foundation of New Zealand [2016] NZCA 609.

(2) Since replaced by the Ministry of Business, Innovation and Employment's "Government Rules of Sourcing" (Third Edition, July 1 2015).

(3) Please see "Government procurement rules used to set aside ministry's procurement decision".

(4) [2008] NZCA 385, [2009] 1 NZLR 776.

(5) [1994] 2 NZLR 385 (PC).

(6) As illustrated by Ririnui v Landcorp Farming Ltd [2016] NZSC 62, [2016] 1 NZLR 1056.

(7) Attorney General v Problem Gambling Foundation of New Zealand, above n 1, at [51].

(8) At [51].

(9) Telco Technology Services Limited v Ministry of Education [2014] NZHC 213.

(10) Government Mandatory Rules of Sourcing, above n 2, at Commentary to Rule 47.