(a) The ARDHBs’ decision to award a contract for laboratory services for the Auckland region to Lab Tests was ultra vires and invalid and of no effect; and
(b) The contract entered into between the ARDHBs and Lab Tests for the provisions of primary referred pathology services on 14 July 2006 is invalid and of no effect.

Leave is reserved to the appellant and the first respondent to seek consequential orders if required.

The second respondent must pay each of the appellant and the first respondent costs of $48,000 plus usual disbursements. We certify for two counsel.

REASONS

Arnold and Ellen France JJ [1]
Hammond J [348]

ARNOLD AND ELLEN FRANCE JJ

(Given by Arnold J)

Table of Contents

Para No.

Introduction [1]
DML’s claim [10]
High Court decision [13]
Issues on appeal [17]
Standard of procedural fairness: scope of judicial review [19]
The issue [19]
High Court [24]

Summary of submissions [27]

The principal authorities [36]
Application to this case [61]
Our evaluation [85]
Conflict of interest [95]
The issue [95]
Statutory provisions [97]
Factual background [108]

(i) Conflicts faced Dr Bierre [110]

(a) The boutique laboratory [111]

(b) RFP 577 [153]

(ii) Dr Bierre’s interest disclosure, and ADHB’s management

of it [160]

High Court [169]

Submissions [172]
Our evaluation [173]
Conclusion [193]
Misuse of inside information [196]
The issue [196]
Statutory setting [197]
High Court [199]
Our evaluation [207]
(i) Desire for open book accounting [217]

(ii) Perception that DML earning super profits and resistant

to change [239]
(iii) Desired level of savings [244]

(iii) Willingness to contemplate radical change to achieve

savings [259]
Conclusion [284]
Consultation [286]
The issue [286]
High Court [287]
Statutory and documentary framework [296]
Our evaluation [311]
Conclusion [332]
Supporting judgment on other grounds [334]
Concluding comments [342]
Decision [345]

Introduction

[1] In February 2006, after several years of preparatory work, the three first respondents, the Auckland region District Health Boards (the ARDHBs), issued a request for proposals for the provision of community laboratory services in the Auckland region (RFP 577).
[2] Community laboratory services involve the collection and analysis of blood and other samples for diagnostic purposes. Approved referrers (typically, general practitioners (GPs) but also other health professionals) refer their patients to community laboratories for the taking of samples, particularly blood samples. Blood samples are taken by technicians (phlebotomists) at a variety of collection centres throughout the Auckland region, transported to central facilities for analysis and, if necessary, diagnosis by pathologists. The results are then provided to the referring GPs. Obviously such testing is an important diagnostic tool and GPs place a high value on the accuracy and responsiveness of those carrying out the testing.
[3] The purchase of services such as these by District Health Boards (DHBs) falls under s 25(2) of the New Zealand Public Health and Disability Act 2000 (NZPHD Act). That section empowers a DHB to negotiate and enter into a contract for the provision of services “if permitted to do so by its annual plan and in accordance with that plan”.
[4] RFP 577 contemplated an arrangement under which the successful tenderer would provide community laboratory services on behalf of the ARDHBs over a five-year period (with two rights of renewal of three and two years respectively). There were two tenderers – the appellant, Lab Tests Auckland Limited (Lab Tests), and the second respondent, Diagnostic Medlab Limited (DML). The majority ownership interest in Lab Tests was held by an Australian public company, Healthscope Ltd, through two subsidiaries, Gribbles NZ Ltd and Gribbles Group Pty Ltd (Gribbles). Healthscope provides pathology services in Australia and also operates laboratories in Singapore and Malaysia. DML is wholly owned (ultimately) by Sonic Healthcare Pty Ltd (Sonic), also an Australian public company with interests in hospitals and laboratories in Australia.
[5] DML was the incumbent provider. It had a reputation for having provided a high quality and responsive service over a number of years. Lab Tests was a new enterprise. Dr Tony Bierre, a pathologist and elected member of the Auckland District Health Board (ADHB), had an ownership interest in Lab Tests. He had been involved in some of the preparatory work which ultimately lead to RFP 577.
[6] The ARDHBs set up an evaluation panel consisting of five ARDHB personnel and two independent consultants, assisted by several advisors, to consider the proposals. After Lab Tests and DML had made their initial proposals in early April 2006, each had discussions with the panel. There was then an opportunity for the parties to refine or amend their proposals, which each took. On the basis of those further proposals, Lab Tests was selected as the first preferred bidder and DML as the second. There were then discussions between Lab Tests and the ARDHBs. While these were going on, DML submitted a further proposal, which the evaluation panel refused to consider. Shortly after, the ARDHBs and Lab Tests agreed a contract, which they executed on 14 July 2006. Under the contract, Lab Tests was to take over the provision of community laboratory services from DML on 1 July 2007.
[7] When this result became known, DML applied for judicial review of the ARDHBs decision to award the contract to Lab Tests. Broadly, DML alleged that the decision was procedurally flawed, as a result of Dr Bierre’s involvement (because he had inside information and a conflict of interest) and by reason of other procedural failings including the failure to consult. DML argued that the decision was ultra vires and in any event irrational. The third respondent, Harbour Primary Health Organisation (HPHO), was given leave to intervene to make submissions on the issue of consultation: HC AK CIV-2006-404-4724 18 October 2006. (We will refer to the regional Primary Health Organisations collectively as the PHOs.)
[8] DML succeeded in the High Court before Asher J: HC AK CIV 2006-404-4724 20 March 2007 (reported in part at [2007] NZHC 177; [2007] 2 NZLR 832). Lab Tests now appeals. Although they appear as respondents, the ARDHBs are effectively appellants. Although they do not wish to take sides in the commercial dispute between DML and Lab Tests, they wish to support Lab Tests’ submissions on the scope of judicial review in this case, and to argue that they met their obligations to the PHOs in respect of consultation. DML has filed a notice supporting the judgment on other grounds.
[9] We will discuss particular aspects of the factual background in more detail in the context of our discussion of the issues on the appeal.

DML’s claim

[10] Having identified the parties, summarised the statutory framework and summarised the background to RFP 577, DML’s amended statement of claim set out the background facts on which its claim for review was based. It dealt with them under four sub-headings – Dr Bierre, ARDHB Laboratories, Transition and Long-term Risks, and Changed Service Model.
[11] In brief, the factual allegations under each head were as follows:

(a) Dr Bierre: The essential allegation was that Dr Bierre was an insider at ADHB who failed to disclose adequately his interest in pursuing a contract for the provision of laboratory services to the ARDHBs. As a result of his position as an insider, Dr Bierre was able to:

(i) Build important personal contacts with key personnel within the ARDHBs;

(ii) Influence their perceptions of DML and the precise details of the services which the ARDHBs wished to purchase;
(iii) Use confidential information obtained as a result of his position to give Lab Tests an unfair advantage over DML.
(b) ARDHB laboratories: Each of the ARDHBs operated its own laboratory. The allegation was that the ARDHB laboratories indicated to DML that they had only a limited capacity to process tests, creating a legitimate expectation that this position would be adopted in respect of all tenderers. However, Dr Bierre was advised that, with relatively minor changes, that capacity could be increased significantly.
(c) Transition and long terms risks: It was alleged that the nature of the laboratory services contract was such that the proposed change of provider on an exact date was fraught with transition risk, and even small errors could cause serious harm to the health of patients. Further, there was a long term risk in relation to the level of service that would be provided, given the significantly lower price offered by Lab Tests.
(d) Changed service model: If the ARDHBs were prepared to accept a drastically lower level of service (with a reduction in pathologist and collection service staff numbers as well as a move to greater collection of samples by GPs (GP collect), longer turn-around times and a different transportation process), DML should have been given the opportunity to bid on that basis. The ARDHBs were required to consult with the relevant affected parties about any material changes that they proposed and they failed to do so.
[12] The amended statement of claim then set out the basis for DML’s claim. We reproduce this section in full:

In receiving and considering a bid from Lab Tests, despite Dr Bierre’s involvement in the RFP’s design (and in laboratory strategies more broadly) purportedly as a board member, the ARDHBs:

66.1 favoured the interests of one party to the RFP 577 process by allowing Dr Bierre to use (or appear to use) information, contacts and relationships gained as a board member for the purpose of obtaining a personal benefit, and thus failed to act fairly and in good faith; and

66.2 demonstrated bias, the appearance of bias against DML and/or in favour of Lab Tests, and/or predetermination in the RFP 577 process by:

(a) failing appropriately to manage a conflict of interest;

(b) pursuing a process devised or influenced by an interested party; and/or

(c) allowing Dr Bierre and Lab Tests to obtain an improper advantage, or to appear to obtain an improper advantage, in RFP 577.

The ARDHBs acted contrary to DML’s legitimate expectations that:

67.1 the quality and level of service sought under RFP 577 was the status quo;

67.2 the RFP process would be conducted fairly and consistently with terms of the RFP documents.

In their approach to the Decision the ARDHBs acted irrationally and/or arbitrarily in that they:

68.1 failed to make proper enquiries, ...

68.2 determined that the mandatory criteria were satisfied and that Lab Tests was capable of delivering the service from 1 July 2007;

68.3 relied on material mistakes of fact, particularly:

(a) that the same quality of service, could be operational within a year;

(b) that the same quality of service as currently provided could be provided for Lab Tests’ price;

(c) that due diligence had been undertaken on the international capabilities of Healthscope, such that the ARDHBs could reasonably be assured that Lab Tests had met the mandatory criterion of capability and viability and that any transition risks were manageable;

(d) that ADHB and Dr Bierre had addressed any conflicts by an approach that exceeded all statutory or ethical obligations;

(e) that other participants had access to more specific information and understandings as to ARDHBs’ strategies from Dr Bierre;

(f) that the contract with Lab Tests could not be brought to an end by Lab Tests before July 2011; and thus

68.4 failed to take into account relevant considerations and/or took into account irrelevant considerations.

In deciding to purchase the Changed Service Model from Lab Tests, the ARDHBs:

69.1 did not consult with any of the parties identified at paragraph 65 above and thus:

(a) unlawfully failed to comply with their obligations [to consult specified affected parties]; and

(b) unlawfully and in breach of natural justice failed to consult with relevant interested parties; and

69.2 failed to satisfy themselves as to the feasibility, adequacy and quality of the Changed Service Model and its ability to meet the healthcare needs of the wider communities within their respective regions; and

69.3 failed to give DML the opportunity to bid for the Changed Service Model on the same footing as any other bidder; and thus

69.4 failed to act reasonably and in the public interest.

Neither the Lab Tests contract itself, nor the changes to the nature, scope and quality of the community-referred pathology service pleaded herein, were permitted by, nor consistent with, any of the ARDHBs’ Annual Plans, and is as a result ultra vires and of no effect.

The individual and cumulative effects of the matters pleaded at paragraphs 66 to 69 above, when considered against the background of the significance of the Decision for the population of Auckland, general practitioners and other health professionals, the ARDHBs’ own laboratory services, and for DML render the Decision unlawful.

The Lab Tests Contract is invalid and of no effect.

By reason of matters referred to in paragraphs 66 to 69 above, the Decision is contrary to law and should be quashed.

High Court decision

[13] Asher J heard the case over ten hearing days. As the Judge noted (at [5]), some 68 affidavits were filed and almost 12,000 pages of documents were produced. (By agreement, there was no cross-examination, although cross-examination is not permitted as of right in judicial review cases in any event: see, for example, Wilson v White [2004] NZCA 191; [2005] 1 NZLR 189 at [15] – [28] (CA).) In addition to this evidentiary material, there were the parties’ written submissions, which ran to more than 700 pages in the High Court. The Judge said that he was not critical of the quantity of material, given the number of parties involved and the importance and complexity of the issues.
[14] For our part, we consider that the scope of the affidavits could and should have been reduced. Some of the material in them is more in the nature of argument or submission than evidence, and some, while in the nature of evidence, is of doubtful relevance in a judicial review context.
[15] We do not propose to summarise the High Court judgment in detail at this stage. Again, we think that can better be done in the context of our discussion of particular issues. It is sufficient to say at this point that the Judge dismissed the allegations of bias, breach of legitimate expectation and irrationality. He also rejected the claims that the ARDHBs had failed to satisfy themselves as to the adequacy of the changed services model and to act reasonably and in the public interest. However, the Judge found that Dr Bierre’s ability to use confidential information had disadvantaged DML in its bid. He was satisfied that although there had not been bias in the orthodox sense, Dr Bierre should not have participated in the Lab Tests proposal given his prior involvement with the ADHB. He also upheld the claim that there had been a failure to consult, but only in respect of the PHOs, not in respect of DML. Accordingly, the Judge held that the contract was not permitted by or consistent with the ARDHBs’ annual plans and was therefore ultra vires.
[16] The result was that the RFP process would have to be undertaken again, with the DML contract continuing in the meantime.

Issues on appeal

[17] As we have said, Lab Tests has appealed against Asher J’s decision, and DML seeks to support the judgment on other grounds. As a result, everything at issue before the Judge is at issue before us.
[18] We summarise the issues as follows:

(a) Whether the standard of procedural fairness applied by the Judge was too high. This raises the issue of the proper scope of judicial review in a case such as this.

(b) Whether Dr Bierre had a conflict of interest in relation to RFP 577 and, if so, whether the ARDHBs appropriately managed that conflict.

(c) Whether Dr Bierre had confidential or inside information and, if so, whether he took improper advantage of that information.

(d) Whether the ARDHBs had a duty to consult the PHOs and, if so, whether they breached that duty.

(e) Whether the grounds relied on by DML in its notice supporting the judgment on other grounds support the Judge’s decision.

Standard of procedural fairness: scope of judicial review

The issue

[19] The government sector in New Zealand, as in other jurisdictions, has undergone profound change over the last 20 years. This period of change was characterised by the corporatisation, and in some cases the privatisation, of many state trading functions, accompanied by extensive deregulation and economic liberalisation, and by decentralisation. The early background is summarised in Duncan & Bollard Corporatization and Privatization: Lessons from New Zealand (1992) in Chapter 1. They say that about 30 central government organisations were transformed into state-owned enterprises (SOEs). (More recent figures are found in Chen “Changing Shape of the Public Sector” [2001] NZLJ 201 at 202.) In addition, local body organisations were corporatised and in some instances privatised. The premise underlying corporatisation was that the efficiency of state trading activities would be improved by emulating a private sector model.
[20] This period of change also saw the increased use of contracting within the public sector (for a useful discussion of the issues arising from the move towards contracting see the various essays in Boston (ed) The State Under Contract (1995)). For present purposes there are two important elements to this. First, there has been increasing use of broadly stated performance agreements, both to provide specific objectives for the enterprises to which they relate but also to allow for performance assessment and to facilitate accountability. Statements of corporate intent under s 14 of the State-Owned Enterprises Act 1986 (SOE Act), agreed between the boards of SOEs and the relevant Ministers, are one example. Second, state agencies have been encouraged to consider whether they should “make” or “buy” particular services (that is, whether they should provide services themselves or contract with the private sector for their provision). By this means the private sector has increasingly performed work previously performed directly by the public sector.
[21] The health sector has been significantly affected by these changes. The Health and Disability Services Act 1993 (the HDS Act) incorporated much of the thinking that underpinned the changes summarised above. Initially, Crown Health Enterprises (CHEs) were obliged to provide health services consistently with their statements of intent and any other relevant agreements “while operating as a successful and efficient business” (s 11(1) of the HDS Act). Like SOEs, they were obliged to exhibit a sense of social responsibility, to uphold relevant ethical standards, to be good employers and “to be as successful and efficient as comparable businesses that are not owned by the Crown” (s 11(2)(d)). The current Act, the NZPHD Act, represents something of a retreat from that model, a point on which Mr Hodder for DML placed considerable emphasis. We return to it below.
[22] The changes to the public sector over the last 20 years have presented a considerable challenge to the courts, and in particular to their approach to judicial review (see, for example, de Smith’s Judicial Review (6ed 2007) at [3-059]). The particular question that has arisen concerns the extent to which judicial review should apply to decision-making within the new structures or models. Some commentators suggested that there would be a reduced role for judicial review in the new environment: see Taggart “Corporatisation, privatisation and public law” (1991) 2 PLR 77. As will become apparent in the discussion which follows, the courts have not yet finally grappled with the full implications of the changes in the context of judicial review.
[23] At issue in the present case is the ARDHBs’ power to enter a contract under s 25(2)(a) of the NZPHD Act. No party disputed that a DHB’s decision under s 25 to enter a contract was, in principle, subject to judicial review. Rather, the dispute concerned the scope of review.

High Court

[24] As to the scope of review, Asher J said:

[11] It has been clear since Webster v Auckland Harbour Board [1983] NZCA 28; [1983] NZLR 646 (CA) that the exercise of contractual powers by public authorities is open to review on public law grounds in an appropriate case. This approach has since been confirmed in Royal Australasian College of Surgeons v Phipps [1999] 3 NZLR 1 (CA).

[12] Whether a contractual power exercised by a [CHE] (the commercially oriented predecessor to DHBs) was susceptible to judicial review was considered in Southern Community Laboratories Ltd v Healthcare Otago Ltd [HC DUN CP30/96 19 December 1996]. Eichelbaum CJ concluded at p 17 that the statement of claim was an attempt to incorporate administrative law concepts into a commercial decision-making process, and that the issues were not justiciable. He struck out the statement of claim.

[13] The defendants have not sought to rely on Southern Community Laboratories to argue that the decision in these proceedings is not susceptible to judicial review. The Southern Community Laboratories decision was made in the context of the [HDS Act], which expressly brought a commercial edge to public health. Section 11(2)(d) of that Act provided that [CHEs] should be as successful and efficient as comparable businesses that are not owned by the Crown. That legislation, and with it the emphasis on efficiency and profitability, was swept away by the [NZPHD] Act. There is no reference in the new Act to the new DHBs being comparable to businesses. The primary focus for DHBs under the [NZPHD] Act is now the improvement of the health of the New Zealand public.

[14] The commercial context present in Southern Community Laboratories has gone, and the DHBs’ power to enter into contracts with service providers should be subject to judicial review. DHBs are clearly public bodies. DHBs’ ability to enter into contracts with major service providers goes to the heart of their statutory duty to protect and improve public health.

[25] The Judge accepted that standards of procedural fairness vary with the nature of the power exercised (at [51]). But the importance of the decision to the Auckland public, together with the statutory provisions concerning conflicts of interest, the use of inside information and the obligations of DHB members, indicated that “the legislature expects more than minimal or cursory standards of procedural fairness, although obviously the standard expected of judicial or quasi-judicial decision-makers is not required” (at [56]).
[26] Later, when dealing with conflict of interest, the Judge acknowledged that the statutory provisions applying to DHBs in relation to conflicts were less rigorous than those applying to other Crown entities (at [131]), but he went on to say that the concept of conflict of interest in administrative law was not constrained by them. As a consequence, a DHB could deal with a conflict of interest in accordance with the statutory provisions, but that conflict could still, for administrative law purposes, be impermissible “if it amounts to procedural unfairness or impropriety” (at [134]). The Judge said that the ARDHBs had a public law duty “to conduct public affairs with probity” (at [160]). Then, when addressing the statutory provisions dealing with the use of inside information, the Judge said that the ADHB could not have exercised its power to authorise the use of inside information in this context. This was because to have done so would have been to damage the integrity of its processes by giving one party an unfair advantage over another, thereby jeopardising its chances of reaching the best decision (at [225]).

Summary of submissions

[27] The submissions made by Mr Curry for Lab Tests and Mr Illingworth QC for the ARDHBs on this issue were essentially the same. For convenience we deal with them together.
[28] They argued that there is a sliding scale of reviewability. The highest standards are reserved for those exercising adjudicative-type functions having a significant impact on individuals. Where the decision is “commercial”, the requirements of procedural justice are less stringent, particularly where a competitive tender process is involved. Mr Curry and Mr Illingworth relied in particular on the decisions of the Privy Council in Mercury Energy Ltd v Electricity Corporation of New Zealand Ltd [1994] 2 NZLR 385 and Pratt Contractors Ltd v Transit New Zealand [2005] 2 NZLR 433, to which we return below.
[29] In relation to the Judge’s treatment of Eichelbaum CJ’s decision in Southern Community Laboratories, they accepted that the statutory context had changed but said that the NZPHD Act still required the ARDHBs to act commercially. Reliance was also placed on New Zealand Private Hospitals Association – Auckland Branch (Inc) v Northern Regional Health Authority HC AK CP440/94 7 December 1994, where Blanchard J said (at 42):

Here the [HDS Act] has conferred upon regional health authorities the function of making purchase agreements for health services and disability services. To carry out this function it will be necessary for a regional health authority to enter into many such contracts and, similarly, to make decisions about terminating or changing contractual relationships. It would be quite intolerable if, in addition to rules of contract law and other principles of the general law (including equity), a statutory body of this type, which is after all exercising a trading function, should also be subject to judicial review, including particularly an obligation to observe the principles of natural justice. Any trading organisation subjected to that requirement would be at a distinct competitive disadvantage. I doubt very much that those who framed the health reforms would have intended that to be so.

[30] Mr Curry and Mr Illingworth submitted that the Judge in the present case had adopted far too high a standard, one more fitting to a body exercising a judicial or quasi-judicial function. While accepting that not all decisions made by DHBs were properly characterised as “commercial”, the decision in the present case was, they said, purely commercial – to enter into a contract with a private sector provider for certain services on the best terms achievable.
[31] They said that the Judge had failed to pay sufficient regard to the legislative framework as a whole. They emphasised in particular that the ARDHBs are required to:

(a) Endeavour to recover all their annual costs (including the cost of capital) from their net annual income (s 41 of the NZPHD Act);

(b) Prudently manage their assets (s 51(a) of the Crown Entities Act 2004 (CEA)); and
(c) Endeavour to ensure their long-term financial viability and that they act as successful going concerns (s 51(b)(i) and (ii) of the CEA).

Accordingly, they submitted, although the ARDHBs are not required to make a profit (as CHEs were for a period), they must still act commercially, and must be able to do so on the same footing as other parties. To hold the ARDHBs to the high standard imposed by the Judge would be to handicap them in their dealings with private sector firms, which were free to adopt a wholly commercial approach.

[32] Further, they submitted that the power of DHBs to contract for the provision of services under s 25 of the NZPHD Act is in similar terms to the power that health funders had under the HDS Act to enter service contracts (s 22 of the HDS Act). This indicated that the legislature did not envisage a change of approach in this respect.
[33] For his part, Mr Hodder for DML emphasised that fundamental to its position were “those aspects of the rule of law which require public decisions to be made with integrity and in the public interest.” He pointed out that the NZPHD Act was a break from the model reflected in the HDS Act. In particular, the previous “commercial” aspects of the public health and disability sector were removed, in favour of a greater recognition of public service obligations by DHBs to their populations and of increased public participation. Mr Hodder noted that DHBs were stated to be “statutory entities rather than companies” (s 5(3)(d) of the NZPHD Act).
[34] Mr Hodder accepted that the NZPHD Act encouraged DHBs to obtain the best value for money but said that there was nothing in the High Court’s judgment to prevent them from doing so. What the judgment sought to enforce was probity in public decision-making, which was fundamental to open and honest government. Mr Hodder said that this case was about “the Court’s obligation to ensure minimum standards of hygiene in public administration, whether or not the decision is ‘commercial’”. He said that the principle was that “a s 25 decision is reviewable if it is tainted by a serious lack of integrity, i.e., fraud, corruption, bad faith or any other material departure from accepted public sector ethical standards which requires judicial intervention.” He described this as “even-handedness in some sense”.
[35] Against this background we turn to a discussion of the authorities.

The principal authorities

[36] In Royal Australasian College of Surgeons v Phipps [1999] 3 NZLR 1 this Court considered whether judicial review was available in respect of the report of a panel appointed by the Royal Australasian College of Surgeons to review the work of a surgeon who was not a member of the College. The Court held that the report was reviewable under the extended definitions in s 3 of the Judicature Amendment Act 1972, as amended in 1977.
[37] In its judgment, the Court noted that “[o]ver recent decades Courts have increasingly been willing to review exercises of power which in substance are public or have important public consequences, however their origins and the persons or bodies exercising them might be characterised” (at 11). The Court went on to say (at 12):

The Courts have made it clear that in appropriate situations, even although there may be no statutory power of decision or the power may in significant measure be contractual, they are willing to review the exercise of the power including review for breaches of natural justice, ...

While the historical development suggests a liberal approach to the availability of review proceedings, the powers of the Court are not, of course, at large. They must be rooted in principle and in the texts of the relevant statutes and rules.

[38] The factual situation in that case is, of course, far removed from the present. But the principles articulated are relevant.
[39] One of the authorities cited by the Court in Royal Australasian College of Surgeons was the decision of the Privy Council in Mercury Energy. Mercury was party to a transitional contractual arrangement with a SOE, Electricity Corporation of New Zealand (ECNZ), for the supply of electricity, pending negotiation of a long-term supply agreement. When after some years the parties had not reached agreement, ECNZ gave Mercury 12 months notice of its intention to cancel the transitional contract. Mercury sued, alleging breach of contract, breach of statutory duty and abuse of monopoly power (at common law). In addition, Mercury sought judicial review of the decision to terminate.
[40] In this Court, the application for judicial review was struck out (along with other claims), on the basis that ECNZ’s decision to terminate was not amenable to judicial review: Auckland Electric Power Board v Electricity Corporation of New Zealand Ltd [1994] 1 NZLR 551 at 560 − 561. On appeal, the Privy Council rejected that view. Delivering their Lordships’ advice, Lord Templeman accepted that the decisions of SOEs were in principle amenable to judicial review. His Lordship emphasised the public character of SOEs (in terms of ownership and responsibilities) and noted that the decisions of SOEs might adversely effect the rights and liabilities of private individuals without affording them any redress (at 388).
[41] However, Lord Templeman then said (at 391):

It does not seem likely that a decision by a [SOE] to enter into or determine a commercial contract to supply goods or services will ever be the subject of judicial review in the absence of fraud, corruption or bad faith.

And went on to say:

Industrial disputes over prices and other related matters can only be solved by industry or by government interference and not by judicial interference in the absence of a breach of the law.

[42] His Lordship concluded by saying:

The causes of action based on breach of statutory duty, abuse of a monopoly position and administrative impropriety are only relevant if the causes of action based on contract are rejected. If the causes of action based on contract are rejected, the other causes of action will only constitute attempts to obtain, by the declaration sought, specific performance of a non-existing contract. The exploitation and extension of remedies such as judicial review beyond their proper sphere should not be encouraged.

[43] Almost as soon as this decision was delivered, it attracted vigorous criticism, especially from Professor Taggart (see Taggart “Corporatisation, contracting and the courts” [1994] Public Law 351). Professor Taggart argued that there was an inconsistency between the reasons for their Lordships’ acceptance of the availability of review and their subsequent limitation of the scope of review to the narrow set of circumstances envisaged by the words “fraud, corruption or bad faith” (at 357). He speculated that the Privy Council’s decision reflected “a persistent feature of even modern British administrative law to immunise contractual matters from judicial review” (at 358).
[44] Recent English authorities indicate a continuing ambivalence in relation to judicial review and contracting by public bodies, although European Community directives and recent legislative changes have significantly impacted the legal landscape (see the discussion in R (on the application of the Law Society) v Legal Services Commission [2007] EWCA Civ 1264; [2008] 2 WLR 803 (CA)).
[45] Writing in 2005, Professor Arrowsmith noted a conflict in the English cases as to whether judicial review was available in respect of contracting decisions by public bodies in the absence of bad faith (see Arrowsmith The Law of Public and Utilities Procurement (2005) at 79 – 85). The orthodox view is that, absent fraud, judicial review will not be available simply because a public body has made a contracting decision. There must be something more to give the decision a “public” element, such as a “statutory underpinning” which requires the body to negotiate in a particular way or with particular terms (see, for example, R v The Lord Chancellor ex parte Hibbit and Sanders (1993) The Times 12 March 1993 (QB), per Rose LJ at 5 and Waller J at 7). Professor Bailey in “Judicial Review of Contracting Decisions” [2007] Public Law 444 illustrated the broader view by reference to R (on the application of Molinaro) v Kensington & Chelsea RLBC [2002] LGR 336 (QB), where Elias J said:

[67] ... [P]ublic bodies are different to private bodies in a major respect. Their powers are given to them to be exercised in the public interest, and the public has an interest in ensuring that the powers are not abused. I see no reason in logic or principle why the power to contract should be treated differently to any other power. It is one that increasingly enables a public body very significantly to affect the lives of individuals, commercial organisations and their employees.

Professor Bailey supported the Elias J’s approach but noted that it was not clear that it represented the law in England (at 451), a doubt shared by de Smith (at [3060] − [3061]). Indeed, in another note (“Judicial Review and the Tendering Process” [2007] PPLR 11), Professor Bailey said that the question of the amenability of public bodies exercising contracting powers to judicial review in England was “in urgent need of clarification” (at 20).

[46] Returning to Mercury Energy, it must be remembered that the SOE Act is a short, generally worded statute and that SOEs are state trading enterprises incorporated under the companies legislation, expected in large measure to emulate the performance of non-Crown owned businesses. Further, the dispute in that case was essentially about price − how much Mercury should pay ECNZ for electricity. The present context is different, however, because of the nature of DHBs, the more detailed and specific statutory context, and the nature of the dispute. We return to these features below.
[47] In Pratt Contractors there was a claim in contract arising out of a tender process conducted by Transit New Zealand, a Crown entity constituted by the Transit New Zealand Act 1989. The Act imposed an obligation on Transit to approve and follow “competitive pricing procedures” in funding highway construction and maintenance work. These were contained in a competitive pricing procedures manual known as the CPP.
[48] Pratt Contractors tendered for certain highway realignment work. Its tenders were unsuccessful. It sued Transit on the basis of a process contract and for breach of the Fair Trading Act 1986. It alleged that the request for tenders (RFT) contained express and implied terms as to the method by which Transit would select the successful bidder and that Transit had breached these terms. Transit generally accepted the legal framework postulated by Pratt Contractors, and in particular that it was obliged to evaluate and administer tenders fairly and equally, but argued that it had met its obligations.
[49] At trial Goddard J found in favour of Pratt Contractors: HC WN CP221/97 6 September 2000. She held that Transit was required by a process contract to comply with the CPP and other internal manuals, and it had failed to do so. In particular, Goddard J found that Transit was in breach of an implied obligation to deal fairly and in good faith with Pratt Contractors because there was a real risk of bias against the company as a result of an earlier dispute involving the company and Transit’s consultants on the current tender.
[50] In the Court of Appeal ([2002] 2 NZLR 313), McGrath J, writing for the Court, accepted that Transit and Pratt Contractors had entered into a process contract based on the RFT and the documents it incorporated (at [80]). This arose not simply from the terms of the RFT but also from the statutory context (at [78] – [79]). The Court also accepted that Transit had an implied contractual duty to treat tenderers equally in the performance of its contractual obligations (at [86]). Having referred to Finn J’s judgment in Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558; (1997) 146 ALR 1 (FCA), and considered the operating model that Parliament envisaged for Transit, MrGrath J said that the implied duty of even-handedness should not be expanded by the implication of further obligations, unless they met the tests for the implication of contractual terms (at [91] – [92]).
[51] In relation to public law standards, McGrath J noted that it was inevitable within a small market that those involved in assessing tenders would have settled views, based on prior knowledge, about particular tenderers (at [97]). As long as this did not inhibit the exercise of genuine judgment, the existence of such views was desirable. The Judge also said that there was a danger in judicial scrutiny of judgments in this area “if the Court applies standards akin to those required in judicial review proceedings involving the exercise of statutory powers” (at [98]). He said (at [98]):

We do not consider there is a contractual obligation on Transit to avoid conducting its evaluation in a way which would leave a statutory officer open to judicial review for apparent bias. It is only such conduct as demonstrates there was actual unfair dealing in the application of its contractual obligations which can amount to a breach of contract.

[52] In the Privy Council Lord Hoffmann, delivering their Lordships’ advice, said:

[3] At the centre of the dispute lies the question of the extent to which the procedure for competitive tendering should be judicialised. Tenderers naturally want to be judged independently on their merits by an impartial selector and given the opportunity to rebut any suggestions of demerit which they regard as unfair. The parties who invite tenders, even if they are public authorities like Transit, want to be able to choose in what they consider to be their best commercial interests and not be hobbled by quasi-judicial procedural rules.

[53] Lord Hoffmann went on to agree with Finn J’s dictum in Hughes Aircraft Systems International (at 42) that an implied duty of good faith and fair dealing (at [46]):

... does not as such impose on [the employer] under the guise of contract law, the obligation to avoid making its decision or otherwise conducting itself in ways which would render it amenable to judicial review of administrative action.

(Emphasis in original.)

His Lordship said that the duty of good faith and fair dealing required Transit to treat the tenderers equally (in the sense of judging them by the same criteria). But it did not mean that the evaluators could not come to the process with previously formed views about the merits of contractors, nor did they have to act judicially (at [47]).

[54] The statute at issue in Pratt Contractors was more akin to the NZPHD Act than the SOE Act, in that it was more detailed and specific. The decision of the Privy Council nevertheless indicates that the standard of procedural fairness required of a public body acting in a commercial context is not the same as that required of administrative decision-makers. It is clear from the decision that Transit was required to be open to the receipt of information from and about tenderers and to evaluate tenderers equally and honestly against the relevant criteria. But it was not required to act judicially, nor was it bound by the rules against bias that would apply to those acting judicially.
[55] For present purposes, we see the following points derived from the authorities as relevant.
[56] First, where a public body is involved in a commercial process, in this case seeking tenders and awarding a contract, that body must exercise its contracting power in accordance with its empowering statute, if there is one. Here the ARDHBs must (at least) comply with the requirements of s 25. If they do not, their contracting decision is susceptible to judicial review on the ground of illegality. None of the parties before us disputed this.
[57] Second, the procedural obligations of a body performing a public function will vary with context. So, a public body exercising a particular statutory power may be bound by natural justice obligations, but such obligations may have less, or even no, relevance to the same body when making another type of decision under statute.
[58] Third, “context” for these purposes includes the nature of the decision being made, the nature of the body making the decision and the statutory setting within which the decision is made. In the present case, the statutory provisions dealing with confidential information and conflict of interest assume critical importance.
[59] Fourth, the Privy Council’s decision in Mercury Energy indicates that the courts will intervene by way of judicial review in relation to contracting decisions made by public bodies in a commercial context in limited circumstances, although that is subject to the point about context just made. Generally other accountability mechanisms (such as ministerial control and parliamentary oversight) are likely to be seen as more appropriate. Mercury Energy has been cited and applied in England as well as in New Zealand (see, for example, Menai Collect Limited v Department for Constitutional Affairs [2006] EWHC 727 (Admin) (QB) and R (on the application of Gamesa Energy UK Limited) v National Assembly for Wales [2006] EWHC 2167 (Admin) (QB)).
[60] The decision in Pratt Contractors provides further support for this approach, even though there was no public law cause of action in that case. The Privy Council’s unwillingness to import public law notions into the contractual framework suggests that their Lordships saw the contractual framework as sufficient in itself. As we have already said, it is significant that the contracting decision in that case was made in the context of a more detailed and specific statutory setting than is found in relation to SOEs. But the statutory requirement for a competitive commercial approach towards tendering led to the conclusion that the implied duties were limited and would not be supplemented by means of a public law analysis. Furthermore, their Lordships were unwilling to impose process requirements on Transit (in relation to bias) which were inconsistent with the use of an appropriate evaluation methodology (i.e., an evaluation team involving persons knowledgeable in the industry, who, because of their knowledge and experience, were likely to have views about tenderers).

Application to this case

[61] In the period from 1993 until 30 June 1998, CHEs were required to operate as successful and efficient businesses (s 11(1) of the HDS Act). While they were required to exercise a sense of social responsibility by having regard to the interests of the community they served, they were also required to be as “successful and efficient as comparable businesses that are not owned by the Crown” (s 11(2)(d)). From 1998, when Hospital and Health Services (HHSs) took over from CHEs, HHSs had to operate in a businesslike and effective manner, but on a not-for-profit basis (s 11(2) of the HDS Act). Section 11(4) provided that a HHS “operates on a not-for-profit basis if its annual net income covers all its annual costs (including the cost of capital)”. So the “competitive” model of the HDS Act as originally enacted was watered down by the 1998 amendments.
[62] The NZPHD Act (and the DHB structure) took effect from 1 January 2001. Whereas previously the Health Funding Authority, a national body, had purchased services such as community laboratory services for individual hospital regions, under the NZPHD Act that task fell to DHBs.
[63] While the NZPHD Act did effect something of a sea change in the management of public health services when compared to the HDS Act (certainly as originally enacted), it did not sweep away all elements of the former Act. Although the NZPHD Act emphasised the public service aspect of the provision of health services, it did not remove the commercial aspect altogether. 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. We develop these points below.
[64] Section 21 of the NZPHD Act provides that DHBs are crown entities, governed by the CEA, except to the extent that the NZPHD Act expressly provides otherwise. Under the CEA, crown entities are grouped into five categories (s 7(1)). DHBs fall within the category “statutory entities” (s 7(1)(a)). Within that category, they are Crown agents, which must give effect to Government policy when directed by the responsible minister (s 7(1)(a) and Schedule 1, Part 1).
[65] The CEA contains a number of relevant generic provisions. Sections 14 and 15 describe the functions and status of statutory entities. For present purposes, the important functions are those set out in the entity’s Act and any functions incidental to, or consequential on, those functions (s 14(1)(a) and (c)). Under s 14(2) a statutory entity must act consistently with its objectives in performing its functions. Under s 16 a statutory entity may do anything authorised by the entity’s Act or by the CEA, and under s 17 it may do anything that a person of full age and capacity may do, but in each case it must act only for the purpose of fulfilling its functions (s 18).
[66] Sections 19 to 24 of the CEA deal with the validity of acts by statutory entities. Section 19 provides:

Acts in breach of statute are invalid

(1) An act of a statutory entity is invalid, unless section 20 applies, if it is–

(a) an act that is contrary to, or outside the authority of, an Act; or

(b) an act that is done otherwise than for the purpose of performing its functions.

(2) Subsection (1) does not limit any discretion of a court to grant relief in respect of a minor or technical breach.
[67] Section 20 provides that, despite s 19 “or any rule of law to similar effect”, a person dealing with an entity who does not have actual or constructive knowledge of the matters referred to in s 19(1)(a) and (b) may enforce certain transactions, although that does not limit the availability of judicial review (s 21(d)). Section 22 provides that it is “irrelevant to the validity of an act that the act is not, or would not be, in the best interests of the statutory entity.”
[68] The objectives of DHBs are set out in s 22 of the NZPHD Act. As it received some emphasis in argument, we set the section out in full:

Objectives of DHBs

(1) Every DHB has the following objectives:

(a) to improve, promote, and protect the health of people and communities:

(b) to promote the integration of health services, especially primary and secondary health services:

(d) to promote the inclusion and participation in society and independence of people with disabilities:

(e) to reduce health disparities by improving health outcomes for Maori and other population groups:

(f) to reduce, with a view to eliminating, health outcome disparities between various population groups within New Zealand by developing and implementing, in consultation with the groups concerned, services and programmes designed to raise their health outcomes to those of other New Zealanders:

(g) to exhibit a sense of social responsibility by having regard to the interests of the people to whom it provides, or for whom it arranges the provision of, services:

(h) to foster community participation in health improvement, and in planning for the provision of services and for significant changes to the provision of services:

(i) to uphold the ethical and quality standards commonly expected of providers of services and of public sector organisations:

(j) to exhibit a sense of environmental responsibility by having regard to the environmental implications of its operations:
(k) to be a good employer in accordance with section 118 of the Crown Entities Act 2004.

(2) Each DHB must pursue its objectives in accordance with its district strategic plan, its annual plan, its statement of intent, and any directions or requirements given to it by the Minister under section 33 of this Act or section 103 of the Crown Entities Act 2004, or under section 107 of the Crown Entities Act 2004.

[69] Section 23 sets out the functions that DHBs have for the purpose of pursuing their objectives. The first of those functions is:

(a) to ensure the provision of services for its resident population and for other people as specified in its Crown funding agreement:

There are numerous other functions in addition.

[70] Section 25 authorises DHBs to enter into service agreements. It provides:

Service agreements

(1) In this Act, service agreement means an agreement under which 1 or more DHBs agree to provide money to a person in return for the person providing services or arranging for the provision of services.

(2) A DHB may, if permitted to do so by its annual plan and in accordance with that plan, –

(a) negotiate and enter into service agreements containing any terms and conditions that may be agreed; and

(b) negotiate and enter into agreements to amend service agreements.

(3) A DHB that has entered into a service agreement must monitor the performance under that agreement of the other parties to that agreement.

[71] Section 27 deals with the duties of the board of a DHB. It provides:

Duties of board

(1) The board of a DHB must ensure that the DHB acts in a manner consistent with the DHB’s district strategic plan, annual plan, and any directions under section 33 of this Act or section 103 or section 107 of the Crown Entities Act 2004.

(2) The duty in subsection (1)–

(a) applies in addition to the duties of the board in sections 49 to 52 of the Crown Entities Act 2004; and

(b) is a collective duty owed to the Minister for the purposes of section 58 of the Crown Entities Act 2004.

(3) Despite section 60(1) of the Crown Entities Act, a member of a board of a DHB may not apply for a court order under that section.
[72] Sections 41 to 44 of the NZPHD Act deal with the financial responsibilities of DHBs. For present purposes, s 41 is important. It provides:

DHBs to operate in financially responsible manner

(1) Every DHB must operate in a financially responsible manner and, for this purpose, must −

(a) Repealed

(b) endeavour to cover all of its annual costs (including the cost of capital) from its net annual income; and

(d) Repealed.

(2) This section does not limit section 51 of the Crown Entities Act 2004.

[73] Sections 49 to 51 of the CEA deal with the collective duties of boards of crown entities. Of particular importance in this context are ss 50 and 51. Section 50 provides that the board of a statutory entity “must ensure that the statutory entity performs its functions efficiently and effectively and in a manner consistent with the spirit of service to the public.” Section 51 provides:

Entity must operate in financially responsible manner

The board of a statutory entity must ensure that the entity operates in a financially responsible manner and, for this purpose, that it–

(a) prudently manages its assets and liabilities; and

(b) endeavours to ensure–

(i) its long-term financial viability; and

(ii) that it acts as a successful going concern.

[74] Finally we mention s 87 of the NZPHD Act. That provides:

87 Saving of certain transactions

The validity or enforceability of any deed, agreement, right, or obligation entered into, or incurred by, the Crown or a publicly-owned health and disability organisation is not affected by a failure by the Crown or the organisation to comply with –

(a) any provision in sections 3, 4, or 8, or Parts 3 and 4; or

...

(d) Any provision in any statement of intent or district strategic plan or annual plan; or

....

[75] At this stage, we make four points.
[76] First, the objectives set out in s 22 of the NZPHD Act, and the functions described in s 23, are social or public welfare-type objectives and functions. They are not explicitly commercial.
[77] Second, despite the point just made, it is clear that DHBs are expected to act commercially at least to some extent or in some contexts. They are obliged to perform their functions “efficiently and effectively”, albeit “in a manner consistent with the spirit of service to the public” (s 50 of the CEA). They must act in a “financially responsible manner” and endeavour to ensure that they act as successful going concerns (s 51 of the CEA). In addition, they must recover all their costs, including the cost of capital (s 41(b) of the NZPHD Act). That is, they must recover a rate of return on capital invested sufficient to meet the opportunity cost of that capital, the opportunity cost being the rate of return that a DBH could earn if it chose another investment with equivalent risk. While, given the statutory history referred to at [61] above, this must be seen as contemplating a not-for-profit approach, it is a commercial measure. We note that the repealed s 41(a), (c) and (d) of the NZPHD Act were in almost identical terms to s 51(a) and (b)(i) and (ii) of the CEA. So the DHBs’ obligation to attempt to recover all of their annual costs from their net annual income, including the cost of capital, does not apply to crown entities governed solely by the CEA’s generic provisions.
[78] Third, s 25(2)(a) and (b) of the NZPHD Act empowers DHBs to “negotiate and enter into” service agreements or amendments to such agreements. That is relevant to the question of what, if any, public law procedural obligations apply to DHBs when acting under s 25. The section does not require the use of a competitive tendering process. In terms of the section, a DHB is free to negotiate with a single potential supplier if it wishes. (As we indicate below (at [149] – [151]), this occurred in the present case when DML’s contract was extended in mid 2005 to run until 30 June 2007.) Consistently with Pratt Contractors, then, care must be taken in identifying what, if any, procedural obligations flow from the section (or the statute as a whole) as opposed to flowing from a particular selection process which a DHB decides to adopt on a particular occasion (e.g., tendering). The existence of the power to negotiate is relevant for another reason as well. The imposition of onerous procedural obligations may unduly fetter the DHBs’ power to negotiate effectively, thus handicapping them in attempting to deal with determined private sector service providers, as Mr Curry and Mr Illingworth argued.
[79] Fourth, s 87 of the NZPHD Act is broader in scope than the corresponding provisions in the CEA (ss 19 – 24). It is not entirely clear what the interrelationship is between the two sets of provisions. Section 21(2) of the NZPHD Act provides that the CEA applies to DHBs except to the extent that the NZPHD Act expressly provides otherwise. Section 21(3) then identifies the sections in the CEA that do not apply to DHBs, but does not mention ss 19 to 24.
[80] As we noted earlier, the Privy Council in Mercury Energy said that disputes of the sort at issue in that case were better addressed through non-judicial accountability mechanisms than through judicial review. This raises the question of accountability mechanisms applying to DHBs.
[81] We begin with the NZPHD Act. It provides that a DHB board comprises seven elected members and up to four members appointed by the Minister (s 29(1)). Elections are held triennially (cl 9 of Schedule 2). The Minister appoints a board’s chairperson and deputy-chairperson from the elected or appointed members (cl 10 of Schedule 3). The Minister also has the power under s 30 to appoint persons to sit on boards as Crown monitors. The functions of a Crown monitor include observing the decision-making process and the decisions of the board (s 30(3)(a)) and advising the Minister on matters relating to the DHB, its board or its performance (s 30(3)(c)).
[82] Where the Minister is “seriously dissatisfied” with the performance of a DHB board, the Minister may dismiss the members of the board and replace them with a commissioner and up to three deputy commissioners (s 31). The Minister may give directions to a DHB (s 32) and may require a DHB to provide or arrange for the provision of services, but not that they be provided to or by any named individual or organisation and may not specify the price (s 33).
[83] In addition, under cl 8 of Schedule 3 the Minister has the power to remove an appointed or an elected member of a DHB. Appointed members may be removed by the Minister “at any time and entirely at his or her discretion” (s 36(1) of the CEA (incorporated by cl 8(1AA) of Schedule 3)). In relation to elected members, the Minister is allowed to remove them only for one of the reasons specified in cl 9 of Schedule 3. One of these is that the Minister is satisfied that the member failed to declare an interest in circumstances where cl 36, or cl 6 of Schedule 2, required the member to do so (cl 9(b)).
[84] Turning to the CEA, s 27 sets out the role of the responsible Minister in relation to crown entities. Sections 49 – 52 deal with the collective duties of a board. These are owed to the responsible Minister (s 58). Individual duties of board members are dealt with in ss 53 – 57 (to which we return when we deal with confidential information). These duties are owed to the responsible Minister and to the entity (s 59).

Our evaluation

[85] In our view, neither Mercury Energy nor Pratt Contractors supports a broad-based “probity in public decision-making approach” of the type adopted by the Judge. In assessing the standard of review (or scope of the procedural obligations) to be applied, it is necessary to look at the nature of the public body, the particular function being performed, the context within which that function is being performed and what it is said has gone wrong. In this context, we see something of an illogicality in the Judge’s analysis. The Judge relied on the presence in the legislation of the provisions dealing with conflicts of interest and use of inside information to justify the standard of procedural fairness he applied; but then he said that compliance with those provisions would not necessarily meet the required public law procedural standards in relation to conflicts and the use of inside information.
[86] The Judge distinguished Southern Community Laboratories, and, in effect, Mercury Energy, by saying that the NZPHD Act had so altered the legislative framework that the considerations which led the Courts in those cases to identify a limited scope for judicial review were no longer applicable. He said that the focus of the previous legislation on efficiency and profitability had been replaced by a focus on the improvement of health for the benefit of the New Zealand public. While that is to some extent true, we consider that it is not, in itself, a sufficient distinction. The Judge did not mention Pratt Contractors.
[87] The NZPHD Act did make significant changes in the area of the provision of health services, although to some extent it simply built on changes made by the 1998 amendments to the HDS Act (see [61] above). We accept that DHBs are public bodies dealing with public funds and have what can fairly be described as public service obligations. Despite that, they are still expected to act commercially in some contexts, as we have noted above. They have the power under s 25(2) to negotiate and enter into service agreements and must comply with any procedural obligations fairly arising out of that or any other relevant section. In determining what those obligations are, account must be taken of the fact that s 25 does not itself mandate any particular process for the selection of a service provider.
[88] But assuming compliance with any such obligations, we consider that there is limited scope for the imposition of further public law obligations of procedural fairness in this context. Obviously, the imposition of such obligations may significantly limit a DHB’s ability to participate fully, in the interests of its resident population, in commercial negotiations with determined private sector enterprises. In our view, this consequence must be taken into account in assessing the extent of the public law procedural obligations to which an entity will be subject. (We accept, of course, that procedural obligations of a contractual character may arise as a result of the particular selection process that a DHB decides to adopt, as occurred in Pratt Contractors. But that is a different matter.)
[89] Further, there are, as we have said, other accountability mechanisms in the legislation. The Minister has considerable power in relation to the membership and performance of DHB boards, and has various options to maintain or improve their performance. In the context of DML’s complaints in this case, we think it significant that one of the roles of a crown monitor is to observe the DHB’s decision-making process and decisions. This is a statutory indication that it is part of the Minister’s role to monitor this aspect of a DHB’s performance. The Minister has the power to remove boards or individual members in certain circumstances and the election cycle is relatively short, so electors dissatisfied with the performance of a board will have an effective remedy if they can persuade sufficient voters to their way of thinking.
[90] Finally, without reaching a concluded view about s 87 of the NZPHD Act, it does at least indicate that the courts should take a cautious approach to imposing public law procedural obligations of the sort at issue in this case on DHBs.
[91] Clearly, judicial review will be available where there is fraud, corruption or bad faith. Further, we accept, as a matter of principle, that it may be available in analogous situations, such as where an insider with significant inside information and a conflict of interest has used that information to further his or her interests and to disadvantage his or her rivals in a tender. In such a case, it may be that the integrity of the contracting process has been undermined in the same way as in the case of corruption, fraud or bad faith. But, as we have said, the particular statutory context is critical, and in this case the provisions relating to conflict of interest and use of confidential information assume considerable importance.
[92] It follows, then, that we do not accept the final element of the formulation that Mr Hodder put to us (see [34] above). He submitted that a s 25 decision was reviewable “if it was tainted by fraud, corruption, bad faith or any other material departure from accepted public sector ethical standards which requires judicial intervention” (emphasis added). That open-ended formulation is not, in our view, consistent with the authorities, or, in the present case, with the statutory context.
[93] It follows also that we do not agree with the Judge’s view of the scope or standard of judicial review to be applied in the present case. In particular, we consider that the Judge did not give proper weight to the commercial context within which the ARDHBs were operating, or to the relevant statutory provisions. We are particularly troubled by the Judge’s view that DHBs could follow the statutory procedures in relation to conflicts of interest or the use of inside information yet still be found to have breached their public law obligations in respect of those matters.
[94] However, in light of the view we take of the facts, these differences may ultimately not be material.

Conflict of interest

The issue

[95] Broadly, the issue is whether the Judge was right to hold that Dr Bierre had a conflict of interest in relation to the laboratory services contract and that the ADHB failed to manage that conflict appropriately. The conflict was said to have arisen from Dr Bierre’s interest first in obtaining a contract with the ARDHBs in respect of a boutique laboratory service which he wished to operate and then in seeking and obtaining (with others) the contract at issue in these proceedings.
[96] On the facts of this case there is some artificiality in considering the question of conflict of interest separately from the question of misuse of inside information. However, the case was presented to us in this way, and dealing with the two aspects separately does facilitate analysis.

Statutory provisions

[97] Section 6 of the NZPHD Act provides that the term “conflict of interest” includes:

(a) the person’s interest in a transaction (within the meaning of subsection (2)) of the DHB; and

(b) the person’s interest that would, if the person were a member of the board of the DHB or a member of a committee of that board or a delegate of that board, be an interest in a transaction (within the meaning of subsection(2)) of the DHB; and

(c) to avoid any doubt, the employment or engagement of the person, or of the person’s spouse or partner, as an employee or contractor of the DHB.

The terms “transaction” and “interest in a transaction” are also dealt with in s 6. We return to those below.

[98] The obligation to disclose conflicts of interest arises at two points – at the time a person seeks election to, or is appointed to, the board of a DHB and, once a member, as soon as practicable after the relevant facts are known to the member.
[99] Clause 6 of Schedule 2 to the NZPHD Act sets out the obligation for candidates for election to a DHB board as follows:

Candidate to declare conflicts of interest

When a candidate gives the responsible electoral officer notice of the candidate’s consent to being nominated as a candidate, the candidate must also give the electoral officer a statement completed in good faith that−

(a) discloses any conflicts of interest that the candidate has with the DHB as at the date of the candidate’s notice of consent, or states that the candidate has no such conflicts of interest as at that date; and

(b) discloses any such conflicts of interest that the candidate believes are likely to arise in future, or states that the candidate does not believe that any such conflicts of interest are likely to arise in future.

(As to the obligation in relation to appointed members, see s 31(1)(c) of the CEA.)

[100] The continuing disclosure obligation is dealt with in cl 36 of Schedule 3 to the NZPHD Act. That clause provides:

Disclosure of interests

(1) A member of a board of a DHB who is interested in a transaction of the DHB must, as soon as practicable after the relevant facts have come to the member’s knowledge, disclose the nature of the interest to the board.

(2) A member of a board who makes a disclosure under this clause must not (unless subclause (4) applies, or the Minister, by a waiver or modification of the application of this subclause under clause 37, permits) –

(a) take part, after the disclosure in any deliberation or decision of the board relating to the transaction; or

(b) be included in the quorum required by clause 25 for any such deliberation or decision; or

(3) A disclosure under this clause must be recorded in the minutes of the next meeting of the board concerned and entered in a separate interests register maintained for the purpose.
(4) However, a member of the board who makes a disclosure under this clause may take part in any deliberation (but not any decision) of the board relating to the transaction concerned if a majority of the other members of the board permits the member to do so.
(5) If subclause (4) applies, the board must record in the minutes of its next meeting–

(a) the permission and the majority’s reasons for giving it; and

(b) what the member says in any deliberation of the board relating to the transaction concerned.

(6) Every member of a board of a DHB must ensure that–

(a) the statement completed by the member under section 31(1)(c) of the Crown Entities Act 2004 or clause 6 of Schedule 2 is incorporated in the interests register maintained under subclause (3); and

(b) any relevant change in the member’s circumstances affecting a matter disclosed in that statement is entered in that register as soon as practicable after the change occurs.

(7) Sections 62 to 72 of the Crown Entities Act 2004 do not apply to a DHB.
[101] As can be seen, the initial and continuing obligations to disclose are expressed in different terms. Clause 6 contains a reference to good faith, whereas cl 36 does not, although that can hardly be material. More significantly, perhaps, cl 6 requires a candidate to state whether he or she believes conflicts will or will not arise in the future, whereas cl 36 is confined to conflicts that have arisen (on the member’s knowledge of the facts). This difference in focus is understandable given the different contexts in which the two clauses operate.
[102] The prohibition on a conflicted member participating in deliberations and voting arises only where disclosure has been made (cl 36(2)). The clause does not address the position where disclosure should have been made but was not.
[103] Further, the prohibition is not absolute. First, a majority of the board may allow the member to participate in deliberations, although not in the decision. This is to be contrasted with the more restrictive position applying to Crown entities covered by the CEA’s conflict provisions, where the interested member may not vote, take part in any discussion or decision “or otherwise participate in any activity of the entity that relates to the matter” (s 66(a) of the CEA). Where a DHB board allows participation in deliberations, there is a requirement for transparency, in the sense that the majority’s reasons for allowing the conflicted member to participate must be recorded, as must the member’s comments during the deliberations.
[104] Second, the Minister has the power to waive or modify the application of cl 36(2). Clause 37 provides:

Minister may waive or modify application of clause 36(2)

(1) The Minister may, if satisfied it is in the public interest, or the interests of the DHB concerned, to do so, waive or modify the application of all or any part of clause 36(2) in respect of–

(a) any particular member of a board;

(b) any transaction, or class of transaction.

(2) The Minister must effect any waiver or modification under subclause (1) by written notice to the board, and may make the waiver or modification subject to any conditions the Minister thinks fit.
(3) The Minister must present to the House of Representatives a copy of any such notice within 12 sitting days after the date on which the Minister issues the notice.
[105] The Minister’s power is more extensive than that of the board, in the sense that the Minister may lift the prohibition on voting. But again there are mechanisms designed to achieve transparency – written notice to the board and a report to the House of Representatives. A further transparency mechanism is provided by the requirement that any waiver or modification by the Minister under cl 37(1) or by the board under cl 36(4) must be noted in the entity’s annual report (s 42(4)).
[106] Finally, we come to the definitions of “transaction” and “interest in a transaction”. These are important because, as noted above, “conflict of interest” is defined in s 6 by reference to a person’s “interest in a transaction” and the disclosure obligation in cl 36 applies to DHB members who are “interested in a transaction”. The definitions in s 6 are:

(1) ...

transaction, in relation to a DHB, means–

(a) the exercise or performance of a function, duty, or power of the DHB; or

(b) an arrangement, agreement, or contract to which the DHB is a party; or

(2) For the purpose of this Act, a person who is a member of a board of a DHB or a member of a committee of such board or a delegate of such board is interested in a transaction of a DHB if, and only if, the board member or member of the committee or the delegate–

(a) is a party to, or will derive a financial benefit from the transaction; or

(b) has a financial interest in another party to the transaction; or

(c) is a director, member, official, partner, or trustee of another party to, or person who will or may derive a financial benefit from, the transaction, not being a party that is –

(i) the Crown; or

(ii) a publicly-owned health and disability organisation; or
(iii) a body that is wholly owned by 1 or more publicly-owned health and disability organisations; or
(e) is the parent, child, spouse or partner of another party to, or person who will or may derive a financial benefit from, the transaction; or
(f) is otherwise directly or indirectly interested in the transaction.

(3) A person is not interested in a transaction for the purposes of subsection (2) –

(a) if his or her interest is so remote or insignificant that it cannot reasonably be regarded as likely to influence him or her in carrying out his or her responsibilities under this Act or another Act; or

(b) because he or she receives remuneration or other benefits authorised under this Act or another Act.

[107] We will return to these definitions later in the judgment. At this point we note a comment made by Mai Chen about the similar, broadly worded definitions of “matter” and “interested in a matter” in s 62 of the CEA. Ms Chen said that their breadth was such that “there may be difficulties in applying the conflict of interest rules without disqualifying all potential candidates with requisite experience and expertise, because they operate in the particular sector” (“Crown Entities Act: 18 months on” (2006) NZLJ 315 at 320).

Factual background

[108] We do not propose to set out the factual background to these proceedings in full. It covers many events which extend over several years and involve numerous people. Rather, we will attempt to deal with the important features of the factual background as we address particular issues.
[109] In terms of conflict of interest there are three issues in respect of which the facts are important:

(a) What conflicts of interest did Dr Bierre face, when did they arise and how long did they last?

(b) How did Dr Bierre declare those conflicts?

We will briefly summarise the factual background in relation to the first issue and then deal with that relating to the second and third issues together.

(i) Conflicts faced by Dr Bierre

[110] As we have said, Dr Bierre’s conflict of interest is said to have arisen from his interest in obtaining a contract with the DHBs in respect of a boutique laboratory service which he had in mind to develop and then from his interest in obtaining the contract at issue. We detail the background to each proposal, although there is considerable overlap.

(a) The boutique laboratory

[111] From 1991 until 1999 Dr Bierre was a shareholder in DML. In December 1999 he sold his shareholding to Sonic. He remained in DML’s employ until late 2002, when he left, apparently with some acrimony. In any event, there was an employment dispute about the enforceability of a restraint of trade clause, which was not ultimately resolved until November 2003, at which time Dr Bierre was largely free to recommence private pathology practice.
[112] As we have said, from January 2001 DHBs took over responsibility from the Health Funding Authority for the funding of community laboratory services in their regions. Existing community laboratory services contracts country-wide were due to expire towards the end of 2005. In the intervening period, DHBs undertook considerable work in relation to community laboratory services, both at a national and regional level.
[113] At this time community laboratory services in Auckland were provided through two private sector providers, DML and Southern Community Laboratories (SCL), with DML providing over 90 per cent of the services. DML’s contract ran until September 2005. In general, community laboratory services were provided on an uncapped fee-for-service basis in accordance with a schedule of tests. However, DML had a memorandum of understanding with the ADHB in relation to a risk sharing and volume capping arrangement, which ran from July 2002 until June 2005. SCL had no similar arrangement. In addition, each of the ARDHBs had its own in-house laboratory, although their focus was different from that of the community laboratories in the sense that they performed tests for hospital patients, as well as non-schedule tests.
[114] The ARDHBs had set up a company, the Northern DHB Support Agency Limited (NDSA), to provide them with support services. In 2002 it prepared a discussion document on Northern Region Laboratory Services Strategy. NDSA involved a range of people and organisations in the preparation of that document, including DML whose comments it recorded. The document noted the considerable growth in the costs of community laboratory services and the need to control them. One option identified was rationalisation in terms of the number of providers. Later, in 2004, NDSA became heavily involved in work relating to laboratory services in the Auckland region. Early in 2004 it established a working group on the future funding of Auckland laboratory services and later that year ran a project headed by Dr Pilstrom which considered four options for delivering laboratory services. DML was involved in both the working group and the Pilstrom project (we return to this below).
[115] At a national level, District Health Boards New Zealand Inc (DHBNZ) co-ordinated work on diagnostic laboratories. In 2002 it commissioned a paper from Reinhard Pauls of Simon Terry Associates Ltd on options for reform of the diagnostic laboratory services market. That paper identified a number of features of the industry that gave rise to inefficiency in the form of increased costs. It noted, for example, that the fee-for-service arrangement reflected in the then current schedule was “principally an administrative mechanism, not a market mechanism”. It said that current schedule prices did not reflect competitive market conditions, nor was there any reason to assume that they were in any way related to the costs of production (at 8). While there was a fair degree of competition in the market for schedule testing, the economic benefits associated with competitive markets were not captured by DHBs but rather by the industry and by referring GPs and specialists (at 10). The paper considered various options and said that reform of the market could bring about cost savings of several tens of millions of dollars annually. The paper provoked a response from the Association of Community Laboratories, which commissioned a commentary on it from Brown, Copeland & Company Ltd.
[116] Shortly before his departure from DML, Dr Bierre commenced study for an MBA degree from the University of Otago. Much of the work he undertook dealt with community laboratory services. In conjunction with fellow students, including in particular Anthony Halls, Dr Bierre produced various papers on the provision of laboratory services in New Zealand, reflecting their research and analytical work.
[117] Some of these papers became available more generally within the sector. One was a paper known as the Team Rivendell paper, authored by Dr Bierre, Mr Halls and three fellow students. It concluded that industry growth was likely to continue and that there were insufficient control mechanisms for DHBs to manage the diagnostic laboratory industry sustainably. This was the result of a lack of transparency as to the costs of providing community laboratory services, incorrect economic incentives (in particular, to control growth in demand), an absence of volume control levers and a lack of measurement of health outcomes. The authors said that while the inaccessibility of information on the industry’s cost structure made definitive conclusions on industry profitability impossible, their work strongly suggested that the industry was making excessive profits. The paper then recommended that community laboratory providers be required to “provide details of actual operating structures, costs and profitability through an audit process at least annually”, that the specimen collection system move towards more collection at GPs’ rooms and that responsibility for funding devolve to PHOs.
[118] In October 2003 DHBNZ began a project on laboratory services strategy development, to be completed by August 2004. According to the background paper DHBNZ wished to:

develop a co-ordinated strategy to provide a high-level direction for laboratories over the next five to ten years;

identify activity to ensure successful implementation of the strategy;

provide context and develop tools to support national, regional, or local implementation of the strategy.

[119] DHBNZ involved a range of people from across the country in the project, including Dr Jury, the chief planning and funding officer of the ADHB. Dr Bierre and Mr Halls volunteered their services to the project as a means of satisfying a course requirement for their MBA programme. Through that involvement Dr Bierre and Mr Halls met Dr Jury.
[120] Towards the end of 2003, when he was largely free to undertake private pathology services again, Dr Bierre formed two companies, Labtests Auckland Ltd and Labtests New Zealand Ltd. (The former later became LTAL Ltd and the latter, Auckland Pathology Consortium Ltd and then Taupehi Holdings Ltd, which was the vehicle through which Dr Bierre held his interest in the appellant, Lab Tests.) Dr Bierre said in his affidavit that he established these companies simply to preserve the rights in the Labtest name, which he had suggested to DML while he was with them but which DML had rejected.
[121] Dr Bierre also meet with Brian Watson, who was the managing director of Gribbles, and with the laboratory manager and clinical director of LabPlus Ltd, the ADHB’s laboratory company. The purpose of these meetings was to see whether these organisations would support a boutique laboratory business that Dr Bierre had in mind establishing in conjunction with the national breast cancer screening programme. Dr Bierre said that, as he did not have a laboratory himself and was not then intending to establish one, he needed to find suitable support from an existing laboratory.
[122] As part of their work for the DHBNZ project (and for the purposes of their MBA programme), Dr Bierre and Mr Halls prepared a draft paper dated April 2004 entitled “The Laboratory Services Industry in New Zealand: Options for Diagnostic Test Purchasing”. That paper noted that funders had operated with imperfect and asymmetrical cost and other information (as compared to service providers) and that the schedule system meant that providers retained the full benefit of productivity savings. The paper discussed a number of options and included an appendix on the benefits of open book accounting.
[123] This paper formed the basis of discussion at a “stakeholder workshop” held on 29 April 2004. That workshop was attended by representatives of North and South Island DHBs, along with representatives from DML and SCL (as major providers of community laboratory services in New Zealand). Attendees were asked to complete a questionnaire prior to the workshop. DML sent a memorandum dated 28 April to Dr Jury saying that they thought it premature to respond to the questionnaire but noting 12 points which they considered needed discussion. Three of these were: separate collection and transportation systems, GPs collecting specimens and distrust between funder and provider. In a follow up memorandum of 7 May, DML identified these issues (among others) as meriting review in more depth.
[124] In June 2004, Dr Bierre and Mr Halls completed their paper in light of the outcome of the workshop. One of the points noted in the paper was that “[i]ncreased transparency and the use of open book accounting appeared to find favour with DHB and community laboratory workshop participants” (at 116). This reflected the concern that DHBs did not have reliable information about the costs of providing community laboratory services (as opposed to the price which they paid for them). The paper also noted that market segmentation and separating collection from testing would create greater transparency for funders (at 116). Areas identified for further work were a single desk supplier on a regional basis, separation of collection and testing, market segmentation, and competitive tendering (at 117).
[125] After this, Dr Bierre and Mr Halls decided to put their ideas into practice and developed the notion of setting up a pilot project. They prepared a short paper, dated 29 July 2004 and entitled “Establishment of Histopathology and Cytopathology Laboratory as a Pilot Project”, and presented it to representatives of the ADHB. The paper proposed the establishment of a stand-alone histopathology and cytopathology laboratory as a pilot project (i.e., the proposal contemplated some market segmentation). Dr Bierre and Mr Halls proposed a minimum 12 month contract, utilising open book accounting and a cost of capital based return. They put this proposal to Dr Jury but he was non-committal. In October 2004 Dr Bierre also meet with Mr Coe, NDSA’s Project Manager, to discuss the pilot project with him. Nothing came of this, however.
[126] In July 2004, Dr Blue, an acquaintance, approached Dr Bierre about standing for election to the ADHB board on the Citizens and Ratepayers Now ticket. Dr Bierre was initially reluctant, being concerned about the possibility of conflict of interest given that he was a pathologist and funding for pathology services came from DHBs. Dr Blue suggested that he talk to Mr Bell, the campaign manager for Citizens and Ratepayers Now, which Dr Bierre did. Ultimately, Dr Bierre decided to stand. As part of his candidacy he submitted a conflict of interest statement on 7 August 2004 (for the text of that statement see [160] below).
[127] From 2 August, Dr Bierre worked in a locum position in Sydney as a pathologist and commuted between Auckland and Sydney on a weekly basis. This role ended in November 2004.
[128] The DHB elections began in September 2004 and, on 15 October 2004 Dr Bierre was notified that he had been elected. Dr Blue was also elected. At Dr Bierre’s first ADHB board meeting in December 2004, members were asked to make brief statements about themselves. The minutes record Dr Bierre as saying that he was a pathologist with 25 years of experience in laboratories. He had undertaken an MBA at Otago and was interested in health and economics and the provision of services within both primary and secondary contexts. The action points from the meeting record that the Interests Register was to be updated, which subsequently occurred (see [161] below). Dr Bierre was appointed to several of the board’s committees, the most important for present purposes being the Audit Committee.
[129] At this time, Dr Bierre was still interested in pursuing his idea for a boutique laboratory. Dr Bierre thought that the expiry of the ADHB’s existing community laboratory services arrangements in 2005 would provide an opportunity for him to advance this idea. He took various steps during the period late 2004 − early 2005 to prepare for this – for example, he went on a fact-finding trip to the United States and ordered some laboratory equipment.
[130] In January 2005 Dr Pilstrom’s final report (the Pilstrom report) was circulated to the ARDHBs. They had engaged Dr Pilstrom in August 2004 to review options for re-organisation of community laboratory services in the Auckland region. The four options considered were: consolidation of the DHB laboratories into a single laboratory, the absorption of community laboratory testing activities into the ARDHBs, a public-private joint venture for all diagnostic testing and competitive tender of some or all of the collection, transportation and testing services required.
[131] The Pilstrom project was supported by NDSA, and Dr Jury was the project sponsor. The final report drew on input from the Laboratory Stakeholder Group, a group including representatives of the ARDHBs’ in-house laboratories, DML, SCL and NDSA, and from meetings with interested organisations and parties. We will return to the report in a little more detail when we deal with confidential information. It is sufficient at this point to say that, of the four options considered, the report favoured a public/private joint venture for all diagnostic testing (i.e., testing carried out by DHB in-house laboratories and by community laboratories). The report estimated that this could achieve savings of $10 – 12m annually. Dr Pilstrom contacted Dr Bierre in July 2004 and discussed laboratory issues with him on one occasion. Otherwise, Dr Bierre was not involved in Dr Pilstrom’s project and did not see the Pilstrom report until it was discovered in these proceedings.
[132] In March 2005, the ARDHBs engaged Dr Gollop, a health management consultant, to run a community pathology project on their behalf. In effect, this project was to take up where the Pilstrom project had finished. The expiry of the community laboratory contracts later in 2005 meant that the ARDHBs had decisions to make. The project team ultimately assembled included Dr Jury and Mr Coe. The team’s role was, as Dr Gollop described it:

... to consider and report on pathology services, to recommend a future path for the provision of pathology services and to chart a way forward to implement the recommendations.

[133] In early March 2005 Dr Bierre met with Dr Jury to discuss his boutique laboratory proposal. In the course of their meeting, Dr Jury pointed out the conflict that Dr Bierre faced as a board member, which Dr Bierre acknowledged. In his affidavit, Dr Jury commented that there was nothing unusual in the fact that Dr Bierre had a conflict of interest, as such conflicts permeated the sector. He noted that Dr Morris was the clinical director of Auckland Hospital’s laboratory while also being employed as a senior pathologist by DML.
[134] On 7 March 2005 Labtests Auckland Ltd submitted a written application to the ADHB for a contract to provide histopathology and cytopathology services. An open book accounting approach was proposed, together with an agreed cost of capital return. On 21 March Labtests Auckland Ltd opened its laboratory. The laboratory personnel consisted of Dr Bierre and a charge technician to handle processing. Having no DHB funding, they marketed their services to GPs, and Dr Bierre explored other avenues of funding, unsuccessfully as it turned out.
[135] Dr Jury took advice from Mr Northey, the ADHB’s General Counsel, before responding to the application by letter dated 30 March. In his letter Dr Jury said that the ADHB was currently reviewing pathology services and had no policy on provision of histopathology and cytopathology services that was consistent with contracting with Labtests Auckland Ltd. However, Dr Jury said, the letter of application would be provided to those undertaking the review so that it could be fully considered.
[136] Dr Bierre visited another DHB board member, Dr Nash, on 13 April. He deposed that she was the board member responsible for the laboratories portfolio and he wanted to ensure that she was fully aware of what he was doing, and why. Dr Bierre said that it was around this time that he first heard of Dr Gollop’s project.
[137] By May 2005, Dr Gollop and his project team had reviewed a variety of material and prepared a report for the ARDHB CEOs of what they proposed on the basis of this initial review. Their proposal had two important elements – the first that the DHB laboratories would be consolidated into a single entity (this was referred to as “Path Alliance”) and the second that a single community laboratory services provider should be selected (rather than the existing two). In the longer term, the ARDHBs’ combined laboratory entity and the community services provider would work together as strategic partners. The option favoured by the Pilstrom report (creation of a public/private joint venture to undertake all diagnostic testing, community and hospital) was thought to be “a step too far”. Among the project team’s initial priorities was the extension of the DML contract and the associated risk-sharing agreement for one to two years. It was thought that significant savings could be achieved if the community laboratory work carried out by SCL was transferred to DML, subject to the risk-sharing arrangement. Accordingly, Dr Gollop became involved in negotiations with DML for the extension of their existing contract. Over the following two months Dr Gollop negotiated several slightly different arrangements with DML, the last of which was accepted by the ARDHBs (see [149] – [150] below).
[138] Dr Bierre took a close interest in what was happening in relation to community pathology and had several discussions and exchanged numerous emails with Dr Gollop on the topic. On 12 and 17 May 2005 Dr Bierre met with Dr Gollop to discuss issues relating to community laboratory services. Dr Bierre told Dr Gollop that he had a conflict of interest as he was an ADHB member and was trying to set up a boutique laboratory. He discussed with Dr Gollop both the Path Alliance proposal to create a single entity out of the DHB laboratories, and the proposal to extend the DML contract and exclude SCL. He was particularly concerned about the forced exit of SCL from the market as he thought that this would entrench DML as the sole supplier in a monopoly position.
[139] On 23 May 2005, at the request of Mr Brown (the Chair of the ADHB board), Dr Bierre sent a five page memorandum to ADHB board members entitled “Laboratory Issues”. He began the memorandum by saying that he had “a declared conflict of interest in this area”.
[140] In the memorandum Dr Bierre noted that the upcoming expiry of most of the community laboratory contracts in the country provided an opportunity to consider how laboratory services should be delivered in the future. He outlined the two proposals that Dr Gollop favoured, supporting the Path Alliance proposal but expressing doubts about moving to a single supplier of community laboratory services. The paper concluded:

Recommendation

The DHBs should:

actively pursue the “Path Alliance” concept.
address the underlying structural issues in this sector.
pursue a strategy which will ensure that efficient contracting is possible by overcoming the information asymmetry that exists in the sector.
ensure that any strategy keeps the medium and longer term options for controlling expenditure in this sector open for DHBs.

[141] At about this time a representative of International Accreditation New Zealand visited Labtests Auckland Ltd’s laboratory as a preliminary step to its accreditation. The representative wrote to Dr Bierre on 18 May expressing a very favourable initial impression of the laboratory and saying that early accreditation was realistic.
[142] At the ADHB meeting of 2 June, there was discussion of Dr Gollop’s recommendation that the DML contract be extended and DML take over SCL’s work. Dr Bierre was strongly opposed to this. Having declared a conflict of interest, he argued against the proposal and in favour of retaining competition. The board decided that the issue was one that needed to be discussed by all three regional boards. Drs Gollop and Bierre were invited to present their opposing views to a regional meeting.
[143] The regional meeting took place on 9 June. Beforehand, on 2 June, Mr McKernan, the CEO of the Counties Manukau DHB, emailed the other attendees raising the question of Dr Bierre’s conflict of interest given that he was a ADHB board member and a clinician. Mr Keenan, who had been appointed by the Minister as Deputy-Chair of all three of the ARDHB boards, replied that Dr Bierre had fully declared his interests. In the event, Dr Gollop and Dr Bierre presented their views at the regional meeting. Dr Bierre said he focussed on the “big picture” in his remarks. They then left the meeting. Although no firm decision was reached, the regional meeting considered that, if a satisfactory arrangement could be negotiated, the ARDHBs would move to a single provider for a two year period.
[144] Shortly after, following a discussion with the ADHB’s CEO, Mr Smith, who made it clear that there was no prospect of Labtests Auckland Ltd obtaining a ADHB contract in the short term, Dr Bierre decided to “mothball” his boutique laboratory. (He made his laboratory assistant redundant, but continued to use the premises for consulting work.) He telephoned Dr Hutchison, a Member of Parliament, to advise him of this, and to express his concern about the mothballing. They discussed the fact that Dr Bierre had a conflict of interest. Dr Bierre followed that telephone conversation up with a letter, dated 24 June. Dr Hutchison then wrote to Mr Brown, attaching a copy of Dr Bierre’s letter to him, and noting that Dr Bierre had a conflict of interest.
[145] Around this time Dr Bierre began to apply for permanent employment positions. In late June he applied for the position of CEO of the Canterbury DHB. He was advised that his application had been unsuccessful on 8 July 2005. He sent off applications for the role of General Manager of Gribbles Pathology New Zealand on 2 August and for the role of CEO of the Bay of Plenty DHB on 7 August 2005. Neither application was successful.
[146] On 6 July the ADHB Audit Committee met. Dr Jury presented a revised proposal in relation to the extension of the DML contract, and proposed the development of an RFP for the selection of a strategic partner to provide community laboratory services following the expiration of DML’s extended contract. The DML contract was to be extended for three years, with an RFP being held after two years to identify a long-term partner to take over at the end of the three year period. Dr Bierre declared a conflict of interest and argued against the proposed extension of the DML contract. The Committee decided to send the proposal back to management for further negotiation.
[147] There was an ADHB board meeting the following day. SCL had several weeks earlier been advised of what was being proposed and described themselves as having been taken “completely by surprise”. Their lawyers asked that SCL representatives be given the opportunity to speak to the ADHB board. SCL representatives did attend the meeting, and made a presentation suggesting a number of options. DML representatives also attended. But as the matter had been referred back to management, nothing further transpired, although subsequently Dr Gollop did prepare an analysis of SCL’s proposals.
[148] After receiving Dr Hutchison’s letter, Mr Brown wrote to Dr Bierre on 8 July 2005. He said that he had not previously been aware that Dr Bierre’s company was involved in negotiations with the ADHB. Dr Bierre replied to this letter on 11 July. (We return to these letters at [165] – [166] below.)
[149] On 14 July the Chairs and the CEOs of the ARDHBs met. They agreed that DML’s contract would be extended for two years, that DML would take over the work previously performed by SCL and that the ARDHBs would simultaneously commence an RFP process, with the objective of completing a tender for a new community laboratory services contract within 12 months. The new contract was to take effect from 1 July 2007. The additional 12-month period would be required if a new entrant was the successful tenderer and had to establish the necessary infrastructure. As part of the arrangement, DML was to close 20 of its 90 collection rooms (in addition to the 20 or so rooms that SCL would close when it exited the market).
[150] This was put to the ADHB Audit Committee on 3 August, the other ARDHBs having already accepted the proposal. The Committee decided to recommend the proposal to the board. At the meeting Dr Bierre declared that he had a conflict of interest in relation to community laboratory services. There was no formal vote. The ADHB board accepted the Committee’s recommendation at a meeting the following day, at which Dr Bierre also declared his interest and did not vote. Both Mr Brown and Dr Bierre said in their affidavits that Dr Bierre made little or no comment in the discussions at these two meetings.
[151] As will be apparent, the decision to extend the DML contract, but not to offer SCL a contract, was made by the ARDHB boards after negotiations with DML. (Two of DML’s senior executives in the negotiations, Dr Morris and Dr Ockelford, were also part time employees of the ADHB at the time. This illustrates the range of roles that particular individuals played, reflecting the limited pool of expertise available.) The ARDHBs achieved considerable savings in the process ($4 – 5m per annum according to Mr Smith). There were no significant negotiations with SCL. SCL was by far the smaller provider (with just over seven per cent of the regional market) and there were real doubts about its regional capability. In making these decisions the ADHB (and the other regional DHBs) acted under s 25(2) of the NZPHD Act, as they were entitled to do. There has been no suggestion of any procedural impropriety in any of this.
[152] As to Dr Bierre’s interest in providing a boutique laboratory service, he had such an interest when he agreed to be nominated as a candidate for election to the ADHB in August 2004, but was not in a position to provide a service immediately. In any event, the idea received no traction with the ADHB. When he wrote to the ADHB on 7 March 2005 seeking a contract, Dr Bierre had a laboratory and could realistically have provided a boutique service almost immediately (subject to any accreditation issues). Again, however, there was no interest from the ADHB. The option was effectively dead when he mothballed the laboratory in June 2005, and was certainly so for the foreseeable future when the ADHB board decided on 4 August 2005 to join the other ARDHB boards in agreeing to the extension of the DML contract.

(b) RFP 577

[153] As community laboratory contracts were due to expire in the latter half of 2005, various DHBs conducted RFPs for new contracts from late 2004 and throughout 2005. Dr Bierre was involved in a number of them as he was retained as a consultant by various in-house DHB laboratories interested in tendering for DHB contracts. In December 2004 he was engaged by the laboratories of the Otago and Southland DHBs and in June 2005, by the Nelson-Marlborough DHB hospital laboratory. He assisted them in preparing and submitting bids for the relevant RFPs.
[154] In mid-September 2005, Dr Bierre was engaged by the Northland DHB hospital laboratory in relation to its proposed response to the Northland DHB’s RFP. The Northland DHB laboratory decided to make a joint tender with a Gribbles-owned company, so Dr Bierre was retained as a consultant by Gribbles as well. This work was completed by late October.
[155] After each of the ARDHB boards had adopted the recommendations of Dr Gollop and his team in July and August 2005 to extend DML’s contract and hold a RFP, they established a working group to give effect to their decision. The first task of the group, which was also led by Dr Gollop, was to prepare the RFP. In early October 2005 Dr Gollop suggested to Mr Smith that they have a preliminary workshop on the RFP. The meeting was held on 1 November 2005, and involved Dr Gollop, various representatives of the ARDHBs and Mr Coe. (Some of these attendees later became members of the Evaluation Panel for RFP 577.) Dr Bierre was also invited to attend.
[156] According to the minutes, Dr Gollop began the meeting by giving an overview of the current position. There was then an opportunity for attendees to make comments. Dr Bierre is recorded as saying: “Opportunity to get Community Laboratories Services right for next 20 years. Now we have an inefficient delivery model with high unit costs”. Following that, key issues were identified and then there was some discussion of evaluation criteria and weighting. Dr Gollop had prepared a draft of the RFP discussion paper that was to be distributed to stakeholders for comment, and it was discussed.
[157] On 28 November, Ms Walker of Gribbles (who was based in Australia) emailed Dr Bierre to say that she would be in New Zealand in the week of 12 December with Gribbles’ commercial manager, Mr Loucas. She said that she would like to catch up with Dr Bierre to thank him for his work in relation to the Northland RFP and to discuss future opportunities in Wellington and Auckland. She followed up by email on 5 December. Dr Bierre agreed to meet.
[158] About this time, according to his affidavit evidence, Dr Bierre became aware that the ARDHBs had issued a RFP discussion document, which he downloaded from the NDSA website. Dr Bierre deposed that he considered that this document showed a “paradigm shift in the provision of laboratory services, moving to a partnership approach and a close relationship between the ARDHB hospital laboratories and the community based provider.” As such, he found it attractive and started to think about putting together a consortium to respond to the proposed RFP, comprising (potentially) the ARDHB laboratories, the Auckland University School of Medicine and a provider of community laboratory services.
[159] Dr Bierre contacted several people at the ADHB’s laboratory, LabPlus, to discuss this possibility. He subsequently raised the matter with Ms Walker and Mr Loucas when they met on 13 December. After further discussions with representatives of LabPlus, Dr Bierre met with Mr Smith on 21 December and they agreed that he should take leave of absence from the ADHB to pursue the proposed RFP. On 22 December Dr Bierre wrote to Mr Brown requesting leave of absence from the ADHB board between 14 January and 30 June 2006. This request was granted. (This is discussed in more detail at [168] below.)

(ii) Dr Bierre’s interest disclosure, and ADHB’s management of it

[160] When he stood for election to the ADHB in August 2004, Dr Bierre made a disclosure of interest statement, as required by cl 6 of Schedule 2 to the NZPHD Act. It said:

I hereby disclose the following conflict of interest with the [ADHB] that may arise in the future. I am currently employed as a part-time Senior Lecturer at the University of Auckland School of Medicine. The [ADHB] is the major funder of pathology services in the Auckland region. All pathologists working in the region served by the ADHB are either employed by the ADHB or have a contractual relationship with the ADHB. At present I am not employed by ADHB nor [do I] have a contractual relationship with the ADHB. However there is a possibility that this may change in the future and may represent a conflict of interest.

[161] In addition, on 20 December 2004 Dr Bierre provided a statement for the Interests Register (cl 36(3) of Schedule 3). It read:

Senior Lecturer (Part-time), Department of Molecular Medicine and Pathology, University of Auckland.

Owner/Director, ZKTHB Ltd.

Managing Director LABTESTS Auckland Ltd.

Director LABTESTS New Zealand Ltd.

Member, Medical Advisory Committee, New Zealand Breast Cancer Foundation.

[162] In addition to these formal statements, the conflicts of interest faced by Dr Bierre were raised, by him and by others, at various times throughout the period. We have referred to some of these instances in the narrative given above.
[163] As we have said, Dr Bierre had first raised his aspirations in relation to a boutique laboratory with Dr Jury in July 2004 in the context of his “pilot project” proposal. However, ADHB board members and other senior employees were not aware that Dr Bierre was pursuing a contract with the ADHB until varying times in 2005. (Dr Blue may be an exception given her discussions with Dr Bierre before he agreed to stand for election.) Dr Bierre’s disclosure statement did not spell out precisely what his possible interests in relation to the ADHB were. Rather, it followed what appears to have been the common form of such disclosure statements in the ADHB.
[164] Mr Smith said that he did not become aware of the nature of Dr Bierre’s conflict until mid June 2005, when Dr Jury told him of Dr Bierre’s interest in obtaining a contract for his boutique laboratory. When Mr Smith learnt of this, he told Dr Jury that ADHB executives should exercise care in dealing with Dr Bierre on laboratory issues.
[165] This brings us to Mr Brown’s letter of 8 July 2005. In that letter, Mr Brown said that, prior to receipt of Dr Hutchinson’s letter (see [144] above), he was not aware that Dr Bierre’s company “was involved in negotiations with the DHB.” He went on to say:

The Board may therefore have been compromised in the interim as, given your expertise in the lab test field, the Board has put considerable stock on your advice in regard to the current regional laboratory testing process and your advice has been central to decisions the Board has taken. As there appears to be a clear conflict of interest what was required to happen under [cl] 36 Schedule 3 of the [NZPHD Act] was that your personal position should have been made clear to the Board, allowing the Board to have considered that issue and your on going involvement first. You advised the Board to follow the Auditor General’s approach however your failure to expressly declare your conflict of interest may have compromised the Board’s process.

I am advised that you should now be excluded from considerations on lab testing and the current regional process. I would also draw your attention to your obligations under the [CEA].

[166] Dr Bierre replied, in writing, on 11 July. He said that he considered that he had complied with his disclosure obligations and that senior ADHB personnel were well aware of his conflict.
[167] Subsequently, on 14 July, Mr Brown told those who had been involved in the regional meeting of 9 June of the position in relation to Dr Bierre. They agreed that had they known the true position they would not have permitted Dr Bierre to speak at the meeting.
[168] As we noted at [159] above, Dr Bierre contacted various people at LabPlus in early December 2005 to advise them that he was considering putting together a consortium to bid for RFP 577 and to ascertain whether LabPlus was interested in being involved. One of the people contacted was Ms Ritsma. She replied positively, but said that she was concerned that there would be a perception of conflict of interest as a result of Dr Bierre’s membership of the ADHB board “who will ultimately be making a decision and signing off on the responses to the RFP”. Dr Bierre acknowledged her concern, but said that he had declared his interest in this area and if he was involved in a response to RFP 577, he would be excused from any decision making at Board level as had “already occurred in some of the preliminary decisions”. Ms Ritsma advised Mr Smith and Dr Jury of the contact from Dr Bierre. Later, on 20 December, Dr Bierre met with Ms Ritsma and LabPlus personnel to discuss his ideas with them. At the conclusion of the meeting Ms Ritsma suggested that Dr Bierre speak to Mr Smith. On the same day Mr Smith met Mr Brown and they discussed Dr Bierre’s position. They agreed that Mr Smith should talk to Dr Bierre. Dr Bierre arranged to meet Mr Smith the following day and they agreed that Dr Bierre should stand down from the board for a period. Dr Bierre then wrote to Mr Brown formally seeking leave of absence for approximately six months, which was granted.

High Court

[169] The Judge held that the funding of community laboratory services was a “function, duty or power” of a DHB and said that he was satisfied that the reviews carried out by Dr Pilstrom and Dr Gollop were part of the exercise and performance of that function (at [132]). The deliberations and steps taken through 2005 towards renewing the DML contract, preparing the discussion documents and issuing the RFP fell within the statutory language (at [133]). It seems, then, that the Judge viewed the entire process as “a transaction” within the meaning of s 6 of the NZPHD Act.
[170] The Judge concluded that Dr Bierre had a conflict of interest (in the sense of being interested in a transaction for the purposes of cl 36(1)) when he was pursuing a contract for his boutique laboratory throughout 2004 and 2005 and when he was pursuing a contract for the proposed consortium from some point in November 2005 (at [142]). He held that Dr Bierre had failed to disclose these interests adequately in his various disclosure statements (at [147] − [151]), and that the ADHB did not deal appropriately with Dr Bierre’s conflicts of interest (at [152] − [155]).
[171] The Judge summarised his conclusions on this aspect of the case in the following way:

[156] Dr Bierre was in a conflict of interest from the time he started sitting on the ADHB in December 2004. Throughout his time as an ADHB member he was interested in securing ADHB funding for his own laboratory, which amounted to an attempt to further his own private financial interests. Dr Bierre had an even more serious conflict of interest once he began discussions with Gribbles and others in November 2005 about a general proposal to provide laboratory services in Auckland in response to the pending RFP.

[157] Dr Bierre’s initial concern about his conflict of interest in July 2004, Mr McKernan’s reaction on 2 June 2004, Dr Hutchison’s comment on 27 June 2005, Mr Brown’s reaction on 8 July 2005, Ms Ritsma’s reaction on 7 December 2005 and Mr Smith’s position later in December 2005, were all correct. Dr Bierre’s conflicts of interest were a serious threat to the integrity of the ARDHBs’ process.

[158] From the time Mr Brown became aware of Dr Bierre’s serious conflict of interest, the ADHB was obliged to address it. The action taken by the ARDHBs was entirely inadequate. Indeed, apart from Dr Bierre’s abstention from voting in the 4 August resolution, there was no action. The ADHB could have recorded the disclosure in the Minutes and entered it into a separate interests register pursuant to clause 36. It could then have voted on whether Dr Bierre could take part in any deliberations. For the reasons I will set out in the next part of this judgment, it would then have had to conclude that Dr Bierre should cease to have any involvement in deliberations relating to laboratory services and the RFP. In allowing Dr Bierre to continue to be involved in discussions about laboratory services, while he wished to bid for them himself, the ARDHBs permitted this process to be damaged. They were being influenced by a person who was driven by his own interests, rather than the interests set out in the PHD Act.

[159] Unfortunately, no action was taken until 21 December 2005 when, after the email exchange with Ms Ritsma and being spoken to by Mr Smith, Dr Bierre agreed to stand down. By this time, however, Dr Bierre had a detailed knowledge of the thinking of the panel and the ARDHBs’ members. The ARDHBs missed another chance to address the conflict of interest by failing to reiterate in February and March 2006, when it was clear that Dr Bierre was planning to submit a proposal, that his involvement in entering a proposal was inappropriate and impermissible. Finally, the ARDHBs’ receipt of the Consortium proposal, despite being aware of the conflict of interest, amounted to another missed opportunity.

[160] The ARDHBs had a duty to ensure that they conducted their affairs fairly and properly. This duty arose not only from cl 36 of Schedule 3 of the PHD Act but also from a public law duty to conduct public affairs with probity. The ARDHBs’ failure to prevent Dr Bierre’s involvement in the ARDHBs’ attempt to reform the provision of community laboratory services, meant that the only pathologist involved was seeking outcomes that suited his commercial goals rather than the ARDHBs’ statutory objectives of improving and protecting public health. The ARDHBs’ failure to prevent Dr Bierre’s involvement damaged the integrity of the ARDHBs’ considerations and undermined public confidence in Board processes. The ARDHBs’ failure to respond adequately to Dr Bierre’s conflict of interest created the platform for Dr Bierre to use knowledge and information acquired form his ADHB position to make a proposal [when] the opportunity arose.

Submissions

[172] In the interests of length we do not propose to summarise the parties’ submissions separately in relation to this and the remaining issues on the appeal. Rather, we will address their submissions to the extent necessary in the course of our discussion.

Our evaluation

[173] Plainly, at the time he was pursuing a contract for his boutique laboratory, Dr Bierre faced a conflict of interest. The DHB was proposing to enter into a contract for community laboratory services, in particular by extending the DML contract for two years. Through his company, Dr Bierre sought such a contract, albeit for a boutique service. On any view of it, this amounted to an “interest in a transaction”, and no party before us contended otherwise. So also when Dr Bierre approached LabPlus and Gribbles in December 2005 to sound them out about being involved in a consortium to bid in response to RFP 577. The ADHB was proposing to enter into a contract for the provision on community laboratory services through the RFP. Dr Bierre wanted to be party to a bid for that contract. Again, no party contended that Dr Bierre did not face a conflict at that point.
[174] The critical question is whether Dr Bierre was in a conflict position throughout in relation to RFP 577. That is, was he in a conflict position from the time he took his position on the ADHB until he decided to attempt to put together a consortium (after which he clearly was in such a position)? Or was he in a position of conflict at two different periods and in two different contexts?
[175] The Judge took the former view. On the Judge’s approach, it was irrelevant that Dr Bierre abandoned his boutique laboratory proposal when it was clear that the ADHB had no interest in it (somewhere in the period mid June to early August 2005). It was also irrelevant on that approach that there is no evidence Dr Bierre had any interest in being involved in a bid for the whole of the community laboratory services contract until late November or, more likely, early December 2005 when he downloaded the RFP discussion document from the NDSA website. Dr Bierre was in a position of conflict throughout because he was interested in pursuing some form of laboratory proposal with the DHB, albeit that the two proposals were very different and were advanced at different times. As a consequence, the position of Dr Bierre and the ADHB in relation to RFP 577 was compromised.
[176] For our part, we do not agree with the Judge’s analysis.
[177] As the Judge said, the definition of “transaction” in s 6(1) of the NZPHD Act is very broad (see [106] above). Indeed, paragraph (a) of the definition is so broad on its face that it is difficult to see any need for paragraphs (b) and (c). If those paragraphs are to be given some independent role, it may be necessary that paragraph (a) be read down.
[178] In the present case, after Dr Bierre joined the ADHB board, the ARDHBs entered into two relevant contracts – the two year DML contract and the contract at issue in the present case. The processes preceding these contracts can fairly be described as “proposals” for the purposes of paragraph (c) by the time that Dr Gollop and his project team recommended them to the ARDHB Chairs and CEOs in July 2005, and perhaps even earlier. However, the Pilstrom report had assessed a number of options in relation to community laboratories, and recommended a public/private joint venture for all diagnostic testing. Accordingly it was not obvious when Dr Bierre joined the ADHB board at the end of 2004 that the ARDHBs would be conducting an RFP a year or so later for a community laboratory provider. It is difficult to see that there was any “proposal” at that time. However, if paragraph (a) is applied in accordance with its terms, in commissioning the Pilstrom report the ADHB was performing one of its functions (i.e., considering future strategy in relation to community laboratories) and was therefore involved in a “transaction”. Indeed, its involvement in that “transaction” would have gone back earlier than the time the Pilstrom project commenced, ending only when the contract resulting from RFP 577 was concluded.
[179] Turning to the phrase “interested in a transaction”, s 6(2)(c) of the NZPHD Act makes it clear that the possibility of deriving a financial benefit from a transaction means that there is an “interest” − a person who “will or may derive a financial benefit from the transaction” has an interest in it. Accordingly, a person bidding in a competitive tender for a DHB contract will be interested in a transaction, as will a person proposing to bid for a contract which the DHB is proposing to put to tender. Further, the language of s 6(2)(e) is wider still – “otherwise directly or indirectly interested in the transaction”. But at some point along the spectrum of future possibilities an interest will become so nebulous that s 6(3) will come into play. The effect of that subsection is to treat as irrelevant interests that are so remote or insignificant that they cannot reasonably be regarded as likely to influence DHB members in carrying out their statutory responsibilities.
[180] Dr Bierre’s declaration of interest when elected was general in nature. It referred to the fact that he was a pathologist and might contract with the ADHB. But it did not specifically identify the possibility that he might seek and obtain a community laboratory services contract. Clearly at the time of his election Dr Bierre had an interest in establishing a boutique laboratory. He said in his evidence that the pilot project had been “scuttled” by then as a result of the ADHB’s lack of interest. But even accepting that, he was still interested in establishing a boutique laboratory because, as we have said, he went on a fact-finding trip to the United States and purchased some equipment. He had to obtain funding if such a laboratory was to be viable, and, practically, that had to come from the ADHB.
[181] When Dr Bierre raised the possibility of the ADHB funding a pilot project with Dr Jury in July 2004, he was essentially sounding Dr Jury out as he was not in a position to make a firm proposal (for example, he did not have his own laboratory or access to one owned by someone else). It may be, then, that initially his general disclosure statement was sufficient, although clearly it would have been preferable had it been more specific as to the nature of his possible involvement with the ADHB.
[182] However, when Dr Bierre wrote to Dr Jury on 7 March 2005 applying for a contract he was in a position to make a firm proposal. By then, the Labtests Auckland Ltd laboratory was operating, although it had yet to be accredited. Accordingly, while his general statement may have been sufficient in the absence of a firm proposal, it was not once he had decided to undertake the steps necessary to enable him to put such a proposal to the ADHB. By that point, even if the ADHB had not previously been considering community laboratory services, Dr Bierre was “interested in a transaction”.
[183] As previously noted, one ADHB board member, Dr Blue, was aware of the nature of Dr Bierre’s conflict of interest prior to his election because he raised it with her. Dr Jury, a senior executive of the ADHB, was also aware of it from his discussions with Dr Bierre about the boutique laboratory pilot project in July 2004 and the letter which he received in March 2005. From April 2005, Dr Bierre advised various other people associated with the ADHB, including board members, that he had a conflict of interest in relation to community laboratories. For example, in April 2005 he spoke to a fellow board member, Dr Nash, and told her about his plans for a boutique laboratory. Dr Bierre’s memorandum of 23 May 2005 to ADHB board members entitled “Laboratory Issues” started by saying that he had “a declared conflict of interest in this area”. The minutes of the ADHB board meeting of 2 June 2005 record that “[Dr] Bierre declared his conflict of interest” under the minute headed “Renewal of community laboratory and ‘risk share’ contract with [DML]”. Mr Keenan, the Ministerial appointee, was aware that he had a conflict (see [143] above).
[184] Mr Brown’s letter of 8 July 2005 to Dr Bierre must be seen against that background. All members of the board must have understood by the end of May 2005 that Dr Bierre had a conflict of interest in relation to the laboratory proposals it was considering because he had advised them that he did. What Mr Brown (and some other board members) did not appreciate was that Dr Bierre’s interest related to a boutique laboratory in respect of which he had recently applied for ADHB funding.
[185] So the criticism of Dr Bierre at this point is not that he did not disclose that he had an “interest in a transaction”, but that he did not do so soon enough and was, in any event, not sufficiently explicit about the nature of his interest. The criticism of the board is, first, that they (or some of them) did not find out from Dr Bierre exactly what his conflict of interest was and second, that even though Dr Bierre had declared a conflict of interest, the board did not follow the process set out in cl 36. Rather, the board simply allowed Dr Bierre to participate in their deliberations.
[186] However, to the extent that there was non-disclosure by Dr Bierre or a failure by the ADHB board to adopt the process set out in cl 36 up to this point, it is difficult to see that either was in any sense material in terms of RFP 577. Dr Bierre was pursuing a proposal for a boutique laboratory, which necessitated acceptance by the ARDHBs of some market segmentation. Apart from that, Dr Bierre was opposed to the move to a single supplier. He was concerned about the development of a monopoly position and expressed his concerns about that to the board (among others). The ADHB board and management rejected both elements of his views. The ADHB extended DML’s contract and gave it responsibility for the work previously performed by SCL, thus forcing SCL from the market. So if Dr Bierre can be said to have been pursuing his own interests at this point, he did not succeed.
[187] As to RFP 577, Dr Bierre’s obligation was to disclose any interest in a transaction “as soon as practicable after the relevant facts [had] come to [his] knowledge”. The “relevant facts” must go to the existence of a “transaction” and of an “interest” in it. Dr Bierre knew of the possibility of an RFP process from, at the latest, late July 2005 because that was what Dr Gollop recommended to the ADHB board, although he is likely have learnt of it earlier, in late May or June. But initially Dr Bierre had no interest in that proposal – his interest related to his boutique laboratory, which arose in the context of the proposal to extend the DML contract. Once it became clear that the ADHB was not interested in his boutique laboratory proposal, Dr Bierre began exploring employment options which had nothing to do with RFP 577 (see [145] above).
[188] Dr Bierre only became interested in RFP 577 when he decided that he would attempt to put together a consortium to tender, and that interest did not arise until he downloaded the RFP discussion documents (late November/early December). (In this connection, we note that the Judge was wrong when he said (at [142]) that Dr Bierre contacted Gribbles in November about setting up a consortium to bid in RFP 577. The evidence is that those contacts occurred in December.)
[189] If we take the position at, say, September 2005 it is difficult to see what form of disclosure Dr Bierre could have been required to make under cl 36 in relation to the proposed RFP. As we have said, there is no evidence that at that stage he had any notion of participating in it. Rather, the evidence is that he was applying for other positions.
[190] This leaves Dr Bierre’s attendance at the meeting of 1 November 2005. As Dr Bierre had no intention of participating in RFP 577 at the time he attended that meeting, no obligation to disclose arose under cl 36. However, Mr Hodder raised a broader question. He submitted that it would have been unimaginable that any potential bidder would have been invited to such a strategy session; but Dr Bierre, who ultimately participated in the successful bid, did attend and contribute.
[191] In essence, that seems to raise a “use of inside information” issue, to which we are about to come. But attendees who gave evidence about this meeting said that nothing was said that was not later set out in the RFP discussion paper and that Dr Bierre obtained no advantage from his attendance at it. For example, Mr Northey said that the focus of the workshop was simply operational, that no strategic decisions were made and that the outcomes of the meeting were all set out in the RFP discussion document subsequently issued. Dr Gollop said that the comments made at the meeting were incorporated into the discussion paper as finally issued and that he did not believe Dr Bierre obtained any advantage from his attendance.
[192] As a consequence, while it may have been better had Dr Bierre not attended this meeting, the fact that he did does not, on the evidence, mean that he breached his disclosure obligations. Nor, on the face of it, does it appear to raise a misuse of information problem, but we will return to that below.

Conclusion

[193] We consider that the Judge was wrong to conclude that Dr Bierre was in a relevant conflict situation from the time he became an ADHB board member in December 2004 through to taking his leave of absence in December 2005. Rather, we consider that he had a conflict of interest in relation to his boutique laboratory proposal, but that came to an end when it became clear that the ADHB had no interest in such an option. That had become clear by mid-June 2005 when Dr Bierre mothballed his laboratory or, at the latest, by July/August 2005 when the ARDHBs agreed to Dr Gollop’s proposal to extend the DML contract. If there was any breach of the conflict rules in relation to the boutique laboratory proposal, that has no relevance to the position in relation to RFP 577, given that the boutique proposal was fundamentally different from what was contemplated in RFP 577.
[194] In relation to RFP 577, Dr Bierre was clearly in a position of conflict once he decided that he would attempt to put together a consortium to tender. The evidence is that he did not make this decision until late November or, more likely, early December. While Dr Bierre did not immediately arrange to take leave of absence, he did so on 22 December. This delay, while undesirable, is not problematic as nothing occurred in the intervening weeks to prejudice the position.
[195] Asher J also considered that, while in a position of conflict, Dr Bierre advocated an approach to community laboratories that favoured his interests over those of the ADHB. Putting to one side Dr Bierre’s opposition to a monopoly supplier, the Judge appears to have considered that Dr Bierre was acting self-interestedly when he advocated matters such as open-book accounting. This leads on to the issue of the improper use of inside information, to which we now turn.

Misuse of inside information

The issue

[196] DML claimed, and the Judge accepted, that Dr Bierre had confidential or inside information which he used to procure a material advantage for Lab Tests in relation to RFP 577. This information concerned the thinking and attitudes of key decision-makers within the ARDHBs. In particular, it related to:

(a) The desire for open-book accounting;

(b) A perception that DML was achieving super profits and was opposed to change;

(d) A willingness to contemplate a radical change in the level of service provided to achieve those savings.

Statutory setting

[197] As we have already noted, ss 53 – 57 of the CEA deal with the duties of individual members of Crown entities (including DHBs). Section 57 deals with confidential or inside information. It provides:

Duty not to disclose information

(1) A member of a statutory entity who has information in his or her capacity as a member that would not otherwise be available to him or her must not disclose that information to any person, or make use of, or act on, that information, except –

(a) in the performance of the entity’s functions; or

(b) as required or permitted by law; or

(d) in complying with the requirements for members to disclose interests.

(2) A member may disclose, make use of, or act on the information if –

(a) the member is first authorised to do so by the board or, in the case of a corporation sole, by the responsible Minister; and

(b) the disclosure, use or act in question will not, or will be unlikely to, prejudice the entity.

[198] For present purposes the key features of this provision are that:

(a) In relation to the relevant information:

The member must obtain it in his or her capacity as a member; and
It must be information not otherwise available to him or her.

(b) The board may authorise use or disclosure of the information if that “will not, or will be unlikely to, prejudice the entity”.

High Court

[199] Asher J said that misuse of information in public law “turns on damage to the public process” (at [162]). The Judge referred to s 57 of the CEA, noting that there was no definition of “information” in the Act, nor is there a definition of the word “prejudice” used in s 57(2)(b). He said that none of the usual administrative law characterisations easily apply to misuse of confidential information. If there was a principle, it was that “a DHB should not allow insiders to an administrative process to use significant information gained as a consequence of their position, for their personal advantage” (at [169]).
[200] The Judge said that he derived assistance from the decision in LGS Group Inc v Canada (Attorney-General) (TD) [1995] 3 FC 474 (FC). He said:

[173] As a matter of common sense, questions must be asked when a person who has been on a decision-making body involved in the lead-up to a request for proposals or tenders, then participates in a proposal to that same body. It can be expected that the proposer will have knowledge of the decision-maker’s expectations and mindset beyond that of any other proposer in the absence of an explanation to the contrary. I will return to this issue after examining the evidence.

[201] The Judge found that Dr Bierre had (at [179]):

... become privy to the thinking of the ARDHBs’ leading members, employees and consultants who were involved in the review of laboratory services and the ensuing RFP process. He was aware of their attitude to DML and its processes. A knowledge of how persons in a decision-making position think can be commercially useful information.

The Judge drew support for this from the decision of this Court in Black v Taylor [1993] 3 NZLR 403 at 406.

[202] The Judge then turned to the four matters identified at [196] above:

(a) Open book accounting: The Judge considered that, although the concept was probably favoured by the ARDHBs before Dr Bierre became a member, he put his weight behind the idea. Further, although DML knew that the ARDHBs wanted open book accounting and made a deliberate policy decision not to comply, DML did not realise how uncomfortable the ARDHBs were with its refusal to co-operate on this issue, whereas Dr Bierre did, having helped to create that discomfort.

(b) Perception that DML was earning super profits and was opposed to change: Asher J said that Dr Bierre had helped to create the perception that DML was earning super profits and was unwilling to change. The Judge said that while DML was aware that the ARDHBs wanted it to disclose its profit margins, it was not aware of the extent of the dissatisfaction of some ARDHB members and staff with its refusal to do so. By contrast, Dr Bierre did understand this.

(c) Desired level of savings: The Judge found that, while a ADHB member, Dr Bierre obtained information about the thinking of the ARDHBs as to the level of savings that they were seeking to achieve. The Judge said that the public documents revealed a desire for “only relatively modest savings” but Dr Bierre knew that a much greater level of savings was desired. This the Judge said could be achieved only with a significant reduction of collection points and staff employed, as was ultimately reflected in the Lab Tests bid.

(d) Desire for radical change: Asher J found that Dr Bierre was uniquely placed to understand the type of change that the ARDHBs were looking for, particularly in relation to GP collect. This flowed through into the Lab Tests bid.

[203] The Judge inferred that the extent of Dr Bierre’s shareholding in Lab Tests was in part a recognition by Healthscope of the advantage that he brought to Lab Tests, namely his knowledge of what the ARDHBs wanted, and what would make a winning bid. Lab Tests’ “use of that information debased the proposal process and made it unsound on an objective basis. It prejudiced the ARDHBs’ function to make good decisions about providing good health services for Aucklanders” (at [203]).
[204] The Judge accepted that DML had certain advantages as an incumbent, but said that they were unavoidable. By contrast, the advantages enjoyed by Lab Tests through Dr Bierre’s knowledge were avoidable. The Judge said that the ARDHBs should have refused to entertain any bid involving Dr Bierre given the inside information that he had (at [207]). The Judge considered that Dr Bierre’s standing down from the ADHB board did not meet the problem and that the informational advantage he enjoyed was not removed by the process followed. While DML understood that the ARDHBs wanted a “killer” deal, DML did not appreciate that it was perceived as a “monopolist making super profits and committed to opposing significant change” (at [213]). The Judge said (at [216]):

... DML reasonably did not envisage that major changes to [the] structure of the existing service would be acceptable. This is why [Lab Tests] had such an advantage, understanding as Dr Bierre did the acceptance of the ARDHBs of the possibility of fundamental change.

[205] The Judge summarised his conclusion as to the use of confidential information by Dr Bierre as follows:

[225] In terms of s 57 of the Crown Entities Act, Dr Bierre was making use of information that he had acquired in his capacity as an ADHB member that would not have otherwise been available to him. He knew, but DML did not, that the ARDHBs’ considered that DML was making super profits, and that it wanted a radical new structure plan from which it could extract savings of up to $20 million per annum. He knew they would be receptive to the idea of placing more collections with general practitioners. In terms of s 57(2) he did not use the information in the performance of the ARDHBs’ functions, or as required or permitted by law. He used it for his own personal advantage in the [Lab Test] proposal. He did not obtain authorisation to use it from the ADHB. In any event, its use prejudiced the ARDHBs, and could not have been authorised. Its use damaged the integrity of the ARDHBs’ processes by giving one party an unfair advantage over another, and thereby jeopardised the chances of reaching the best decision.

[226] This meant that Dr Bierre was in breach of s 57. Further, the ARDHBs’ knowledge of his conflict and their consequent inaction made the process procedurally unfair. The [Lab Test] proposal had a significant advantage over the DML proposal. The public were not getting the benefit of a fair RFP process.

[227] Dr Bierre should have appreciated that as an ADHB member involved in the processes leading up to the RFP he could not participate in the bid. It could not be fair for him to do so. The ARDHBs, for their part, should have appreciated that Dr Bierre’s involvement in a proposal was unacceptable. The evaluation panel and ARDHBs’ knowledge of Dr Bierre’s conflict of interest from December 2005 could not purge his information advantage. What was required was that Dr Bierre abstain from participation in any way in the Lab Tests’ bid. It was not procedurally fair to allow one party to obtain an improper advantage over another.

[228] I consider that it was impossible for Dr Bierre to divorce himself from his knowledge of the ARDHBs’ philosophy and wishes. Even if there were not specific pieces of information that could be isolated and referred to, it can be inferred that [Lab Tests] gleaned a significant and improper advantage from the involvement of Dr Bierre. It is important from the point of view of public confidence in the integrity of public office holders that they are not perceived to have taken advantage of their previous office.

[229] I am satisfied to the civil standard that Dr Bierre had actual knowledge of the ARDHBs’ information, which gave the Consortium proposal a significant advantage. Although I have mentioned an onus of persuasion, I do not have to turn to such a concept. I conclude that Dr Bierre’s use of that information which he had acquired as an ADHB member in the [Lab Test] proposal, and the ARDHBs’ acceptance of that Consortium proposal in the circumstances, constituted a clear procedural impropriety.

[206] The Judge went on to say that the ARDHBs’ procedural errors in relation to Dr Bierre were (at [233]):

(a) The ADHB failing to act in July 2005, when it became fully aware of his conflict of interest, to ensure that he would not be a proposer, or to prevent his further participation in laboratory matters.

(b) The ARDHBs failing to advise in December 2005, when they became aware of Dr Bierre’s possible involvement in the [Lab Test] proposal, that such a proposal would be unacceptable because of his position as an ADHB member.

(c) The ARDHB’s failing to make it clear from January through to April 2006 as Dr Bierre’s involvement became more likely, that a proposal from [Lab Tests] involving him would be unacceptable.

(d) The ARDHB’s failing to refuse to receive the [Lab Tests] proposal in April 2006 when it became clear that Dr Bierre was involved as a shareholder.

Our evaluation

[207] As we see it, two questions arise at this point:

(a) Is this type of information (described in argument by Mr Curry as “soft” information) capable of constituting confidential or inside information for the purposes of s 57?

(b) If so, was the information in the present case confidential or inside information (i.e., information that would not otherwise be available to Dr Bierre − s 57(1))?

[208] Before we address those issues, however, we make a preliminary point. There seems to us to be some confusion in the Judge’s analysis between, on the one hand, improper use of information by Dr Bierre for his own ends and, on the other, improper influence on the decision-makers to the prejudice of DML. They are, of course, different points. Further, Mr Hodder said in his submissions that Dr Bierre “had used his position as a board member to seed and then frequently water the ideas that he later used for his bid”. This implies that Dr Bierre was following some sort of self-interested strategy throughout his time on the ARDHB board, culminating in Lab Tests’ successful tender in RFP 577. Considerable care needs to be taken before such a conclusion is drawn in the context of a judicial review application.
[209] We are prepared to accept for the sake of argument that “soft” information could constitute inside information for the purposes of s 57, although we have significant reservations about that. There is little authority for such an approach, as the Judge acknowledged.
[210] The Canadian case upon which the Judge relied, LGS Group Inc, does not establish a general principle. It involved an application for judicial review. An RFP was issued on behalf of the Department of National Defence. The applicant tendered successfully, having received advice from a consultant, a retired Canadian Armed Forces officer. An allegation was made of a possible conflict of interest and unfair advantage to the applicant from the consultant’s involvement. The consultant, as a former Armed Forces officer, was prohibited after retirement from giving “counsel”, for the commercial purposes of the recipient of the counsel, concerning the programs or policies of the Canadian Armed Forces, other than counsel based on information generally available to the public. He said that he had effectively acted simply as a “wordsmith” for the proposal. However, he had headed the office which both recommended the issue of the RFP and designed the “Statement of Work” which formed the basis for it. The Minister agreed with the complainant and exercised his power to rescind the applicant’s contract.
[211] The Judge said that he was satisfied that the Minister’s decision was one which was reasonably open to him and refused the application for review. He said that advice regarding the expectations and mindset of those who would review the applicant’s proposal, of key words or of phrases to be emphasised or avoided was “counsel for commercial purposes” within the meaning of the relevant rule (at [41] – [42]). As we see it, little in the way of general principle can be drawn from this case.
[212] Similarly we do not see Black v Taylor as providing much assistance in this context. That case concerned a lawyer who had acted for a family for many years. He wished to act as counsel in litigation on behalf of some family members against another family member for whom he had previously acted. The High Court had ruled that he could not act. This Court upheld that decision. Obviously, in the course of a lengthy professional relationship a lawyer will obtain information about the character and personality of the client, information which could be useful in, for example, cross-examination of that person (see Cooke P at 406). More importantly, however, Richardson J considered that treating this as a case of misuse of confidential information was somewhat artificial. He considered it preferable to rely on the inherent jurisdiction of the Court to protect the integrity of the judicial process (at 412).
[213] Quite apart from the limited support provided by the authorities, we see strong policy arguments against treating this type of information as inside information for the purposes of s 57.
[214] First, the NZPHD Act makes it clear that Parliament wished to encourage practising health professionals to make their expertise available to DHBs. Indeed, it would be impossible for DHBs to function without that expertise. But if soft information of the type at issue were to disqualify such professionals from seeking contracts with the DHB, we consider that there would be significant risk that they would be reluctant to join the boards of DHBs. The risk that they might acquire soft information which would prevent them from pursuing future contracts with DHBs, whether directly or with others, would simply be too great. And even if they did not acquire such information, there is a significant risk that they would be perceived to have acquired it, which the Judge seems to have regarded as a sufficient disqualification (at [228]). Further, the somewhat nebulous nature of this type of information provides significant opportunities for disappointed rivals to disrupt the contracting process by making colourable but ultimately unjustified allegations of wrongful use of inside information.
[215] Second, the information which s 57 seeks to protect is information of the relevant entity. In principle, that information should be recognisable to the entity as “its” information. Soft information is inherently difficult to identify when it is being acquired, particularly in situations such as the present when matters evolve over a lengthy time period. It is also difficult to identify when it is being used. We consider it relevant (albeit not decisive) that ADHB board members and management who gave evidence considered that there had been no use of ADHB information (i.e., the ADHB did not recognise the relevant information as confidential).
[216] However, we need not finally determine this question. On the assumption that “soft” information may qualify as inside information for the purposes of s 57, we do not consider that the evidence justifies the conclusion that Dr Bierre had inside information not available to DML when it made its final bid, or that DML was irretrievably prejudiced from the time of its initial tender. Accordingly, we do not agree with the Judge’s conclusion on this aspect of the case. We will address the four respects in which the Judge said that Dr Bierre had an advantage in turn.

(i) Desire for open book accounting

[217] To reiterate, the Judge accepted that DML did know that about the ARDHBs’ desire for open book accounting and made a deliberate decision not to comply. He accepted that Dr Bierre’s knowledge that the ARDHBs did seek open book accounting was not a great information advantage. But, he said, DML did not realise how uncomfortable the ARDHBs were with its refusal to provide open book accounting, whereas Dr Bierre did as he had helped to create that discomfort (at [181]).
[218] We make two preliminary points. First, the Auditor General’s Statement of Good Practice in relation to Procurement, issued in June 2001, had a section on sole or monopsonist procurers (which includes DHBs). It said in part:

Post-tender negotiations (see section 7 of Part 2)

Negotiation assumes considerable importance for a sole procurer, because:

Suppliers are likely to have more information than the procurer about the costs or quality of the goods or services. This increases the risk of over-pricing, or suppliers engaging in inefficient provision of goods and services – which is especially relevant if there are few barriers to entry or little competition.
The public entity should not use its purchasing power to force prices down to a level if this may affect the supplier’s capability to deliver the services, or cause the quality of the service capable of being delivered to drop below an acceptable level.

To ascertain the cost of the services procured, the public entity could:

Negotiate a schedule of fees with a representative group of suppliers; or
Establish the costs of the service and negotiate an appropriate profit margin with the supplier.

(Emphasis added.)

In a tender context, the statement envisaged that these negotiations would occur with the preferred bidder after the tender round but before a contract was agreed. Obviously the italicised recommendation requires knowledge of the relevant costs.

[219] The Judge gave significant weight to the fact that at the ADHB’s Audit Committee meeting of 4 May 2005, in the context of a discussion about awarding a palliative care contract, Dr Bierre moved a motion about open book accounting. We reproduce the full section from the Audit Committee’s minutes:

It was noted that the report did not say anywhere that ADHB was obtaining value for money. While there was no open book process the annual report had been provided to ADHB. The provider was the best in the country and ADHB were looking to them to increase community services noting that they did get significant external contributions.

There was discussion on the need to ensure value either through price competition and if not then on an open book accounting to show that a good price was being obtained and the organisation being efficient.

Moved Tony Bierre, seconded Ian Scott

That the Audit Committee recommends that the ADHB purchasing process policy be amended to state that when services or supplies, including capital items, are being purchased that a competitive tender process be used and if this [is] not possible due to market conditions the “open book accounting” basis must be established with the supplier.

Carried

[220] This motion was consistent with the italicised portion of the Auditor General’s good practice statement. The adoption by a public body of an approach recommended in a publicly available good practice statement issued by the Auditor General cannot sensibly be seen as constituting “inside” information. Nor can the advocating of such an approach sensibly be seen as self-interested.
[221] Further, this illustrates the difficulties to which we referred at [214] and [215] above. This motion was moved in the context of a palliative care contract, which was not something that Dr Bierre had any interest in. But it identified the approach that the ADHB would take to contracting in certain contexts, albeit an approach reflecting good practice. The Judge treated the adoption of the approach as inside information in relation to RFP 577. But it is unlikely that any of those involved in passing this motion would or could have recognised it as inside information for the purposes of s 57 in that context.
[222] The second preliminary point is that the evidence shows that Dr Bierre favoured open book accounting before he became a member of the ADHB board. For example, he and Mr Halls advocated it in their joint MBA paper. Further, it is clear that others within the ADHB board, in particular Mr Brown and Mr Burkhardt (who chaired the Audit Committee), favoured the approach, independently of Dr Bierre’s views about it. So the approach was not one that Dr Bierre learnt of through his board membership. Rather, it was his advocacy of the approach, and the ADHB’s acceptance of it, which gave rise to concern on the part of the Judge.
[223] We turn now to the facts on the issue of open book accounting. The work in relation to community laboratories carried out by or for DHBs from 2002 identified that the DHBs had little information about the costs of providing community laboratory services. This was to be expected, given that DHBs had taken the funding role over only shortly before, in 2001. Further, DML knew of the ARDHBs’ concern about their lack of information. For example, DML was a member of the working group on the future funding of Auckland laboratory services put together by NDSA. The group met on 23 April 2004. Participants were provided with background material, including copies of the Pauls’ paper and the Team Rivendell paper, both of which highlighted the issue of information asymmetry in relation to costs. The covering paper also noted the lack of relevant cost information.
[224] This issue was also addressed in the Pilstrom project, in which DML was also involved. In a preliminary paper to the ARDHB CEOs dated 23 July 2004, Dr Jury, Mr Coe and Dr Pilstrom said that they thought that annual savings of up to $20−30m could be made. In relation to open book accounting, they said:

Reduction of the current profit margin [of providers of community laboratory services] can only be achieved by significant structural change of the procurement/production of community testing.

A joint venture between private and public providers with open book accounting can provide more transparency around the profit margin in the private sector. If this methodology is applied a reasonable profit margin can be applied, thereby guaranteeing a reasonable return on equity for the private sector.

[225] DML received this paper and strongly disputed aspects of it in a letter dated 24 August 2004, including the potential savings figure. But for present purposes, what is important is that the paper identified open book accounting as desirable, albeit in the context of a public/private joint venture. Similarly, the Pilstrom report, which DML saw in draft, noted the lack of relevant cost data. It said that “[t]he largest uncertainties in the estimate of current cost revolve around the community laboratories, where no substantial data has been available” (at 8). The report referred to earlier papers, including the two Bierre/Halls papers previously mentioned, and said (at 15):

Most of the previous papers have highlighted the problem of shortage of information about the diagnostic laboratory market in New Zealand. This relates both to the lack of data on e.g. testing volumes and population vs demand relationships, as well as no access to the cost structure for the private community laboratories, and no information on production capacity. There seems to be a profound interest in reaching a higher level of transparency and a generally higher data quality for the NZ lab sector.

[226] The Pilstrom report said that in addition to cost reduction and demand management capability, transparency was an important strategic goal for the project. The report noted that although the community laboratory service providers had made significant operational data available, they had not provided any financial data or commented on all the key assumptions (at 16, 18 and 43). Mr Hodder spent some time going through this report in his oral submissions, seeking to persuade us that DML had provided detailed information, but plainly it did not provide any significant financial data.
[227] Clearly, then, DML was aware of the concern about cost information asymmetry from its involvement in the various community laboratory projects that were conducted from 2002 on. Further, as we now move on to indicate, in the context of RFP 577 DML was specifically advised that open book accounting was something that the ARDHBs were seeking. We refer to five events.
[228] First, on 20 September 2005, at the request of DML, Mr Keenan visited the DML laboratory. In his evidence, he said that he took the opportunity to communicate to DML the need to address price and transparency in the upcoming RFP. He said he told DML’s Dr Morris of the funding pressures faced by the ARDHBs, their desire to make savings in the area of community laboratories and the need for innovative approaches. He said that he and Dr Morris discussed open book transparency. He made sure Dr Morris knew it was something that needed to be addressed. He said Dr Morris accepted that there was a perception that DML was making super profits and that this also would have to be addressed. Mr Keenan later reported on the visit to the ADHB Audit Committee on 5 October 2005. Its minutes record that Mr Keenan advised that DML had accepted that there was a perception of super profits and the need to have a better, more transparent relationship. None of this is disputed by Dr Morris.
[229] Second, DML established an internal “Think Tank” to deal with the RFP. The agenda for its meeting of 27 October 2005 included the provision of a summary of “open book”. In the minutes of that meeting, two of DML’s objectives were noted to as being to “avoid ‘open book’ or margin based on ‘return on assets’” and to “argue away from a ‘cost plus’ model”. Under the heading “General discussion points” the minutes contained a note reading “‛Open book’ untried in laboratories. Low return for laboratory”. The matter was returned to at the meeting of the Diagnostic Group Management Board on 3 November 2005 under the heading “Think Tank for RFP”, where the following appears “Away from open book and retain margin in turnover”. Again, this material indicates that DML understood that the ARDHBs sought an open book approach.
[230] Third, the documentation distributed in relation to the RFP identified the need for a sharing of cost information. On 30 November 2005, NDSA sent the RFP discussion document to approximately 140 stakeholders, including DML. This was intended to produce feedback, which would be taken into account before the RFP was finalised and issued in February 2006. Under the heading “Regional Pathology Vision” on the first page of the discussion document the following appears:

Community and DHB hospital laboratory providers will work in close partnership sharing all cost information and implementing the optimum service configuration in order to maximise value for money in the sector.

The point about the sharing of cost information was noted again several times throughout what was a relatively short document.

[231] RFP 577 was issued in early February 2006. The service and quality specifications identified one of the key objectives of the ARDHBs as being to “share cost information between the parties”. Later the specifications said:

Cost Transparency

There will be a sharing of cost information between the parties. Both parties, the selected provider and the ARDHBs, will make available to each other the costs of service provision in sufficient detail to:

(a) facilitate decisions on the most efficient configuration of collection, testing and utilisation of capacity in both community and hospital settings;

(b) participate in 6-monthly and annual benchmarking activity in both New Zealand and Australasia. Cost information will include a breakdown of staff, reagent, collection, transport, supply, capital and overhead costs at an individual level.

(Dr Morris said that DML interpreted this as requiring the sharing of cost information after the contract was agreed and said that DML was prepared to participate in benchmarking exercises if it was awarded the contract. We address this below at [237].)

[232] Fourth, Mr Inglis of Audit New Zealand (who assisted the Evaluation Panel by providing probity assurance) attended a meeting between the Panel and Drs Morris and Tuck of DML on 21 April 2006. In the course of the meeting Mr Inglis told the DML representatives that the ARDHBs wanted a full breakdown of DML’s laboratory services costs to show transparency and to enable comparison of individual cost items for the RFP evaluation. Mr Inglis recorded their answer in his meeting notes as being “Yes, would be able to show transparency of costs.” Mr Inglis said that Dr Gollop followed this up by saying “Beyond this meeting we’ll need more transparency and detail in written responses.” Mr Inglis said that the Panel went on to advise DML that it expected: “a cost per test, broken down and including reagent costs, staff costs, and a breakdown of costs per test. Not a total cost”. DML was advised that it should redo its price, dividing it into three headings: (a) collection, transport and registration; (b) processing; and (c) IT. The report of Drs Morris and Tuck to the DML Board of Management about this meeting confirms these points.
[233] The Evaluation Panel repeated its concerns in this respect in its meeting with DML on 26 April and again on 4 May 2006. At the 26 April meeting, the DML representatives said that there were difficulties in separating out costs as they were integrated. They said that they understood that separation would be worked towards in the long term – it was evolutionary rather than revolutionary. The Panel said in response that the ARDHBs wanted cost transparency at the beginning of the contract, not the end. They advised that they needed an open book proposal.
[234] At the 4 May meeting DML was told that price was the main outstanding issue, and that its new price was not good enough. The Panel’s minute of the meeting records the Evaluation Panel as saying: “We want you to say: here are our costs, our margin and this is an acceptable return. You start from the bottom up and you get the right price.” DML resisted this, saying that this was a new requirement and that the requirement to know the margin was not in the RFP. It said that if the price was lower there would be safety issues.
[235] Finally, Mr Wilks, Sonic’s Financial Director, sent two notes to Dr Goldschmidt, Sonic’s Managing Director, setting out his thoughts on the RFP process. As we understand it, Mr Wilks was not closely involved in the process, although he did accompany Dr Goldschmidt to New Zealand to meet the ARDHB CEOs, Dr Gollop and Mr Coe on 6 December 2005 in connection with the RFP. In the first note, sent after the Evaluation Panel had selected Lab Tests as the first preferred bidder, Mr Wilks summarised the positions of the various parties. In relation to the ARDHBs, he noted: “Perhaps frustrated by our initial response and their lack of leverage against our monopoly position and our resistance to provide transparency”. This is consistent with what members of the Evaluation Panel said they understood to be DML’s position.
[236] We have no doubt that DML was aware of the ARDHBs’ desire for open book accounting from an early stage in the RFP process and was resistant to it, at least in the form and at the time the ARDHBs sought it. We note that DML did eventually provide its cost data in its offer of 11 July 2006. By that time, Lab Tests had been selected as the first preferred bidder, and the Evaluation Panel refused to consider the offer.
[237] Dr Morris said in his affidavit in reply that the RFP requirement was for transparency after the contract was made, not before. He says that there is nothing in the RFP to indicate that cost information was to be provided before the contract was entered into. We make two comments about this:

(a) First, given the concerns that the ARDHBs had expressed about lack of information about costs over several years, such an approach makes little sense as a practical matter. Once the tender was accepted, the price or basis of pricing was settled, so transparency as to costs would assist only at some point in the future. This point was made by the Evaluation Panel in its meeting with DML on 26 April 2006. Mr Hodder drew attention to Mr Bishop’s notes of the meeting of 26 April, where Dr Morris is recorded as saying: “it [transparency of costs] starts before the start of the contract”. This, he said, demonstrated that DML was willing to participate in sharing cost information. But the difficulty remains that the contract was to be agreed following the RFP although it would not commence until 1 July 2007, a year later. So to be of any practical immediate assistance in assessing price, the cost information was required before the contract was agreed, rather than before it took effect.

(b) Second, Dr Morris’ view is not consistent with what DML was told on a number of occasions, that the ARDHBs’ expectation was that cost information would be provided as part of the tender. The contemporaneous notes and the affidavit evidence make this clear.

[238] As the Judge found, DML made a policy decision that it would not provide open book accounting as part of its bid although it knew that the ARDHBs wanted it (at 181]). While DML was prepared to participate in benchmarking exercises if it was awarded the contract, it was not willing to proceed (in its April and May proposals) on an open book basis prior to being awarded the contract. No doubt it adopted this stance for its own commercial reasons. But it should not have been in any doubt that the ARDHBs regarded the provision of full cost information as part of the bid as a fundamentally important issue. We do not consider that the evidence establishes that Dr Bierre had some informational advantage over DML in this respect.
(ii) Perception that DML earning super profits and resistant to change
[239] The Judge found that while DML was aware that the ARDHBs wanted it to disclose its profit margins, it was not aware of the depth of concern on the part of some ARDHB members and staff about its refusal to do so. The Judge emphasised that Dr Bierre had helped to create the perception that DML was earning super profits and was resistant to change (at [182] – [183]).
[240] Again, we do not consider that the evidence supports the Judge’s assessment. DML knew from an early stage (before Dr Bierre was involved) that some within the ARDHBs considered that it was resistant to change. For example, in their joint report to the ARDHB CEOs dated 23 July 2004, Dr Jury, Mr Coe and Dr Pilstrom said as much, and DML took exception to the comment in its letter of 24 August 2004 (see [224] – [225] above). DML representatives also knew from their involvement in the various workshops and stakeholder meetings in 2004 that there was a perception that providers of community laboratory services were making excessive returns. Again, DML specifically commented on this claim in its 24 August letter.
[241] Dr Bierre and his fellow MBA students certainly expressed these views in their papers (although they were not focussed on DML), and Dr Bierre continued to express them after becoming a ADHB board member. But Dr Bierre and his Otago colleagues arrived at their views independently of the ARDHBs, as part of their studies.
[242] More importantly, even if Dr Bierre did contribute to or reinforce the ARDHBs views, DML knew that these concerns remained at the time of the RFP process. As we have said (at [228] above), Mr Keenan explicitly raised them with Dr Morris during his visit to the DML laboratory on 20 September 2005, and Dr Morris accepted that the perceptions were there and needed to be addressed. The same points emerged in DML’s meetings with the Evaluation Committee in April and May 2006, as we have also noted above.
[243] In these circumstances, we do not consider that the evidence establishes that Dr Bierre had inside information in this respect, which he used improperly, or that he had an informational advantage over DML.
(iii) Desired level of savings
[244] It is clear from all the interactions that DML had been involved in about community laboratories in the Auckland region that DML knew that the ARDHBs were seeking to achieve savings from the RFP. Further, at the time of the RFP DML was told as much. The Board of Management of the Diagnostic Group met on 22 September 2005. The minutes record the following:

Meeting with Ross Keenan, deputy Chair to the three Auckland DHB boards (20/9/05). Messages around innovative approaches, funding pressures, need for savings in pathology.

As the minutes of the Think Tank meeting of 27 October 2005 record, DML understood that the ARDHBs were looking for a “better deal than the current one” and possibly “a ‘killer’ deal”. The Judge acknowledged that (at [213]).

[245] However, the Judge found that DML was at an informational disadvantage in not knowing the extent of the savings that the ARDHBs were looking for. The Judge said that the public documents that had been issued disclosed a wish for only modest savings (he instanced the Pilstrom report) (at [185]). He said that the ARDHBs were in fact looking for savings of $20m per annum from the RFP. By contrast, Dr Bierre did know that this level of savings was sought. The Judge saw it as significant that the Lab Tests’ bid involved an annual saving of $16m (at [187]).
[246] There are, then, three issues:

(a) Did the ARDHBs make a decision that they were looking for savings of $20m per annum from the RFP?

(b) If so, was Dr Bierre aware of that?

[247] Mr Keenan prepared a memorandum dated 14 July 2005 for the regional meeting of the Chairs and CEOs of the ARDHBs. He had been asked to prepare it to explain his view that he had not seen evidence of a sufficiently commercial viewpoint in relation to the future provision of laboratory services. He was concerned about the proposal to extend DML’s contract and force SCL from the market, on the basis that this ran the risk of creating a monopoly situation. The paper listed four points. One read:

I would advise the players [DML and SCL] that we seek a minimum saving on current spend of $20m in the first year (whatever that year may be given we may need to seek a temporary extension to the current timing.) The $20m would be against the total spend with both lab services currently and therefore a pro-rata discussion would need to be held. I would want to discuss a joint venture based on 50/50 with a sensible split of governance decisions. We would not be putting in capital and the joint venture structure would need to respect the partners investment in this regard – we would be delivering the business and the DHBs contribution would need to be respected in such a structure. The joint venture would have a review period after two years as to structure, financial returns, affordability.

In his affidavit evidence, Mr Keenan said that he forwarded this memorandum to Dr Bierre for his comment.

[248] This, then, is the basis for the Judge’s finding. In our view, the evidence does not justify a finding that the ARDHBs had a settled view as to the extent of the savings they thought could be achieved.
[249] First, Mr Keenan’s paper is not entirely clear. He was opposed to forcing SCL from the market and also seems to have favoured the Pilstrom report option, namely a 50/50 public/private joint venture involving all laboratory services, community and hospital. But on the assumption that the $20m figure relates to savings from community laboratory services, Mr Keenan raised it in the context of the proposal then being discussed, namely that DML take over SCL’s work. When that proposal was implemented, considerable savings were made, and they need to be taken into account. Accordingly, the $20m figure did not relate solely to savings flowing from the RFP process.
[250] Second, having discussed Mr Keenan’s paper, and despite his misgivings, the regional Chairs and CEOs decided at the meeting to go ahead with the proposal that DML be the single supplier. As we have said, DML’s contract was then extended and SCL exited the market. There is nothing in the minutes to indicate that the Chairs and CEOs decided that savings of $20m per annum were to be sought through the RFP. Equally, there is no evidence that individual boards of the ARDHBs adopted $20m as a savings target in relation to the RFP, either at this time or subsequently.
[251] We accept that the ARDHBs were looking for significant savings from RFP 577. The 30 November 2005 discussion document noted that it was the ARDHBs “preliminary belief” that they could realise their regional pathology vision “from a significantly lower overall cost base”. RFP 577 underscored the importance of price when it set out the evaluation criteria and the weighting accorded to them. The first was: “Value for money with emphasis on price (50%)”. In this context, the Judge placed some emphasis on the fact that three members of the evaluation panel gave DML a score of zero out of ten on this criterion, although DML’s final score was three (compared to Lab Tests’ score of ten). Given that the criterion made it clear that the emphasis was on price, however, this is not surprising. But in any event, it does not indicate that a particular level of saving was being sought.
[252] Although the ARDHBs were looking for significant savings, it would have been difficult for them to have adopted a policy as to the particular level of savings that they wished to achieve. This was because, as Mr Keenan noted in his paper, the ARDHBs did not know the costs of providing community laboratory services in the region. As Mr Illingworth submitted, part of the point of the tender was to ascertain what level of savings could be achieved through a competitive process.
[253] Finally, Mr Keenan was not a member of the Evaluation Panel for RFP 577, and there is no evidence that the Panel was instructed that it was to look for a particular level of savings.
[254] There was also mention of potential savings of $20 − 30m from laboratory services in the preliminary joint paper of 23 July 2004 prepared by Dr Jury, Mr Coe and Dr Pilstrom (see [224] above). It said:

The project has reviewed the supply organisation for diagnostic laboratory services in the Auckland region. A number of options have been identified that could give cost savings of up to $20-30m. Any of these options require major organisational change to yield the desired outcome.

But that figure related to savings in relation to all diagnostic testing, not simply that performed by community laboratory services.

[255] As we have said, this provoked a strongly worded response from DML, challenging that this level of savings was achievable. Dr Pilstrom’s final report attempted a much more detailed analysis and produced a range of (lower) figures, although they were subject to significant uncertainties. Dr Bierre saw none of this material, although DML did receive it.
[256] Further, it should be noted that some of the DHBs which held RFPs for community laboratory services before the ARDHBs had achieved significant savings in the process, for example the Otago and Southland DHBs. DML was aware of this and identified the arguments against it, as the minutes of the Think Tank meeting of 27 October 2005 indicate. Dr Bierre was also aware of the savings that had been achieved as he acted as a consultant in respect of several of these RFPs (see [153] – [154] above).
[257] Finally, it should not be forgotten that a new entrant like Lab Tests was unlikely to succeed in a tender against a well-established and highly regarded incumbent like DML unless it offered the ARDHBs significant savings. The members of the Evaluation Panel confirmed this in their evidence. They said that to justify taking the transition risk of moving to a new provider, the Lab Tests’ offer had to be at least $5m per annum better than the DML offer. Realistically, then, if Lab Tests (or any other new entrant) was to bid at all, it had to formulate an offer that met the service specifications, but at a significantly lower price than DML. That must have been apparent to all concerned.
[258] In the result, then, we consider that the evidence does not establish that Dr Bierre had any informational advantage in this respect.
(iv) Willingness to contemplate radical change to achieve savings
[259] Asher J found, in light of Dr Morris’ evidence, his hand-written notes and the contents of the RFP, that DML “reasonably did not envisage that major changes to [the] structure of the existing service would be acceptable” (at [216]). The Judge said that from the moment DML lodged its proposals on 10 April 2006, it was disadvantaged and nothing that occurred subsequently cured that (at [223] − [224]).
[260] In making these findings the Judge gave considerable weight to hand-written notes that Dr Morris made at the time of a meeting with Dr Gollop and Mr Coe concerning the draft service specifications for the RFP. Those draft specifications were distributed with the material sent to the 140 stakeholders on 30 November 2005. Dr Morris sent a written response to Dr Gollop, dated 19 December 2005 with a covering letter. The response went through the draft service specifications in turn, providing comments and posing questions. At his request, Dr Morris had a meeting with Dr Gollop and Mr Coe on 10 January 2006 to discuss the matters raised in his letter and made brief notes on his copy of it. At the top of the letter he wrote “General theme = status quo + mods” (i.e., modifications).
[261] In his evidence Dr Morris said that at the meeting he, Dr Gollop and Mr Coe discussed the draft specification at some length. He said that Dr Gollop stated to him on at least two occasions that the general theme for the RFP was “status quo for the level of service to be purchased.” He then said that they discussed collection points, turnaround times, pathologist availability and at risk populations. Dr Morris said that at the conclusion of the meeting his overall sense was that the ARDHBs wished to purchase “the status quo with some modifications around the edges.” He said that DML relied on this when it formulated its proposal.
[262] Dr Gollop and Mr Coe also gave evidence about this meeting. Dr Gollop said that he did not accept that he told or indicated to Dr Morris that the ARDHBs were simply seeking the status quo. He said that his comments in relation to the status quo were made to Dr Morris in response to specific questions from Dr Morris about relatively minor matters, and that he did not say that the status quo was required for the method of delivery. He noted that he had told Dr Morris that the number of collection rooms was a matter for DML. Mr Coe denied that there was any real discussion with Dr Morris. Rather Dr Morris told them what DML currently provided and they listened. He said that neither he nor Dr Gollop gave DML any feedback on the question of DML’s current level of service, although they were invited to do so. They simply referred to the specifications.
[263] Dr Morris has deposed that he and DML believed that the ARDHBs were not looking for any significant change in the method of delivery of community laboratory services. We are in no position to disbelieve that, although we do observe that Dr Morris did not say that he passed this critical information on to others within DML or Healthscope, nor is there any record of it in subsequent internal DML documents, nor did DML raise it with the Evaluation Panel during the 21 April meeting when DML was told that it had underestimated the ARDHBs’ appetite for change (see [281] below). However, accepting that this was Dr Morris’ belief, we do not agree with the Judge that, on the evidence, that belief was a reasonable one. The general context of the RFP and DML’s understanding of it, the context of the 10 January meeting, the terms of the RFP documentation and DML’s discussions with the Evaluation Panel all tell against the Judge’s conclusion.
[264] Beginning with the general context, the ARDHBs’ decision in July/August 2005 to extend DML’s contract for two years, and to transfer to it the work formerly performed by SCL, was a stop-gap measure. It was designed to allow time for a RFP process to be undertaken and, if a new provider was selected, for that new provider to undertake the necessary preparatory work, such as setting up appropriate facilities. This decision was made against the background that the ARDHBs (and other DHBs) had identified the increasing cost of community laboratory services as a matter of concern and had conducted various projects directed at exposing the issues (including the cost drivers) and identifying more efficient and cost-effective ways of providing such services. The Pilstrom report, for example, had noted that considerable savings were achievable through the reorganisation of collection services, in particular by reducing the number of collection rooms and increasing the proportion of GP collections.
[265] As we have seen, DML was aware of this work, and involved in much of it. Its letter to the ADHB on 10 December 2004 suggesting an alternative approach to the provision of laboratory services in the region, and its comments on the Pilstrom report around the same time, indicate that DML understood that the ARDHBs were seeking significant cost savings, and were prepared to contemplate changes in the way the service was delivered to do so.
[266] Furthermore, DML was told of the ARDHBs’ desire for innovative solutions when Mr Keenan visited the DML laboratory on 20 September 2005. This is recorded in the minutes of the DML Board of Management meeting of 22 September (see [244] above). Further, under the heading “Think Tank for RFP” those same minutes record “?innovative approaches” (sic). Dr Morris wrote to Mr Keenan on 30 September and suggested that he arrange a meeting between Dr Goldschmidt and Mr Keenan, the ARDHB COEs and Dr Gollop. Dr Morris commented in the letter that he thought “there would be significant benefit for planning innovative solutions for the future”. The minutes of the DML Board of Management meeting of 6 October 2005, under the heading “Think Tank for RFP”, noted “possibility of innovative solutions on a national basis.”
[267] Turning to the 10 January 2006 meeting, in his letter of 19 December 2005 commenting on the draft specifications and raising questions about them, Dr Morris made what he described as “an initial observation” that in places the draft was general “and far too open ended in describing the services being sought”. Dr Morris said that “[t]here is significant scope for the final document to be definitive on actual service specifications.” At a number of points throughout the letter, he suggested that the draft specifications be amended to include words such as “as currently provided”. Dr Morris subsequently asked to meet Dr Gollop to discuss the draft specifications.
[268] In his evidence Mr Coe said that he used the service specifications incorporated into DML’s existing contract as the basis for the draft, but modified it to accommodate enhancements that the ARDHBs wanted. (The Judge accepted that the service specifications in DML’s contract, RFP 577 and Lab Tests’ contract were similar (at [244]).) When the material was distributed to stakeholders on 30 November 2005 the covering letter said that the current service specifications and a working draft of the proposed service specifications would be available on the NDSA website.
[269] Reflecting the existing specifications, the draft specifications focussed on describing the outcomes desired, rather than specifying the means of achieving those outcomes. The provider was to provide specified tests, in accordance with standards of timeliness, professionalism and such like. But in important respects the specifications were, as Dr Gollop described them and as Dr Morris recognised, “open-ended”. In relation to staff, for example, the draft specifications said that the provider had to ensure that “[a]dequate numbers of pathologists are available and readily accessible during normal working hours and after-hours to support the normal clinical requirements and to provide specialist pathology advice to laboratory staff and community referrers” (at cl 10.2). The provider had to decide how to meet that requirement. In relation to specimen collection, the draft said (at cl 4.2):

The collection of specimens must meet the requirements of referring practitioners along with the following:

(a) Accessible collection centres appropriately distributed throughout the region. Providers should consider the geographical nature of the Auckland region, and other access factors when considering where they may wish to locate collection centres. Auckland region DHBs welcome proposals that explicitly outline patient access points ...

Again, the provider had to decide how to meet that requirement, at least in the first instance.

[270] In our view, the conclusion that the service specifications amounted to “status quo + mods” was correct. But the “overall sense” which Dr Morris drew from that, namely that the ARDHBs were not looking for any significant change in DML’s method of delivering the desired outcomes, was not only wrong, but could not reasonably be justified.
[271] We take the issue of collection centres as an example, because that, and the associated issue of collection of samples by GPs, received considerable emphasis at the hearing before us.
[272] In his 19 December letter Dr Morris specifically raised collection rooms. In relation to cl 4.2(a) he asked “[w]ho determines what constitutes ‘appropriate distribution’?”. He also asked whether there was a desire for a reduction in the number of collection centres. He commented:

From January 1^st 2006 there will be 83 collection centres in the region. The number has evolved to meet the current access needs of referrers and patients. For clarity the specifications should refer to the coverage as “as currently provided” and state that any significant change requires DHB agreement.

Dr Morris may have had in mind DML’s existing arrangement with the ARDHBs. When the DML contract was extended in 2005, DML agreed under cl B4.12 “[t]o commit to maintaining at least current regional coverage/access of community laboratory services.” The clause went on to say: “You [i.e., DML] are anticipating rationalisation of some collection clinics that are currently operating. Any proposed changes will be discussed and agreed by us [i.e., the ARDHBs].” Presumably this reflected DML’s proposal, which the ARDHBs had accepted, to close 20 of its existing 90 collection rooms.

[273] Dr Gollop’s response to Dr Morris’ query was that the number of collection rooms was for DML to determine, as Dr Morris accepted in his affidavit. Accordingly, the words “as currently provided” were not added. So although Dr Morris sought greater detail in the specifications, the ARDHBs were unwilling to be more prescriptive. Dr Morris said in his evidence that he took from this that there was no desire for change in the number of collection centres. In our view, what Dr Morris was told does not justify such a conclusion. More importantly, nor does the language of the final specifications released with RFP 577.
[274] In relation to collection rooms, the final version of the specifications contained an important addition to the draft that Dr Morris commented on. It contained a new cl 4.2(a) and what had been cl 4.2(a) in the draft became cl 4.2(b), with some wording modifications. The new cl 4.2(a) and (b) provided:

Collection of specimens

The collection of specimens must meet the requirements of referring practitioners along with the following:

(a) collection of specimens at the time of visit to a primary care provider within the PHO setting is seen as a service improvement strategy that we would encourage;

(b) accessible collection centres appropriately distributed throughout the region. You should consider the geographical nature of our region, and other access factors when considering where you may wish to locate collection centres. We require patient access points to be agreed, documented in writing and will form part of the contractual relationship. ...

[275] This language clearly signals that the ARDHBs were interested in encouraging GP collects, and that the location of collection rooms was the responsibility of the tenderer, albeit that the ARDHBs had an interest in their location.
[276] In addition:

(a) The number of collection centres in the Auckland region was something that was identified in the earlier community laboratory projects as an area where savings could be achieved. It was thought that Auckland had too many clinics for its size, particularly when international comparisons were taken into account. DML was aware of this because it participated in these projects.

(b) As we have already said, when its contract was extended in mid 2005, DML indicated it would close 20 of its 90 collection rooms, in addition to the 20 or so rooms that SCL would be closing. DML obviously commenced this process, because Dr Morris said in his 19 December letter that the number of collection centres in the region would be 83 as from 1 January 2006 (see [272] above). So a process of rationalisation was already underway.

(c) The contemporaneous documents indicate that in the context of RFP 577, both before and after the 10 January meeting, DML considered the option of a greater reduction in the number of collection rooms. The minutes of DML’s RFP Think Tank for 27 October 2005 noted 50 collection centres as one option for consideration. The minutes of DML’s Board of Management meeting on 12 January 2006, under the heading “RFP Planning”, noted that modelling of options and margins was progressing, but it is unclear whether this work encompassed fewer collection rooms. However, the minutes of the 26 January 2006 meeting record: “Collection Rooms: model for 30-50 rooms”. This was several weeks after Dr Morris’ 10 January meeting with Dr Gollop and Mr Coe. Again it is unclear whether this work was carried out.

[277] Finally in this context we note that the RFP dealt specifically with the ARDHBs’ desire for innovation. This was emphasised by the inclusion of “Innovation and strategic fit” as one of the evaluation criteria, with a value of 10 per cent. Part 3 of Appendix 2 to RFP 577 described this criterion as follows:

Innovation and strategic fit

As a minimum this section should include:

how your proposal represents a ‘step forward’ for the sector and the improvements that will deliver cost reduction through the life of the contract;
how your proposal fits with our strategic interests in relation to laboratories, and the long term market implications of the proposals.

[278] In our view, the language of the RFP material made it clear that the ARDHBs were looking for innovative solutions in order to achieve lower costs. In relation to collection rooms, the RFP made it clear that tenderers had the responsibility of proposing a collection network that met the needs of referring practitioners while accommodating the region’s geography and that GP collect was seen as a worthwhile service enhancement. DML appear to have understood that the ARDHBs were looking for an innovative approach. The minutes of the Board of Management meeting of 9 March 2006 (under the heading “RFP Planning”) record that there was discussion of innovative ways of delivering laboratory service, including associated difficulties and risks.
[279] We deal lastly with DML’s discussions with the Evaluation Panel. In relation to collection rooms, DML’s proposal was as follows:

Services are currently provided to the greater Auckland (including Waiheke and Great Barrier Islands) community. We have 85 collection rooms all with stable leases and a vehicle fleet of 45.

[DML] would propose that all service provisions currently in place would continue in the short term, with the opportunity to discuss ideas for providing a more effective and efficient service in the long term.

(Emphasis added.)

The proposal went on to give a general description of the 85 collection rooms. It also emphasised that DML had arrangements with over 150 practices for “on-site” blood collection services.

[280] The italicised words indicate that DML knew that the ARDHBs wanted to achieve greater efficiencies in relation to the collection network and that its existing collection network could be made more efficient and effective. No doubt DML faced some difficulties in changing the configuration of its collection network in the short-term, given issues such as leasing arrangements, and those difficulties may explain its proposal. But they were not issues for the ARDHBs − they were simply a drawback of incumbency.
[281] The Evaluation Panel took up the question of collection rooms at its meeting with DML on 21 April, asking why so many were necessary. In the course of that discussion, Dr Morris acknowledged that some areas had too many rooms but said that fewer rooms would not necessarily decrease costs as the same number of staff would be required. A member of the Panel, Mr Morgan, told DML that it had “underestimated [the ARDHBs’] appetite for change”. Dr Morris responded that there was no other way that was more innovative than what DML did.
[282] Dr Morris recorded Mr Morgan’s comment in his report to the DML Management Board on the 21 April meeting. The report identified various steps that were to be taken, including pricing out savings on the basis of 30 or 50 collection rooms. Ultimately, on 28 April, DML made a proposal based on a 50 collection room network.
[283] For these reasons, we do not accept that the evidence justifies a conclusion that DML did not understand that the ARDHBs were willing to contemplate significant change to achieve savings. Dr Morris seems to have equated any change in the way that DML provided the service with a service reduction. But what was important was meeting the service specifications. In essence, what the ARDHBs sought through RFP 577 was fulfilment of the existing service specifications but at a reduced price.

Conclusion

[284] In relation to two of the four matters said to constitute inside information (the desire for open book accounting and the perception that DML was earning super profits and was resistant to change) the Judge said that, although DML was aware of them, it was not aware how important they were to the ARDHBs. We have some reservations about whether these conclusions could properly be reached in a judicial review case, where cross-examination is generally not available. However, putting that to one side, we consider that the ARDHBs’ desire for open book accounting was brought to DML’s attention explicitly and repeatedly. Accordingly, DML should have been in no doubt as to the ARDHBs’ position. So also was the DHBs’ concern about excessive rates of return, which had been identified early on in the various community laboratory projects and was reiterated in the context of RFP 577.
[285] Further, we consider that the evidence shows that DML was aware that the ARDHBs were looking to achieve significant cost reductions from RFP 577, although we disagree with the Judge that the ARDHBs were committed to any particular level of reduction. Finally, like the Judge we consider that the service specifications for RFP 577 and in the Lab Tests contract were similar to those in the DML contract. What was different was that the ARDHBs sought to have those specifications met at less cost. We do not agree that the evidence supports the view that DML was misled into tendering on the basis that the ARDHBs were not looking for any significant change to DML’s existing system of delivery. Accordingly, we do not consider that the evidence establishes any improper use of inside information by Dr Bierre, or that DML was at an informational disadvantage when compared to Dr Bierre.

Consultation

The issue

[286] Broadly the issues in respect of consultation concern the nature of the ARDHBs’ obligation to consult, whether it was triggered in the present case and whether what the ARDHBs did met any obligation that they had.

High Court

[287] The Judge found that the NZPHD Act (in particular, ss 3(1)(c)(iii) and 22(1)(h)) and various Government documents showed that “at the heart of the functions of DHBs is the need to consult with those in the community affected by significant decisions” (at [259]). The documents on which the Judge particularly relied were the New Zealand Health Strategy issued by the Minister in December 2000, the ARDHBs’ funding agreements with the Crown, the Operational Policy Framework (OPF) issued by the Ministry of Health with effect from July 2005 and the Ministry’s Consultation Guidelines. The Judge said (at [259]):

... [Section] 22(1)(h) and the documents referred to create a legal duty on the part of DHBs to consult with those sections of the community or their proper representatives who may be affected by a contemplated significant change to health services.

[288] The Judge went on to say that the ARDHBs’ own community laboratory projects (e.g., the NDSA project and the Pilstrom project) recognised the interest of PHOs in the issue and the need to consult them. The Judge concluded that, against that background, the “PHOs would have had a legitimate expectation that they would be consulted about significant changes to the way in which laboratory services were delivered” (at [262]). This legitimate expectation was reinforced by the terms of the contracts between the individual DHBs and PHOs (at [263]).
[289] The Judge then said:

[267] A review of the ARDHBs’ actions up until they entered into the contract with Lab Tests shows that they were prepared to accept the following changes:

A long-term contract with an entity other than DML.
An exclusive long-term contract to a single monopoly provider.

The achievement of very significant cost savings by the following devices:
1. Pursuing the prospect of possible amalgamation of the ARDHBs hospital laboratories with the business of the new provider.
2. Reducing collection centres down from 84 to 43 (ultimately 47).
3. Reducing pathologist [full time equivalents (FTEs)] down from 23.5 to 16, (increased later to 17).
4. Reducing FTE nurses and couriers down from 236 to 172.

Moving towards general practitioners assuming much greater responsibility for collecting samples.

[268] I will deal with the extent to which these changes were communicated in the next section of this judgment. I record at this point that the overall effect of these contemplated changes were significant. It is not possible for the reasons that I give later, to express a final view on how much those changes will affect the every day practice of general practitioners. I am, however, satisfied that they will be affected, and that the changes contemplated by the ARDHBs were sufficiently significant to require consultation.

[269] An indication as to the significance of the changes can be seen in the contentions of the PHOs. They claim:

That the reduction in collection centres will substantially reduce access for patients, particularly high-need patients who already often do not present for testing unless it is a simple and quick process that can be carried out close to home.
That the turnaround times for regional biochemistry and haematology testing will blow out beyond the existing normal 12 to 48 hours.

That general practitioners require immediate access to consultant pathologists to discuss results and to discuss treatment or other investigative options so that patients can be managed efficiently in the community rather than admitted to hospital. They fear that general practitioners’ access to pathologists will be dramatically reduced because pathologists will have to work much harder to carry out their testing load. They also consider that there is a danger that the error rate (which is at present 1% for DML collections) will increase, to the subsequent detriment of patients.

That general practitioners’ specimen collection skills have rapidly diminished over the years. While it used to be common for general practitioners to collect specimens, most have not done so now for quite some time. It is said that general practitioners simply do not have the skills for a move to general practitioner collections.
That there are substantial transition risks involved in the proposed changeover. Harbour PHO does not think that it can be done adequately in the time available. It does not think that the expected savings will be achieved. It believes that in fact the new service will prove to be grossly inadequate and that substantial public funds will have to be spent in upgrading it back to close to something that DML was already offering. It questions whether savings of anything like $15 million per annum will be achieved.

[270] It is not necessary, and indeed for reasons that I will be elaborating on later in this judgment, possible, to comment on the merits of these various assertions. They may or may not be correct. That is not the point. The point is that the proposed changes are of significance to general practitioners who should have been fully consulted. That process should have been approached by the ARDHBs providing full information, and without undue haste.

[290] The Judge then noted that the formal step which the ARDHBs had taken to consult with the PHOs was the distribution of the RFP discussion document on 30 November 2005. The Judge said that the covering letter clearly signalled the possibility of a change in provider, and of a long-term monopoly supplier. But it contained no indication that any major changes to the way that services were organised and supported were anticipated (at [274]). A careful reading of the attached documents might alert readers to the ARDHBs’ willingness to receive proposals “outside the conventional square”, but the references to service changes were “somewhat buried”. In any event, they could not be seen as notice of the possibility of significant changes to pathology and phlebotomist resources (at [278]), nor of significant changes to the number of collection sites and the move towards GP collections (at [283]). Accordingly the ARDHBs had not provided a sufficiently informative and explicit outline of the proposed changes (at [289]).
[291] Further, the Judge said that the ARDHBs had not allowed sufficient time for consultation, given that responses were expected by 14 January 2006 (at [287]).
[292] Finally the Judge dealt with three arguments raised by Mr Illingworth on behalf of the ARDHBs. Mr Illingworth argued first that there was no contractual requirement for more GP collect in the Lab Tests contract. The Judge noted that the ARDHBs viewed more GP collect as a service enhancement. He said that while the contractual obligation to collect rested with Lab Tests, it was possible that Lab Tests would be able to secure sufficient support from GPs “to put pressure on general practitioners generally to move to such a collection system”. Given this possibility, there was an obligation to consult (at [291]).
[293] Mr Illingworth’s second argument was that the matters that the PHOs regarded as significant changes had emerged when Lab Tests made its proposal in April 2006. Proposals were confidential and it was, in any event, not possible for the ARDHBs to consult at that stage of the process. The Judge rejected this submission. He said that the ARDHBs could have sought a waiver of the confidentiality clauses, or if necessary, cancelled the process and started again with proper consultation (at [293]). The Judge described the ARDHBs’ obligation to consult as “absolute” (at [294]).
[294] Third, Mr Illingworth had submitted that there was still time to consult further on issues such as turnaround times given the contractual structure. The contract required the provision of a high quality service and did not provide for a reduction in the number of pathologists or phlebotomists. It envisaged an interactive process with PHOs in the area of demand management. Although the Judge accepted that there were terms in the contract which enabled the ARDHBs to insist on high standards and to negotiate on certain issues, he said “these do not provide any realistic answer to the ARDHBs’ failure to consult” (at [297]). The Judge said (at [297]):

The consequence of the contract is that the service will receive $16 million less in funding per annum than that which was previously paid. The new services to be set up will have reduced numbers of collection rooms, phlebotomists and pathologists, pursuant to the contract. These changes will occur, and there has been no opportunity for input from the PHOs. While there may still be some room for negotiation as to standards, and more discussion about a move to encourage increased general practitioner collection, general practitioners will be in a very different laboratory testing environment from the time the contract comes into force.

[295] The Judge concluded that, as a result of their failure to consult with the PHOs, the ARDHBs’ decision was ultra vires.

Statutory and documentary framework

[296] All parties accepted that the ARDHBs have consultation obligations. They may arise from a variety of sources (see [313] below). But the existence of an obligation to consult will not always be enforceable by way of judicial review. Care must be taken to identify the source and nature of the obligation and the way in which it is said to have been breached.
[297] Beginning with the NZPHD Act, as Mr Illingworth said, the “paradigm shift” made by this Act was to move away from centralised decision-making in relation to policy, strategic planning and resource decisions to regional governance. DHBs are not simply providers of health services – they also make planning and resource allocation decisions. In that context, they are expected to involve their resident communities. This is reflected in s 3(1)(c) of the NZPHD Act. It provides:

3 Purpose

(1) The purpose of this Act is to provide for the public funding and provision of personal health services, public health services, and disability support services, and to establish new publicly-owned health and disability organisations, in order to pursue the following objectives:

...

(c) to provide a community voice in matters relating to personal health services, public health services and disability support services–

(i) by providing for elected board members of DHBs:

(ii) by providing for board meetings and certain committee meetings to be open to the public:
(iii) by providing for consultation on strategic planning:
[298] There are two relevant features of this provision. First, it sets out three mechanisms by which a community voice will be provided. Second, the third of these mechanisms relates to consultation, but it is limited to consultation “on strategic planning”. Such planning is carried out through the district strategic and annual plans (see ss 38 and 39 of the NZPHD Act respectively).
[299] A district strategic plan details the DHB’s plans for fulfilling its objectives and functions over the next five to ten years (s 38(1)). Before a DHB makes a significant amendment to a district strategic plan it must prepare a draft and consult its resident population on that draft (s 38(3)(b) and (4)).
[300] By contrast, the annual plan is agreed between the Minister and the DHB annually, and the statutory process does not envisage public consultation (s 39(1)). But the annual plan must be consistent with the DHB’s strategic plan (s 39(8)). Further, a DHB has an obligation to consult its resident population “[a]s soon as reasonably practicable after proposing a significant change to policies, outputs, or funding for outputs stated in its most recent annual plan” (s 40). Taking the ADHB’s annual plan for the year 1 July 2005 to 30 June 2006 as an example, it addresses laboratory services. It notes a review of current community laboratory service provider agreements in the actions for 2005 to 2006, and contains the comment: “To enable DHBs to work within funding while maintaining service provision”.
[301] Also relevant in this context is s 22(1)(h) of the NZPHD Act, upon which the Judge relied. It provides that one of a DHB’s objectives is “to foster community participation in ... planning for the provision of services and for significant changes to the provision of services”. The use of the word “foster” suggests to us that to describe the obligation to consult in s 22(1)(h) as “absolute” overstates the position.
[302] For the sake of completeness, we note that DHBs have other consultation obligations but none of them has been identified as relevant in the present context (see, for example, s 20, s 22(1)(d) and (f) and cl 43 of Schedule 3).
[303] We turn now to the documents referred to by the Judge.
[304] Crown funding agreements are contracts entered into between the Crown and individual DHBs under which the Crown agrees to provide funds in return for the DHBs providing, or arranging the provision of, the services specified in the agreement (s 10(1) of the NZPHD Act). A Crown funding agreement is an output agreement for the purposes of Part 4 of the CEA. Section 170(2) of the CEA provides that the purpose of an output agreement is:

... to assist a Minister and a Crown entity to clarify, align and manage their respective expectations and responsibilities in relation to the funding and production of certain outputs, including the particular standards, terms and conditions under which the Crown entity will deliver and be paid for the specified outputs.

Such an agreement must be in writing and be signed and dated but need not be legally enforceable as an agreement, although it will give rise to legally enforceable board member duties (s 170(4) and (5)).

[305] Under s 23(1)(a) of the NZPHD Act one of the functions of a DHB is “to ensure the provision of services for its resident population and for other people as specified in its Crown funding agreement”. Further, under s 49 of the CEA, DHB board members have a collective duty to ensure that a DHB acts in a manner that is consistent with its Crown funding agreement. That is a duty owed to the responsible Minister (s 58), and enforceable by him or her (s 60(2) – (4)).
[306] Counsel submitted that various provisions in the funding agreements were relevant to the issue of consultation. In particular:

(a) The scope of obligations owed under an agreement is limited to the parties to it, and a person who is not a party may not enforce its provisions (cl A.12.2).

(b) Other documents are incorporated as part of the agreement, specifically the Service Coverage Schedule and the OPF (cl A.3.2).

(d) DHBs are required to deliver outputs and any other obligations under their agreements consistently with the goals and objectives of the New Zealand Health Strategy (cl B.1.1(a)).

(e) DHBs must ensure compliance with the OPF (cl B.1.5).

[307] The Service Coverage Schedule sets out the national minima in the range and nature of services that DHBs must ensure are provided to their populations. It has a section headed “Diagnostic, Therapeutic and Support Services – Personal Health”, which includes laboratory tests. In relation to access, it provides that the referring health professional will make the initial decision about whether a service is needed.
[308] The OPF is concerned with DHBs’ operational accountabilities to the Minister. Chapter 5 deals with changes in service. It details the process to be followed where a DHB is proposing a service change that raises an issue of compliance with the Service Coverage Schedule or the possibility of an amendment to the relevant district annual plan. In these circumstances, the agreement of the Minister will be required. A DHB must also advise the Ministry when a proposal requires consultation under s 40 or is likely to result in substantial public comment. In these instances, the Ministry will determine whether the Minister must be consulted. Finally, cl 4.3.C the OPF records that the Ministry has developed Consultation Guidelines for DHBs and says that each DHB “is required to comply with its statutory and legal obligations relating to consultation”. Those guidelines identify the consultation obligations of DHBs and give guidance as to how consultation should be conducted.
[309] Finally we come to the New Zealand Health Strategy. Mr Gray QC for HPHO relied on this as further support for his argument that the ARDHBs had an obligation to consult the PHOs. The Foreword says that the Strategy “provides the framework within which [DHBs] and other organisations across the health sector will operate. It highlights the priorities the Government considers to be most important.” Mr Gray noted that one of the seven fundamental principles of this strategy is “[a]ctive involvement of consumers and communities at all levels”. Appendix 3 deals with communities and consultation. In relation to DHBs’ consultation obligations, the Strategy says:

[DHBs] will be expected to consult on their strategic plans, when:

initiating significant new policies, services or plans
making significant changes to existing policies, services or plans
establishing local priorities, within the context of national priorities set by the Ministry of Health
significantly changing the range or type of services, or access to them
proposing significant changes in methods of funding.

[310] The Judge also relied on the agreements between the PHOs and the DHBs. Taking the agreement between the Waitemata DHB and the Harbour PHO as an example, it contains what are described as “relationship principles”, which require co-operation, collaboration, good faith and open and timely communication between the parties (cl C.3). The agreement defines “consult” (cl B.2.1), and creates obligations to consult in specified circumstances, none of which seems to have direct application here. The Judge relied on two clauses in particular, cl D.14.1 and cl F.9.3(b). The first provides:

We both agree to advise the other party promptly in writing of any changes, problems, significant risks, or significant issues (including ... those issues that could reasonably be considered to have high media or public interest), which materially reduce or affect, or are likely to materially reduce or affect, the ability of either of us to meet our respective obligations under this Agreement.

The second provides:

Unless otherwise agreed, neither of us will operate in a way that shifts costs or volumes between the Services that would result in additional costs to either of us. This does not preclude movements of individuals between providers for reasons of good clinical practice.

Our evaluation

[311] Mr Gray said that the Lab Tests contract contemplated substantial changes to the existing service, in the respects enumerated by the Judge at [267] (quoted at [289] above). He summarised the PHOs’ position as follows:

In summary, Harbour PHO says that it, the GPs it represents, and the patients they treat, are the true consumers and users of community laboratory testing services. They are the people whose interests are affected by any service changes, and they are the people who should be consulted about changes. Importantly, their experience and knowledge should inform any decision-making about changes.

He said that the ARDHBs’ obligation to consult the PHOs arose from the NZPHD Act, from the Crown funding agreements and other documents referred to above and from legitimate expectations arising from the DHB/PHO contracts, the commitments to consultation in the ARDHBs’ strategic and annual plans, the consultation which the ARDHBs undertook during the earlier community laboratory projects and the consultations carried out by other regional DHBs in respect of community laboratory testing.

[312] We make three points.
[313] First, DHBs have a variety of consultation obligations. Some may arise from statute, some from contract, some from legitimate expectations and some from “best practice”. But where it is claimed in judicial review proceedings that consultation obligations have been breached, it is necessary to be clear about the source of the relevant obligations.
[314] As identified above, DHBs have statutory obligations to consult in some circumstances. A failure to meet them may give rise to a successful application for judicial review on the ground of illegality. But (putting legitimate expectation to one side for the moment) we do not agree that the ARDHBs’ Crown funding agreements and the other Government documents relied upon by Mr Gray, and accepted by the Judge, create additional consultation obligations enforceable by way of judicial review. As Mr Illingworth submitted, there is a distinction between consultation undertaken as a matter of good practice and consultation undertaken in accordance with an obligation to undertake it, enforceable through judicial review – see R v Devon County Council, ex parte Baker [1995] 1 All ER 73 (CA), per Dillon LJ at 85. Unless the agreements and other documents are brought into the statutory framework in some relevant way, they add nothing to the statutory obligations.
[315] Second, if there was a statutory obligation to consult in this case, it was an obligation to consult the resident populations of each of the ARDHBs. That would not be satisfied by consulting the PHOs. The extent of the obligation may cast some light on the circumstances in which the legislature must have expected consultation to occur.
[316] Third, on the face of it, the ARDHBs were attempting to contract for the same service specifications as those in the DML contract but at a lower price, as the Judge said. They did not know what was possible in terms of cost savings as they did not know the relevant cost structure, what interest there would be in tendering, or what the nature of any tenders would be. The whole point of the RFP process was to see what would be offered and how expenditure could be limited without compromising service. If the ARDHBs’ intention was indeed to contract for the same level of service specification, and if that was the effect of the contract which they entered into, we do not consider that a statutory obligation to consult was triggered. We now expand on this.
[317] In his oral submissions Mr Gray emphasised s 40 of the NZPHD Act. He accepted that s 40 did not require a DHB to consult where it was proposing to purchase the same outputs for less money. But in the present case the consultation obligation was triggered because the outputs had changed. Mr Gray said that the ARDHBs were looking to reduce the amount of money that they spent on community laboratory services and this necessarily affected output. Two significant areas where money could be saved involved a reduction of the number of collection centres and of personnel (pathologists and phlebotomists), and this would necessarily lead to a reduction in service (slower turnaround times, for example). In addition, the move towards greater GP collections had the effect of transferring costs to GPs.
[318] The NZPHD Act does not contain a definition of “outputs”. However, s 10 of the CEA does. It provides that “outputs” has the meaning given to it by s 136 of the CEA. There, “outputs” is defined to mean “the goods or services that are supplied by a Crown entity”. The effect of s 4(1)(a) and (b) of the CEA seems to be that this definition will apply to “outputs” in the NZPHD Act. So the ARDHBs were obliged to consult their resident populations under s 40 if they were proposing a significant change to community laboratory services or to funding for those services stated in its most recent annual plan.
[319] As to the annual plans, Mr Gray did not identify any particular part of the plans that he claimed stated matters that would be subject to significant change as a result of RFP 577. Referring again to the ADHB’s plan, it indicated that the community laboratory services review was being undertaken to enable the DHBs to work within funding while maintaining service provision, presumably a common enough position in the health sector given the funding pressures it has faced. It cannot be the case that where a DHB sets out to achieve savings or to limit expenditure, while at the same time maintaining existing service standards, it is obliged to consult its resident population.
[320] In this context, it is of course important to identify what were the existing service standards. Mr Gray submitted that the reduction in the number of phlebotomists and pathologists and the reduction in the number of collection points inevitably meant that service would suffer. But what is important is the level of service contracted for. We take turnaround times as an example. DML achieved rapid turnaround times, but they were not part of its contractual obligation (in the sense that its contract did not fix such times) and it did not report its turnaround times to the ARDHBs. Under its contract Lab Tests’ essential obligation is the same as that of DML under its contract ─ to meet the clinical needs of its referring health professionals. But the Lab Tests contract goes further and includes indicative turnaround times as Key Performance Indicators. These indicative times are longer in some instances than those which DML achieved (see Appendix G to the Lab Tests contract). But that does not, by itself, indicate a decline in service. Clinical need will sometimes require a rapid turn around time. For more routine tests, however, a longer turnaround time may be satisfactory. As we understand it, this is what the Lab Tests contract seeks to recognise.
[321] Another example relates to pathologists and phlebotomists. The number employed is for the provider to determine. The provider contracts to provide a service in accordance with a service specification. That specification includes, for example, the obligation to provide “specialist pathology advice for referrers and availability for consultation by referrers on a 24 hours, 7 days a week basis” (cl 3.1(g) of the Service Specification). The provider must meet such obligations, but how many pathologists and phlebotomists it chooses to employ will depend on a range of factors which it must assess. As we have said, the service specifications in the Lab Tests contract were very similar to those in the DML contract, although in some respects more onerous.
[322] Collection rooms are in a different position, in the sense that RFP 577 indicated that they were to be part of the contractual framework. But again, a reduction in the number of collection rooms does not necessarily indicate a decline in service. We have already referred to the reduction in the number of collection rooms towards the end of 2005, and the contemplation was that they would decrease further. It was not suggested to us that this involved a reduction in the level of service. Rather, it seems to have been an acknowledgement that the structure inherited by the ARDHBs encouraged an inefficient proliferation of collection rooms. The collection network had, in terms of the Lab Tests contract, to be sufficient to service the needs of the resident populations of the ARDHBs. Obviously there is room for different views about the configuration of such a network in a city of the size and topography of Auckland, but that was not an issue that the ARDHBs were required to consult their resident populations about. Ultimately it was a matter of assessment, on the basis of a range of factors including international data.
[323] In relation to GP collect, the Lab Tests contract (through the service specification) simply says that increased GP collect is a service enhancement that the ARDHBs seek to encourage. It does not require further GP collect, much less enshrine any particular level of GP collect. It is clear from the evidence that GP collect is a feature of DML’s community laboratory service and that there are some GPs who would welcome increased GP collections, seeing it as a service enhancement for their patients. Other GPs do not favour it, however, for various reasons. But increased GP collect will occur only if and as GPs agree to it. The Judge’s concern that if additional GPs agree to it, others will feel pressured to agree is, in our view, too remote and speculative to be relevant. To the extent that the Judge was concerned about the possibility of GPs being forced to bear additional costs without their agreement, we see no prospect of that.
[324] We make three final points before dealing briefly with the legitimate expectation argument.
[325] First, we agree with the Judge that if public bodies have public law consultation obligations they cannot avoid them by establishing tendering or similar processes that make it difficult or impossible to meet them. That said, we do not think it realistic to expect DHBs or similar organisations to break off negotiations in the middle of a tender process in order to undertake further consultation, as the Judge seems to have considered was appropriate in this case (at [293]).
[326] Second, we agree with Mr Illingworth and Mr Curry that account should be taken of the nature of the contractual framework in this case, which contemplated further consultation with GPs after the contract was agreed. (It was, of course, not due to come into effect for a further 12 months.) The nature of the service specifications was such that there was room for consultation with GPs in order to give greater specificity to particular contractual standards. In relation to GP collect, GPs who did not wish to undertake collection of specimens could not be forced to do so. Lab Tests had begun consulting with GPs about sample collection, and proposed to continue to do so. In a context such as the present we see no reason why account should not be taken of this.
[327] Third, the GPs and others who filed evidence in support of the PHOs raised a number of concerns about possible degradation of the service following the implementation of Lab Tests’ contract. The Judge accepted that he could not assess the merits of these points, but said that there would be some effect on GPs and that the changes were sufficiently significant to require consultation. We see some dangers in such an approach. In this context, the obligation to consult must depend on whether a DHB is proposing significant changes to a service, viewed objectively, rather than on the fears of a particular group or groups within the DHB’s resident population that a service reduction may result. That said, we accept that this is a matter of degree. For our part, we do not equate what was proposed here as analogous to the closure of a hospital in a particular locality, which is a matter likely to require consultation.
[328] As to a legitimate expectation of consultation, we do not agree that there was such an expectation in this case. First, as we have said, we do not accept that RFP 577 or the Lab Tests contract was significantly different from the DML contract. The ARDHBs’ intention was that RFP 577 would produce a service meeting similar service specifications to those in the DML contract. Clearly some GPs and other health professionals doubt whether that is possible but that is a matter for the judgment of the ARDHBs.
[329] Second, we do not agree with the basis on which the Judge found that there was a legitimate expectation of consultation. The Judge said that it arose in this case from the Pilstrom report and the PHO/DHB contracts in particular.
[330] The Judge described the Pilstrom report as a public document (at [185] (and see also [262])). He relied on passages from the report which stated that there would need to be consultation with affected parties, including PHOs. However:

(a) It is not clear on the evidence that the Pilstrom report was made widely available. It was a report prepared for the ARDHBs at the conclusion of a project which they funded. Interested parties such as DML were given the opportunity to comment on it, but it does not appear to have been a publicly available document. Dr Bierre deposed that he had not seen it until it was provided on discovery in this litigation.

(b) In any event, the Pilstrom report recommended the option of establishing a public/private joint venture to handle all diagnostic testing. That would certainly have required widespread consultation but it was a materially different proposal to that contemplated by RFP 577. That RFP involved the continuation of the existing community laboratory service by a single provider.

[331] As to the PHO/DHB contracts, the provisions containing specific consultation obligations are not applicable, and we do not see the other provisions referred to by the Judge as being relevant in light of our view that no significant change to the service specification was contemplated.

Conclusion

[332] We consider that the ARDHBs’ statutory obligation to consult arises where significant changes are to be made to the services being provided. Here the ARDHBs were seeking the same service specifications, but delivered at a lesser price. Ultimately they had to make a judgment as to the capacity of particular tenderers to meet the contractual service specifications, which they did. Many GPs are concerned about whether the ARDHBs have made the right choice. That is understandable. DML has provided an excellent service and appears to have good working relationships with GPs. But that does not mean there was an obligation to consult.
[333] As to the particular matters about which GPs have expressed concern, ultimately the number of personnel that Lab Tests needs to employ to meet its contractual obligations is for it to determine. If it does not meet its obligations, it will be answerable for that. But it cannot be assumed that it will not do so. In relation to GP collect, that is already a feature of community laboratory services, as we have said. The ARDHBs see benefits in having more GP collect, as do some GPs. Lab Tests considers that it will be able to reach satisfactory arrangements with sufficient GPs to enable it to collect a substantial proportion of samples in that way, but has a collection network that the ARDHBs consider sufficient to meet the service specifications even if that does not occur. Again, we do not see that as meaning that there was an obligation to consult.

Supporting judgment on other grounds

[334] DML seeks to support the judgment on two grounds rejected by Asher J, namely:

(a) Unreasonableness/irrationality.

(b) Legitimate expectation (failure to consult with DML about the ARDHBs’ appetite for significant change to the service).

[335] We deal with the legitimate expectation ground first. DML’s submission was that the method that Lab Tests proposed to deliver the service was so drastically different that DML needed to be informed of the possibility of such a proposal being accepted. It argued that the Judge’s reasoning with respect to the PHOs applied equally to DML. Further, Mr Hodder relied on the following paragraph from DML’s letter giving its revised price:

We believe this proposal addresses the issues we were asked to address. If, however, you have ideas that would lead to further cost savings please discuss them with us. We will return to you any realised savings from such recommendations.

[336] As we have said, we do not agree with the Judge that the PHOs had a legitimate expectation of being consulted in the circumstances of this case. We do not accept that DML had a legitimate expectation either. In any event, we consider that DML was put on notice that the ARDHBs were looking to achieve significant cost savings, although wishing to maintain the same service specifications, and had the opportunity to express its views about that.
[337] Furthermore, in part, this argument seems to be based on the proposition that an incumbent provider has a legitimate expectation of being given the opportunity to respond where a competing tenderer makes a proposal which meets the service specifications but involves significant savings over the incumbent’s existing service. Incumbency has many advantages, but that does not seem to us to be one of them. Nor do we think that a tenderer, even if the incumbent, can create or enhance a legitimate expectation by including a paragraph such as that quoted at [335] above in its proposal.
[338] Turning to unreasonableness/irrationality, Mr Hodder argued that because of the high public importance attaching to major decisions affecting public health, the courts should take a “hard look” at the decision-making process. It will be apparent from what we have already said that we do not agree that such an approach should be adopted in the present context.
[339] Mr Hodder attacked the evaluation process, as he did before Asher J, particularly the evaluation panel’s assessment of the “value for money with emphasis on price” criterion. He said that the basis for the panel’s assessment was irrational. He pointed out that the reason that Lab Tests’ price was much lower than DML’s price was because of the dramatically different prices for the collection of specimens. Mr Hodder said that the evaluation panel had failed to obtain an understanding of why this was so. Consequently its process was seriously flawed.
[340] As the Judge said, the decision was made by an evaluation panel comprising well-experienced people from both inside and outside the ARDHBs. In addition, they had well qualified advisors available to assist. The panel went through a lengthy process, and visited Gribbles’ facilities overseas in the course of their evaluation. Like the Judge, we do not think that a court is well placed to assess on a judicial review application the medical, economic and other complexities raised by an evaluation process such as that undertaken in the present case.
[341] Accordingly, we reject these additional grounds.

Concluding comments

[342] This is a lengthy judgment, much longer than is desirable. But to deal with the submissions advanced, we have had to examine the evidence in some detail. This process has highlighted that disputes such as this are not well suited to being dealt with in judicial review proceedings, at least where there are broadly framed allegations of the type made in this case. The factual and other subtleties are too great to be dealt with in what is supposed to be “a relatively simple, untechnical and prompt procedure” (Minister of Energy v Petrocorp Exploration Ltd [1989] NZCA 95; [1989] 1 NZLR 348 at 353 (CA)), which normally does not involve cross-examination.
[343] DML’s claim was very broad. It was based on a notion that it is the role of the courts to ensure what Mr Hodder described as good hygiene in public decision-making. In our view, that overstates the courts’ role in this context. The processes at issue in the present case were lengthy, involved numerous people, evolved over time, raised difficult medical, business, financial and other considerations and ultimately involved a competition for the community laboratory services market for the contractual period. Courts are not well equipped in judicial review proceedings to deal with the range of issues that such processes raise.
[344] Further, if Mr Hodder’s approach were to be adopted, we consider that there would be almost indeterminate scope for intervention by the courts in this context. We illustrate this by reference to DML’s position as the incumbent provider. Mr Curry submitted that, as the incumbent, DML had distinct advantages in RFP 577. As we have said, the Judge accepted that DML did have advantages but considered that they were unavoidable (see [204] above). Clearly some were unavoidable, for example, the absence of transition risk or the presence of established relationships with key personnel within the ARDHBs. But, arguably, other advantages were avoidable. For example, to the extent that DML had inside knowledge of the concerns of the ARDHBs through its participation in the various community laboratory projects, the ARDHBs could have made the relevant material available to other tenderers. In other words, it is not self-evident that the obligation of even-handedness which underlies DML’s claim could not be invoked against a public body by a new entrant tenderer which considered that it was operating at a significant informational disadvantage when compared to the incumbent (provided that the body could have rectified the informational disadvantage). Equally, it is at least arguable that there was a lack of even-handedness (in the sense that Mr Hodder used the term) in the way that the ARDHBs dealt with SCL and DML when DML’s contract was extended in mid 2005. Much depends on the perspective adopted. In our view, these considerations suggest that the approach articulated by Mr Hodder would take judicial review far beyond its proper role.

Decision

[345] Accordingly, we allow the appeal. We quash the following orders of the High Court:

(a) The ARDHBs’ decision to award a contract for laboratory services for the Auckland region to Lab Tests was ultra vires and invalid and of no effect; and

(b) The contract entered into between the ARDHBs and Lab Tests for the provision of primary referred pathology services on 14 July 2006 is invalid and of no effect.

[346] Lab Tests should have taken over as the community laboratory service provider on 1 July 2007. That has not happened. Mr Illingworth submitted that, as a consequence, Lab Tests should go back to being the first preferred bidder and a new contract should be negotiated. We do not agree. We consider that, as soon as it can reasonably be achieved, Lab Tests should commence to supply services under its contract for the remainder of the contractual term. We accept that there may be issues of implementation. We invite Lab Tests and the ARDHBs to attempt to resolve those by discussion. However, we reserve leave for both Lab Tests and the ARDHBs to apply for consequential orders should any difficulties emerge.
[347] DML is to pay costs of $48,000 to each of Lab Tests and the ARDHBs, plus usual disbursements. We certify for two counsel. If there is any issue as to costs in the High Court, it should be determined by that Court.

HAMMOND J

[348] I agree with the result of this appeal as set out in the judgment of Arnold J and, in general, with the reasoning by which that result was arrived at.
[349] Because this is an important administrative law case, I propose to add some broad comments on the proper scope of judicial review in a case such as this. I emphasise that they are not intended to detract from the actual resolution of this case as set out in the judgment of Arnold J, to which the entire panel has subscribed.
[350] As a matter of convenience, I have grouped my comments under four heads, which might be called four “P’s”: 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. I will then add some brief comments on this particular case.

The point of entry of judicial review

[351] The point at which judicial review may be resorted to is a matter of distinct importance. While, in principle, any decision of a public nature is potentially reviewable, there seems to be a growing misconception that just about any decision is amenable to judicial review. However, there are some “no-go” areas, as well as “twilight” contexts which have occasioned real, and still largely unresolved, arguments as to the appropriateness of making judicial review available in those areas.
[352] One of these twilight areas is public sector contracting, where governmental bodies provide or arrange for the provision of services to the public by means of contractual relations with private sector enterprises. “Government by contract” has had major ramifications for administrative law theory and practice as it has become the dominant paradigm for the provision of public services over the last quarter of a century. See Harlow “Law and New Public Management: Ships that Pass in the Night” in Gordon (ed) Judicial Review in the New Millenium (2003) at 5 – 18; McLean “Contracting in the Corporatised and Privatised Environment” (1996) 7 PLR 223; and Allars “Administrative Law, Government Contracts and the Level Playing Field” [1989] UNSWLawJl 7; (1989) 12 UNSWLJ 114.
[353] Leaving to one side any applicable statutory provisions, the problem for the law, stated in the simplest terms, is whether to apply private law principles, public law principles, or some admixture of the two. See, for example, Oliver Common Values and the Public-Private Divide (1999) and Taggart “‘The Peculiarities of the English’: Resisting the Public/Private Law Distinction” in Craig and Rawlings (eds) Law and Administration in Europe: Essays in Honour of Carol Harlow (2003) 107 at 120. Some commentators have suggested that the courts should develop a stand-alone set of “government contract” principles which are to be applied. See, for instance, Davies Accountability: A Public Law Analysis of Government by Contract (2001). For a comparative common law and continental perspective, see Auby “Comparative Approaches to the Rise of Contract in the Public Sphere” (2007) PL 40.
[354] There has been real ambivalence on the part of both commentators and courts on this issue. Professor Freedland, a prominent commentator on “government by contract”, started out by arguing for the application of public law principles: “Government by Contract and Public Law” (1994) PL 86. Yet more recently, Professor Freedland has oriented his overall approach more firmly in the direction of private law (“Government by Contract Re-examined – Some Functional Issues” in Craig and Rawlings (eds) Law and Administration in Europe: Essays in Honour of Carol Harlow (2003) 123 at 133):

My real reason for sketching out an area of public/private enterprise law, which is not specially oriented towards public law, is not so much the view that ‘government by contract’ should be regulated by a body of law which is not specially oriented towards public law, but rather a prediction that English law will on the whole tend to generate a mixed but private law-based body of law for that purpose.

Indeed, Professor Freedland now goes so far as to suggest that (at 134):

... we might expect that the techniques of private law in the areas of contract, tort, and restraint of trade will be the tools mainly used to address issues arising from the tension or conflict between the public contracting role and the public/private market-making function, and that our primary concern should be to ensure that these private law-based instruments are tuned to register the sound of public interest.

[355] A contrary view can be found in Collins Regulating Contracts (1999), which argues that markets do not provide an appropriate mechanism for distributing public services and questions the efficacy of contract law principles in this area. For a critical discussion of Collins’ analysis, see Cane “Administrative Law as Regulation” in Parker and others (eds) Regulating Law (2004) 206 at 210 – 213.
[356] Unsurprisingly, courts have had the same sort of difficulties as to what approach the law should adopt. As a general proposition, which I can only sketch here, the early cases around the British Commonwealth and in New Zealand did not favour judicial review. But some courts then began to adopt a stance that judicial review is available if there is a sufficient “public” component. The high water-mark of that approach is R v Panel on Take-overs and Mergers, ex parte Datafin plc [1986] EWCA Civ 8; [1987] QB 815 (CA) which evidenced a shift from a “source of the power” test for reviewability to a “nature of the function” approach: Hunt “Constitutionalism and the Contractualisation of Government in the United Kingdom” in Taggart (ed) The Province of Administrative Law (1997) 21 at 29. In the “government by contract” context, that kind of thinking rests on a market contract paradigm which somehow becomes sufficiently suffused with public characteristics, or has a sufficient impact on the public, so as to render events attendant on it reviewable.
[357] With respect, this analysis is much too simplistic. The stereotype of the market contract involves a purchaser going into a market, which offers many opportunities (or service providers) for the transaction in question. That purchaser then has the option of purchasing the services in question either in a single transaction or a number of distinct transactions.
[358] There are, however, two characteristics which differentiate “government by contract” from the market orthodoxy. The first is that government contracting arrangements are functionally a form of regulation. (This conclusion is shared by Walsh and others Contracting for Change: Contracts in Health, Social Care, and Other Local Government Services (1997).) The second is that these kinds of agreements are a classic example of what I have referred to elsewhere as “relational” contracts: Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 8 TCLR 612 at [93] (HC). The contracting parties routinely provide that the contract will run for some time, involving ongoing evolutionary elements, and obligations of good faith and the like. In short, they are not closed market contracts. Moreover, the government has a powerful interest in ensuring that goods or services are supplied in accordance with a contract. If a contractor defaults, the continuity of essential public services may be jeopardised. Thus, these contracts involve what we could loosely call wider public interests.
[359] The characteristics I have noted might suggest that, as with any other government activity, government contracting should ultimately take place within a framework of public law precepts, modified to the particular contractual and statutory context, but nonetheless underpinned by constitutional values such as respect for the rule of law and democratic principles. But the pull in favour of private law still remains strong.
[360] My purpose in making these general points is not to attempt to resolve the present case in an abstract way. Each case will have its own complexities, as Arnold J has convincingly demonstrated, and the statutory and contractual context will be of the greatest importance. My concern is that I would not want it to be thought in other cases that, on the basis of what has happened in the case in front of us at this time, counsel can automatically assume reviewability in this subject area.
[361] In this case, we are faced with a somewhat unusual position. Typically a case of the kind which is before us would have attracted strenuous debate as to its amenability to judicial review in the first place. Here, both Diagnostic Medlab Limited (DML) and Lab Tests Auckland Limited (Lab Tests) have accepted that judicial review is appropriate. But they are poles apart as to why and how reviewability should come into play. For Lab Tests, Mr Curry takes a very narrow line. He contends that the wider arguments as to reviewability do not really matter very much in this case because the only possible ground for review is the admittedly narrow statement of Lord Templeman, for the Judicial Committee of the Privy Council, in Mercury Energy Ltd v Electricity Corporation of NZ Ltd [1994] 2 NZLR 385 at 391 that “[i]t does not seem likely that a decision by a [SOE] to enter into or determine a commercial contract to supply goods or services will ever be the subject of judicial review in the absence of fraud, corruption or bad faith.” Mr Hodder, on the other hand, doubtless delighted to have got over the preliminary hurdle of reviewability without opposition, has advanced a far-reaching basis for judicial review: namely an ability in the High Court to constrain, at least in some respects, decisions “tainted by a serious lack of integrity, i.e., fraud, corruption, bad faith or any other material departure from accepted public sector ethical standards which requires judicial intervention” (emphasis added). I will enlarge on what Mr Hodder meant by that later in this judgment.

The purpose of judicial review

[362] Broadly, there are two schools of thought about the Judge’s task when engaged in judicial review.
[363] The traditional stance is that the Judge’s predominant task is to ensure that administrative authorities remain within the powers granted to them by law. Whatever the Court may do by way of judicial intervention, that intervention must be linked, in one way or another, to the legal powers of the relevant public authority. This orthodox approach to administrative law has been defended, most magisterially, by Sir William Wade: Wade and Forsyth Administrative Law (9ed 2004) at 4-5. There can hardly be any argument that the legality principle is the first and most important limb of judicial review. While cases decided under the legality rubric routinely throw up difficult issues of statutory construction, that is nevertheless a “comfortable” task for a court, which can set about it without any disconcerting suggestion that the court is outside its proper bailiwick.
[364] On this traditional approach, the only long stop for challenging the decision itself, as opposed to what led to it, was so-called Wednesbury review for unreasonableness: Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1947] EWCA Civ 1; [1948] 1 KB 223 (CA). The primary decision is that of the first instance decision maker and courts have a highly constrained ability to interfere with respect to the decision actually taken.
[365] Wednesbury review is logically circular, distinctly indeterminate and functions as a “cloak” which, on the one hand, has the potential to seduce lawyers and courts into the merits rather than legality of decisions and, on the other hand, can lead to abject caution. See Le Sueur “The Rise and Ruin of Unreasonableness?” (2005) JR 32 at 32 and, more generally, Taggart “Reinventing Administrative Law” in Bamforth and Leyland (eds) Public Law in a Multi-layered Constitution (2003) at 311 – 335. Famously, Lord Cooke of Thorndon in R (Daly) v Secretary of State for the Home Department [2001] UKHL 26; [2001] 2 AC 532 (HL) regarded Wednesbury as (at 549):

... an unfortunately retrogressive decision in English administrative law, in so far as it suggested that there are degrees of unreasonableness and that only a very extreme degree can bring an administrative decision within the legitimate scope of judicial invalidation. The depth of judicial review and the deference due to administrative discretion vary with the subject matter. It may well be, however, that the law can never be satisfied in any administrative field merely by a finding that the decision under review is not capricious or absurd.

[366] Instances of successful intervention on the basis of Wednesbury unreasonableness appear to be much more common in the United Kingdom than in New Zealand. In “The Rise and Ruin of Unreasonableness?” (above at [365]), Le Sueur observes that close to half of the Wednesbury unreasonableness/irrationality cases (some 40 cases) heard between January 2000 and July 2003 in the UK succeeded on those grounds (at 44 – 51). Even then, Lord Woolf has suggested extra-judicially that judicial review is still excessively executive-friendly in the UK: “Judicial Review – The Tensions Between the Executive and the Judiciary” in Campbell-Holt (ed) The Pursuit of Justice (2008) 131 at 142. In New Zealand, success under this head is a distinct rarity. I am reminded of an observation by Bauer CJ in the United States of America: the decision must “strike us [as] wrong with the force of a five-week old dead, unrefrigerated fish [to attract review]” (Parts and Electric Motors Inc v Sterling Electrical Inc 866 F2d 228 at 233 (7^th Cir. 1988; cert. denied, 493 US 847 (1989)).
[367] The second, and more modern, school of thought challenges the traditional orthodoxy. At heart it holds that High Court judges have always had, and still have, an independent capacity to intervene by way of judicial review to restrain the abuse of power and to secure good administration. Protagonists of this school of thought include, amongst commentators, Professors Oliver and Craig in the United Kingdom, and Professor Cane in Australia. Amongst the senior judiciary its adherents include Sir John Laws and Sir Stephen Sedley. At rock bottom the broad concern is to identify what might be termed “core public law values” and secure better governance.
[368] Again, these two schools of thought are reflected in the position of the parties before us: Mr Curry stands firmly on what I have called the “traditional” orthodoxy while Mr Hodder on this occasion advances a thoroughly “modernist” argument.
[369] As a matter of fairness, to exercise a putative right of reply for Mr Curry, there are a number of decisions in courts of the highest authority (particularly the High Court of Australia) to the effect that judicial review should not allow courts to impose ideas about “good administration” or “good governance” on the executive or other governmental bodies. Historically, or so the argument runs, judicial review involved a “power grab” by the courts which is bearable and even beneficial, so long as it is kept within its traditional bounds and goes no further than it already has.
[370] In light of this division, it is obvious that one of the fundamental difficulties which afflicts judicial review is that there is a widespread disagreement about the fundamental task of the reviewing judge. It is true that all basic building blocks of the law attract some measure of disagreement about “purposes”, but none have the difficulties, or the “edge” that judicial review attracts, given its impact on government and governance. And when fundamental disputes about “purpose” are leavened with confusion as to the principles on which courts will intervene (often called the “grounds for review”), the state of the law is rendered distinctly problematic.

The principles of judicial review

[371] The Chief Justice of New Zealand, writing extra-judicially, has suggested that “the Courts are largely adrift” in dealing with cases where the decision maker has (to put it broadly) got the decision wrong: Elias “The Impact of International Conventions on Domestic Law” (Address to the Conference of International Association of Refugee Law Judges, March 2000) at 8.
[372] The nautical metaphor can be pressed further. William Prosser, the doyen of American torts scholars, once recounted something said by a West Coast North American Indian sitting on a rock and looking out to sea:

Lighthouse, him no good for fog. Lighthouse, him whistle, him blow, him ring bell, him flash light, him raise hell; but fog come in just the same.

Prosser went on:

That quotation has been haunting me. I have the feeling that it has some application to something connected with the law, but I do not know exactly what. I have shown it to a number of lawyers, and some of them have told me that it summarizes for them a lifetime of argument before the courts. Some of the judges seem to think that it describes the thankless task of writing opinions for the bar to read. To some morose and melancholy attorneys it calls at once to mind their relations with their clients. One man was sure that it must have something to do with the income-tax regulations, although he was by no means clear as to precisely how. Among only one group have I found general and enthusiastic agreement. I have yet to show that quotation to any professor of law who did not immediately say, with a lofty disregard of the laws of English grammar, “That’s me!”

See “Lighthouse No Good” (1948) 1 J Leg Ed 257 at 257.

[373] The public law practitioner could also say: “That’s me!” The reason is that judicial review is a critically important beacon and guard against abuses of power. But it does presently stand in something of a fog of mushy dogma. And lighthouses do not work by themselves. They function effectively only in concert with complete and precise charts. It is a pressing task for the courts to ameliorate the problem of fog in judicial review.
[374] There is one possibility I can get out of the way at the outset. Every so often a senior judge attempts to formulate a unified theory of judicial review, by reducing everything to one theorem.
[375] One example was the extra-judicial suggestion by Sir Robin Cooke (as he then was) that “it might not be an altogether absurd over-simplification to say that the day might come when the whole of administrative law could be summed up in the proposition that the administrator must act fairly and reasonably”: “The Struggle for Simplicity in Administrative Law” in Taggart (ed) Judicial Review of Administrative Action in the 1980s: Problems and Prospects (1986) 1 at 5.
[376] More recently, in “Administrative law in Australia: Themes and values” in Groves and Lee (eds) Australian Administrative Law: Fundamentals, Principles and Doctrines (2007) 15, the newly appointed Chief Justice of Australia, Robert French, has suggested that (at 23):

... [A]dministrative justice in the sense administered by the courts may be identified as follows:

Lawfulness – that official decisions are authorised by statute, prerogative or constitution.
Good faith – that official decisions are made honestly and conscientiously.
Rationality – that official decisions comply with the logical framework created by the grant of power under which they are made.
Fairness – that official decisions are reached fairly, that is impartially in fact and appearance and with a proper opportunity to persons affected to be heard.

The learned Chief Justice explicitly gives his “grand theory” objective (and background in physics) away, when he goes on to note that “the identification of these elements of administrative justice is a little like the identification of ‘fundamental’ particles in physics” (at 24).

[377] Even senior appellate courts are not immune from this sort of approach. Recently, the Supreme Court of Canada opted for a dual standard of review, “correctness” and “reasonableness”, which one suspects will bring its own very real share of difficulties: Dunsmuir v New Brunswick 2008 SCC 9 at [34].
[378] Both practitioners and representatives of governmental bodies will rightly state the obvious: that grand theorem approaches fail to drill down far enough to enable respectable advice to be given to parties who are supposed to abide by the law. In short, better charts are needed, without simply exchanging one shibboleth for another.
[379] Another concern is that things like spectrums of response and “deference” in this subject area are ultimately quite unhelpful, and even unworkable. To say that something rests somewhere on a “continuum” is a conclusion, not a principle; it does not tell us how that point in a spectrum is reached. And courts do not defer to anything or anybody: the job of courts is to decide what is lawful and what is not.
[380] As far as the grounds of review are concerned, the difficulty stems partly from the lack of an agreed classification or taxonomy, accompanied by properly developed substantive principles as to when a court will intervene by way of judicial review, particularly in “merits” cases. Then too, there will always be problems of application in the law, but when the underlying principles are obfuscated, there is cause for real concern. The costs of litigation are extremely high in this area, and “uncertainty” is, I think, a major contributing factor to those costs. This in turn restricts access to the courts, which is most undesirable in judicial review.
[381] Perhaps the best way to understand the concerns which judicial review endeavours to reach is to consider the various grounds in functional rather than doctrinal terms. One good reason for a functional rather than doctrinal analysis is that it helps to transcend unhelpful semantic or terminological quibbles.
[382] First, there are procedural grounds of review. These focus on the conduct of the decision maker and include procedural fairness requirements, fair hearing rules, and rules against bias. These sort of rules are well enough settled.
[383] Secondly, there may be concern over the decision maker’s reasoning processes. This is where the vast majority of judicial review cases fit given that it includes things like misappreciation of the law; unauthorised delegation; and the perennial problem of control of the exercise of a discretion. All of this is the stuff of legality and everyday lawyering and, in fairness, the principles “fog” is not at its densest here.
[384] Thirdly, there are grounds which in one sense or another relate to the decision itself, rather than the procedures adopted or the reasoning process. This is easily the most contentious functionalist category of the grounds for judicial review. The argument here is that there should be substantive grounds of review, even where a decision maker has assiduously followed all required procedures and has made no errors of reasoning. But here the fog is presently a “pea souper”.
[385] One thing should be said at the outset. Every so often some commentator suggests that “activist” judges are somehow intent on taking over and making “merits” decisions for themselves. However, in my experience, judges do not like making merit decisions. They are relieved when “government” makes a clear or at least workable decision. Knowing – or purporting to know – what is best for somebody or something else is a dangerous enterprise; judges, of all people, see in their daily work instances of ill or insufficiently considered actions which can cause great difficulties in the lives of others. And they appreciate that judicial review is not an appeal: it is a “review” of what has occurred, but with an emphasis upon principles which ought, in terms of Prosser’s fog metaphor, to be respectably well defined.
[386] If, therefore, judges are going to approach the merits of a decision, the analysis has to be undergirded by something other than concern about the decision as such. That is, there has to be something or some things in a sense standing “outside” the particular decision which rightly attracts judicial concern. The most obvious candidate is the concept of abuse of power, which lies at the very heart of administrative law. See Sedley LJ in R (Bancoult) v Secretary of State for Foreign and Commonwealth Affairs (No 2) [2007] EWCA Civ 498; [2008] QB 365 at [60] (CA): “[Abuse of power] is what the courts of public law are there to identify and, in proper cases, to correct ...”. The French would say that abuse of power is a stand-alone type of illegality: see Auby “The Abuse of Power in French Administrative Law” (1970) 18 Am. J. Comp. L. 549. The term “abuse of power” should not be understood as necessarily pejorative: to act outside one’s powers, in genuine error, is still an abuse of power and the traditional “four-corners” doctrine reels in the large majority of abuses of power. The central issue is, what beyond that orthodoxy ought to be addressed, and how?
[387] There is here a preliminary issue which has vexed pre-eminent social and political philosophers worldwide, and is an issue for lawyers: the very nature of power. There are broadly two possible responses.
[388] The continental school tends to see power as a thing in itself. De Tocqueville suggested that it is men who build up institutions and enslave themselves in a universally tragic way. M de Jouvenal in Du Pouvoir treated power as if it is a morbid pathology, rather like a terrible god with deterministic outcomes. The notion of power as a thing in itself can be seen in the writings of Kant and Nietzsche.
[389] The English school is more pragmatic: it does not see power as a thing in itself. Lord Radcliffe of Werneth put it wonderfully well in Lecture VII of his 1951 Reith Lectures (published as The Problem of Power (1952) at 99 – 100):

Take away the abstract idea and there remains nothing but the conduct of men, human beings, who occupy in their turn the seats of authority. It does not seem to me that there is only one possible attitude towards authority or one inevitable set of rules that govern its exercise. Attitudes change with the social conditions which surround authority and, as we have seen, men in their turn exalt and denigrate power under the impulse of their general attitude towards life itself. You can see it your own way, so long as you know what that way is. It reminds me of an old saying: ‘Take what you want’, said God; ‘take it, and pay for it.’

[390] If Lord Radcliffe is right, and I think he is, it would follow that it ought to be possible to do something practical about the problem of abuse of power through the development of distinct substantive principles in relation to merit decisions.
[391] It is not possible in a judgment to describe what a full scheme of principles based on that fundamental objective might look like. But the law is already moving slowly in the direction of building on that concept. For instance, one area which is now relatively well recognised by the Anglo-New Zealand judiciary is that, in the area of human rights, an otherwise lawful response must still be a proportionate one.
[392] Another possible doctrine is that of substantive unfairness, to be deployed in situations where a result is arrived at which is within the powers of the particular authority but which is so grossly unfair that it ought to be impugned. That is what I effectively held in NZFP Pulp and Paper Ltd v Thames Valley Electric Power Board HC HAM CP35/93 1 November 1993. Although that approach was not favoured by this Court on appeal (see Thames Valley Electric Power Board v NZFP Pulp and Paper Ltd [1994] 2 NZLR 641), in Pharmaceutical Management Agency Ltd v Roussel Uclaf Australia Pty Ltd [1998] NZAR 58, this Court held that (at 66):

The concept of substantive fairness ... also requires further consideration. The law in this country applicable to situations of that kind will no doubt be developed on a case by case basis.

[393] In this instance, I did not understand Mr Hodder to be arguing for an incremental gloss on the well-known Mercury Energy “fraud, corruption or bad faith” test. His argument, at least as I apprehended it before us, was that there should be a distinct substantive principle on which the merits of a decision can be attacked. Mr Hodder put it this way in oral argument:

Public powers and resources under our system are to be used in the public interest, and they are misused or abused if they are used and diverted to private advantage, obviously, apart from statutory authorised grants or where there is contract for mutual benefit. But that’s the essence of the responsibility of public power. It has to be used in the public interest not for private interests.

[394] I will deal with this proposition of a “no-conflict” principle in government contracts later in this judgment. I mention it at this point only because, as I apprehended it, this is where Mr Hodder’s principle would fit in the sort of taxonomy I have been discussing. It must be at least implicit, if not explicit, in Mr Hodder’s proposition that this is a substantive principle which we need in New Zealand today. That brings me to the next subset of comment.

Place

[395] Francis Cooke QC has recently noted that in New Zealand administrative law, “we still take our lead from the United Kingdom”: “Relief at Last” in Administrative Law (New Zealand Law Society Intensive, August 2008) 31 at 31. Whilst a respectful eye will doubtless continue to be cast on judicial review developments in England, I agree that New Zealand has to develop its own solutions in terms of its own needs and aspirations. There are some difficulties which ought to be made explicit here.
[396] One is the question of “opportunity”. Professor Burrows has remarked that case-made law “scores its runs in singles”. That is a real difficulty in a small country like New Zealand, with only an irregular supply of cases (“the bowling”), and consequently the run accumulation technique becomes highly problematic. Commentators in New Zealand routinely fail to focus sufficiently on the “supply” side of bowling from which a respectable innings may be fashioned. It is difficult for senior judges to work at the problem systematically. There is instead an intermittent and somewhat mad-headed chase after the “latest case” on the part of the bar and commentators, and seminars sprout up as if there has been a seismic shift when one case is decided.
[397] A second and related problem is, if I may resort to Willis Airey’s splendid phrase of a “Small Democracy”, that single judicial review decisions in New Zealand have a disproportionate impact. In recent years in the United Kingdom, Lord Woolf, then Lord Bingham, have had to deal with the tensions which arise between the judiciary and the executive when the judiciary exercises a firmer hand. The English judiciary has survived, and many may think it has undertaken its task admirably across a real run of cases. But quite how things would go in a much smaller and more visible “Small Democracy”, where a pebble in a pond has the effect of a boulder, is more problematic.
[398] Thirdly, we should not overlook the problem that if the goal of administrative law is to be defined partly in terms of somewhat broader objectives – such as, for instance, the promotion of good governance – one would normally pay close regard to the empirical evidence that administrative law can actually achieve that end. Regrettably, there is little in the way of empirical evidence in the New Zealand context as to whether administrative law as a behaviour modification mechanism in government actually works. Such empirical evidence as there is in other jurisdictions tends to suggest that administrative law is likely to be able to make only a modest contribution to the promotion of external goals. If that is right, it may suggest that such substantive doctrines as are developed for merit review should go only to what might be termed “true excesses”.

This case

[399] I think 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.
[400] The really critical facts are that, if I may borrow a phrase from the lexicon of intellectual property lawyers, there was not a “protectable interest” at the relevant time. Effectively, what the Judge has done is to take ideas which somewhat resemble the “springboard” principle in relation to the doctrine of breach of confidence in private law, and transmute them into the public domain. There is no doubt that in private law one cannot use information which is not part of one’s general skill base or knowledge and on departure from one institution improperly use that information against the interests of the institution or person from whence it was derived. Private law has a carefully constructed set of principles which surround that kind of activity. But on the facts of this case, the so-called “information” was not of that order, so the case does not get off the ground at the outset. Even if there had been, as Arnold J has demonstrated, the time frame is wrong.
[401] But even leaving those problems to one side, and the very real complications caused by the statutory context, there is the huge difficulty that effectively the Court is being asked to do what Parliament itself has not done. In New Zealand today there is considerable movement in and out of government and governmental agencies. Difficult conflict issues are created. Whatever one thinks about their efficacy, there is no doubt that the prevailing ethos of public administration is that these things have to be “managed”, rather than prohibited per se. Of course some jurisdictions have endeavoured to enact what could be broadly termed “probity in government” measures which, as I apprehend it, have created their own significant difficulties. But there must be huge difficulties, as Mai Chen has put it, “in applying the conflict of interest rules without disqualifying all potential candidates with requisite experience and expertise because they operate in the particular sector” in a “Small Democracy” such as New Zealand: “Crown Entities Act: 18 Months on” (2006) NZLJ 315 at 320. And institutionally, what might be termed the ripple effect of the so-called ethics in government/no conflict rule that Mr Hodder is propounding would be rather more of a tsunami.
[402] The practical solution to conflicts problems of the kind complained of in this instance lies in the careful drafting of legislation and contracts, and the quality patrolling of conflicts regimes. Conflicts of interest are not in themselves unethical. The ethical challenge resides in the recognition and management of them.
[403] Of course, if there is serious mismanagement by public or elected officials, there can be damage to the public confidence which is essential to good government. But I very much doubt that the solution to that lies in setting contracts aside. If things have reached that sort of pass, is there something wrong with the traditional remedy of “throwing the rascals out of office”?
[404] In the meantime I agree with Arnold J that the most appropriate course is to recognise that Lord Templeman’s formula in Mercury Energy is not exhaustive, and the law can be developed incrementally by analogy.
[405] Finally, given Arnold J’s comments in [342] and [343], I would make these brief observations. Judicial review cases have become much more complex than they were twenty years ago. I am not convinced that makes them necessarily non-justiciable as such. But undoubtedly Arnold J’s observations in [344] are relevant to the issue I opened my judgment on: should the courts allow what may be thought to be more like private law issues to be litigated in public law drag?

Solicitors:
Russell McVeagh, Auckland for Appellant
Wilson Harle, Auckland for First Respondents
Chapman Tripp, Auckland for Second Respondent
Lowndes Jordan, Auckland for Third Respondent

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