Dr Diana Scott Limited v South Canterbury District Health Board [2012] NZHC 2764 (19 October 2012)

Last Updated: 2 November 2012

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2012-476-000446 [2012] NZHC 2764

BETWEEN DR DIANA SCOTT LIMITED First Plaintiff

AND SEBENZA INVESTMENTS LIMITED Second Plaintiff

AND TEMUKA HEALTHCARE LIMITED Third Plaintiff

AND WOOD STREET SURGERY LIMITED Fourth Plaintiff

AND SOUTH CANTERBURY DISTRICT HEALTH BOARD

First Defendant

AND SOUTH LINK HEALTH INCORPORATED Second Defendant

Hearing: 9 October 2012

Counsel: G D Jones and M R Bendall for Plaintiffs

J Coates for First Defendant

F Goldsmith for Second Defendant

Judgment: 19 October 2012

_{JUDGMENT OF WHATA J}

[1] The plaintiffs provide primary health care services in rural South Canterbury. They had contracts to provide after hours services with the first defendant, South Canterbury District Health Board (“DHB”). Those contracts expired on 30 June

2011. Over the same period the plaintiffs each had contracts with the second defendant, South Link Health Incorporated (“SLH”). Under those contracts, the plaintiffs agreed to provide, among other things, “first level services” on a 24 hour

_{seven days a week basis for 52 weeks of the year. When the DHB did not renew the}

DR DIANA SCOTT LIMITED V SOUTH CANTERBURY DISTRICT HEALTH BOARD HC CHCH CIV

2012-476-000446 [19 October 2012]

after hours contracts, the plaintiffs cut back their after hours services to an automated message directing patients to a triage service run by the DHB. SLH contends that the plaintiffs are breaching their contracts to provide first level services. The parties entered into dispute resolution processes and it was contemplated that the DHB would commence proceedings for the purposes of obtaining clarity as to the respective obligations of the plaintiffs and the defendants. What in fact happened is that SLH began reducing capitation payments under its contracts in direct proportion to the costs of obtaining alternative after hours primary health services no longer provided by the plaintiffs.

[2] The plaintiffs now seek a mandatory injunction preventing SLH from making further capitation deductions pending trial. Both the DHB and SLH oppose that injunction, on the basis that SLH is entitled, under its contracts, to set off the costs of the alternative service against the payments under the contract with SLH. They also seek payment of the deductions made to date.

[3] I must determine whether the plaintiffs have a seriously arguable case that they are entitled to full payment under their contracts with SLH, and if so whether the balance of convenience lies with granting a mandatory injunction. The critical underlying issue is whether or not referral to the triage service satisfies the requirements of the contracts with SLH.

Facts

[4] The plaintiffs all own general medical practices in Temuka and Geraldine. The Government allocated $5 million in both the 2008/2009 and 2009/2010 funding years to support rural primary health care after hours services. This led to contracts between the DHB and the plaintiffs to provide those services. These initially ran from 1 January 2010 to 30 June 2010. In mid 2010 the same plaintiffs entered contracts with SLH to provide access to “first level services” on a 24 hours a day, seven days a week basis for 52 weeks a year. Each of these contracts was known as a “back to back” contract and in effect implemented SLH’s head contract with the DHB. As the terms of these contracts are central to this dispute, I deal with them in detail in the next section of this judgment.

[5] In about September 2010 the DHB and the plaintiffs extended the after hours contract until 30 June 2011. On 1 June 2011, however, the DHB advised the plaintiffs that they would no longer be eligible for the after hours funding. The plaintiffs then collectively indicated that they would be unable to carry out full after hours services. In particular, in a letter dated 21 June 2011 the plaintiffs said:

2. We all agree that after hours services as notified will be withdrawn on 1 July 2011 unless some alternative agreement is reached before this date.

3. We would be happy to meet and discuss the situation and its resolution with you on 28 June 2011 at 7.00 pm at Temuka Family Practice.

4. If no agreement is reached before 1 July 2011 and after hours services are withdrawn on this date, we are prepared to continue discussions for the reinstitution of after hours services with whatever party is prepared to discuss and adequately fund these services.

[6] The DHB responded by offering to defer the review of the rural funding for a period of two months (to 31 August 2011) and agreed to meet on 28 June as requested. By letter of the same date the plaintiffs responded by stating, among other things:

10. We have continued to supply after hours services to our communities despite the relative inadequacy of the funding for some time. We have done this because we have a commitment to our communities and we have at least received a reasonable if somewhat token gesture from Government and the DHB. The service is not sustainable without the funding. It is barely sustainable with it. Now there is to be none. If services are to be sustainable in the future the funding needs to be adequate, guaranteed for the long term and independent of some arbitrary RRS or any scoring too which denies some communities their rurality or difficulties with accessing services. You have chosen not to view us differently in the past when it come to Rural Retention funding in blatant disregard of the Agreement now we chose to be regarded as equals.

11. We will withdraw from the provision of after hours services on 1

July 2011 as intended unless an adequate solution has been reached before then.

[7] The parties then engaged in a dispute resolution process and agreed to refer the issue to the High Court. There is some dispute as between the parties as to who was responsible for initiating this Court action and in any event, in the interim, the defendants decided it was necessary to retain alternative providers to carry out after

hours services. The second defendant covered the cost of these alternative providers by setting off the cost against the capitation payments due under the primary health care contracts it had with the plaintiffs. The plaintiffs say that these deductions are in the order of 6-9% of their revenues.

[8] The plaintiffs are deeply concerned about the cumulative effect of these deductions and the removal of the after-hours rural payment. Their evidence is that the reduced payments are putting their practices in jeopardy.

[9] This is not accepted by the defendants and they have produced evidence from

Murray William Tilyard, who is currently the executive director of SLH:

In summary, the calculations show that the plaintiffs’ cumulative total practice revenue for that ten month period, as estimated by SLH, has reduced by between 1.6% for the third plaintiff, Temuka Healthcare Limited, to 3.2% for the first plaintiff, Dr Scott. As with the effect of deductions on capitation funding revenue, these percentages will increase incrementally over time with each additional month that deductions are made.

[10] In relation to the cessation of rural funding he also says:

The non-eligibility of the second to fourth plaintiffs for rural practice funding is not in dispute. Dr Scott’s non-receipt of rural practice funding is a consequence of her own decision to withdraw from providing after hours care. All plaintiffs have repeatedly declined SCDHB’s offer to reinstate their previous rural practice funding streams until the dispute over interpretation of their obligations under the back-to-back contracts is resolved. In short, I do not believe that the reduction in the plaintiffs’ practice revenue for that reason has relevance to their assertions about the financial effects of the capitation payment deductions.

[11] There is no substantive rebuttal to this evidence.

[12] Frustrated with the refusal of the defendants to reinstate the full payments under the primary healthcare contract, the plaintiffs commenced proceedings. The defendants maintain that they are prepared to return the plaintiffs to the funding levels they were at before the dispute arose pending the resolution of their substantive claim in these proceedings.

The contracts

[13] Given their central importance, it is necessary to describe in some detail the contracts that frame this litigation.

The Primary Health Care Contracts

[14] The primary contract under scrutiny is the “back to back” agreement. As noted, the reference to “back to back” denotes that it gives effect to the head contract between SLH and the DHB. The Head Contract therefore forms a relevant part of the factual matrix, and various provisions of the Head Contract dealing with payment for services and set off are directly incorporated into the back to back contract.

[15] Turning then to the back to back contract, key aspects include a statement of the objective of the contract, namely:

C.2.1 The objective of this Agreement is to enable you, working in a collaborative and equal relationship with us, to implement and deliver the Primary Health Care Strategy, through improving, maintaining and restoring the health of, and reducing inequalities among, your Enrolled Population and other Eligible Persons as appropriate, and in support of He Korowai Oranga – Maori Health Strategy.

[16] H.1.1 records:

H.1.1 Part H of the Provision of Primary Health Care Agreement describes a minimum set of Essential Primary Health Care Services that we expect you to provide to our Enrolled Population to the extent possible within the funding available.

[17] The scope of services to be provided by the plaintiffs is essentially recorded at Part H. The following clauses are particularly relevant:

H.3.1 You will provide access to First Level Services on a 24-hour a day, 7 day a week basis for 52 weeks a year for all Service Users. We acknowledge that there will be occasions and circumstances where we will need to be directly involved in ensuring arrangements are in place to provide 24-hour, 7 day a week coverage. We will work with you and your contractors in those exceptional circumstances. We acknowledge working parties have been established by the Ministry of Health and locally to examine and find solutions to the provision of First Level Services on a 24 hour a day and 7 day a week basis.

When the results of these working parties and any subsequent work becomes available, we undertake to work with you to implement any recommendations that both of us agree to.

H.3.2 First Level Services must be available for 95% of your Enrolled

Population during:

(a) the normal Business Day within 30 minutes travel time; and

(b) after hours within 60 minutes travel time.

H.3.3 Justification must be provided when the requirements of clause H.3.2 cannot be met. The justification should include details of alternative arrangements for providing access to First Level Services as agreed between us both.

...

H.4.1 Both of us agree that, notwithstanding clause C.2 in the Provision of Primary Health Care Agreement, you cannot, on your own, be expected to improve health outcomes or reduce health inequalities for New Zealanders. You will, however, use your best endeavours to provide services to the extent possible within available funding to enable individuals and communities to benefit from services to:

...

H.4.4 Restore their health by providing the following First Level Services: (a) health information to enable and assist people to care for

themselves and take responsibility for their health and their family/whanau’s health;

(b) urgent medical and nursing services, (including stabilisation and resuscitation, assessment and diagnosis, treatment and referral as necessary);

(c) assessing the urgency and severity of presenting problems through history taking, examination and investigation and diagnosing where possible;

(d) recommending and, where appropriate, undertaking treatment options and carrying out/referring for appropriate interventions and procedures, including but not limited to prescribing, minor surgery and other general practice procedures, counselling, psychological interventions, advising, and imparting information;

(e) referral for diagnostic, therapeutic and support services (support services are those services which may be required for individuals to maintain maximum independence, including but not limited to personal care and domestic assistance).

[18] Payment for these services is addressed at Part F of the contract. Funding is based on a capitated formula; that is a formula based on the demographics of the enrolled population, as described in Schedule F1 of the Provision of Primary health care Agreement, which is incorporated into the head contract between SLH and the DHB.

[19] In addition Schedule F5 of the Provision of Primary Health care Agreement concerns the rural primary health care premium. This is not funded under the back to back contracts. It states:

5.1 Reasonable roster funding is a targeted resource applied to rural localities where, for geographical reasons, General Practitioners and nurses providing First Level Services are experiencing onerous on call arrangements.

...

5.4 From July 2004, reasonable roster funding that was previously paid by us to eligible practices/providers, will be paid to you as part of the rural premium...

[20] Section F of the back to back contract contemplates an offset process at clause F.14 That clause states:

F.14 Set-off

Power of set-off

F.14.1 Where you owe us any amount under this Agreement, including:

(a) in the case of overpayment under clause F.11.5(a) of this

Agreement; or

(b) in the case of any debt you owe us under this Agreement,

we will give you notice of our intention to set-off that amount against any amount that we owe to you at any time, to enable you to review and discuss with us our reasons for the intended set-off.

F.14.2 Where we are in dispute in relation to any proposed set-off, the matter will be resolved pursuant to the dispute resolution clause in D.16.

F.14.3 Set-off deemed to be payment

Where we exercise the power to set-off conferred by this clause you will be deemed to have made payment to us to the extent of the set-

off.

[21] Relevant to this proceedings, the agreement provides for a detailed dispute resolution process recorded at cl D.16 and in particular cl D.16.2, D.16.3, D.16.5, D.16.6 and D.16.7 as follows:

D.16.2 The parties agree to use their best efforts to resolve any dispute that arises under this Agreement through good faith negotiations. A party must not commence any arbitration or litigation in relation to this Agreement unless it has first met with the other party to endeavour to resolve the dispute on mutually acceptable terms.

D.16.3 Any dispute arising under this Agreement which cannot be settled by negotiation between the parties must be submitted to mediation before commencing any litigation. Either party may initiate mediation by giving written notice to the other party.

...

D.16.5 If the dispute or difference is not settled by mediation within 30

Business Days of the commencement of that mediation process, unless both parties agree otherwise in writing, the matter will be

referred to arbitration in accordance with the Arbitration Act 1996.

D.16.6 The parties must continue to perform their obligations under the Agreement as far as possible as if no dispute had arisen pending the final settlement of any matter referred to mediation or arbitration.

D.16.7 Nothing in this clause precludes either party from taking immediate steps to seek urgent equitable relief before a New Zealand Court.

[22] Also relevant are cl D.17.2(a), D.17.3 and D.18 dealing with alternatives. They state:

D.17.2 Our Rights to Terminate

...

(a) we have good reason to believe you are unable, or will soon become unable, to carry out any of your material obligations under this Agreement. We must Consult with you to the extent possible within the twenty (20) Business Days’ notice before terminating this Agreement for this reason; or

...

D.17.3 Your Rights to Terminate

You may terminate this Agreement by giving us no less than 40 days notice in writing prior to the commencement of the next funding quarter.

D.18 Our Alternatives to Termination

D.18.1 Instead of terminating this Agreement under clause D.17, we may do any or all of the following:

(a) vary or withdraw from coverage by this Agreement any of the Services where you have not met your obligations; or

(b) cease Payment for any such Services from the date of variation or withdrawal; or

(c) require you to terminate any subcontract you may have with your contractors for the provision of the Services under this Agreement where that Contractor has failed to perform a material obligation in relation to the performance of this Agreement; or

(d) require you to recover any Payments to your contractors that have been made in breach of this Agreement; or

(e) require you to terminate any subcontract you may have with your contractors for the provision of the Services under this Agreement where a Payment has been made to that Contractor in breach of this Agreement.

D.18.2 Withholding Payments

(a) In addition to our rights under clause D.18.1, we may withhold further Payments or portions of Payments due under this Agreement for each of the following defaulting actions that you or your contractor may commit. Where:

(i) you or your contractors, have failed to co-operate with us or our Auditor and/or have not provided us or the SCDHBs Auditor with reasonable assistance in accordance with clause G.1.2, we may withhold Payment up to 10% of any capitated Payment due tas (sic) is reasonable in the circumstances;

...

[23] D19 then specifically incorporates the set off provisions of the Head

Contract. This clause provides:

D.19 Alternative arrangements on failure to deliver Services

D.19.1 Where you fail to deliver any services described in Parts H or J to Service Users under this Agreement, in addition to our rights under clauses D.17 and D.18, we may take whatever action is reasonably necessary to make alternative arrangements for the provision of those healthcare services, at your expense.

D.19.2 We may act under clause D.19.1 without giving you notice where the circumstances reasonably require such action. In any other

circumstance, we will give you seven (7) Business Days notice, in writing, of our intention to carry out your obligations under this Agreement.

D.19.3 When we give you notice requiring you to pay our costs, you must pay or reimburse us for all reasonable costs we incur acting under clause D.19 and which are not covered by the Payments withheld or ceased under clause D.18 up to a maximum of 10% of the Payments withheld or ceased.

D.19.4 Where you fail to pay any such amount required under clause D.19.3, we may set off the amount owing to us in respect of the costs incurred under this clause D.19 against any amount that we owe to you at any time by way of Payment for the Services, in accordance with clause F.13.

Rural contract

[24] Prior to both the primary health care contract between the DHB and SLH, and the back to back contracts, the plaintiffs had entered into a separate “after hours rural contract”. The terms are recorded in letters to the plaintiff. In particular the letters record the DHB’s agreement for the plaintiffs to:

2. You must provide the Services and conduct your practice or business in a prompt, efficient, professional and ethical manner and consistently with:

a. all relevant strategies issued under the New Zealand Public

Health and Disability Act 2000 (the “Act”);

b. our Objectives as set out in Section 22 of the Act, our district strategic plan, annual plan and settlement of intent, and any directions or requirements given to us by the Minister of Health under Section 32 or 33 of the Act; and

c. all relevant Law.

The relevant services are detailed in the service specification attached, namely:

2.2.2 Rural after hours services (rural 24/7) – provision of primary care services 24 hours a day for 7 days a week, including public holidays.

2.2.3 Eligible practices must:

Have a Rural Ranking Scale (RRS) of at least 35 (this is an average RRS across all GPs in each practice)

Provide primary health care services 24/7 either as a solo practice or within a shared roster area, and

Provide face to face consultations as needed for all patients who present within their shared roster area regardless of enrolment status.

[25] Deliverables are specified as 24/7 primary care services. with the following performance indicators:

Primary care services are available 24/7 including face to face consultations as necessary

Practice hours are posted

Information on how to access services is readily available to the public.

Communities are informed of any change in the service. Changes in service are notified to the PHO and SCDHB.

Arguments for plaintiffs

[26] The plaintiffs make the following core propositions in support of the injunction:

(a) The head contract and sub-contracts require the providers to provide

“access” to first level services on a 24/7 basis for all service users.

(b) The after hours Contracts with the DHB impose more specific requirements on the practices to provide services, and included the specific requirement to “provide face to face consultations as needed for all patients who present within their shared roster area regardless

of enrolment status.”[1]

(c) The service levels required by the after hours contracts with the DHB were higher than the “access” required by the back to back contracts with SLH.

(d) Since 16 August 2012 the plaintiffs have provided access to 24/7 first level services by means of provision of an after hours triage service

and, where necessary, referral by that service to Timaru Hospital

Emergency Department.

(e) The essence of the substantive dispute is that the plaintiffs say that the arrangements they have put in place since 16 August 2011 constitute access to first level services on a 24/7 basis as required by cl H.3 of the sub-contract. Conversely the defendants maintain that these arrangements do not constitute “access” to the relevant services.

(f) The parties attended mediation on 2 November 2011 and it was agreed that the dispute would not be referred to arbitration and that the DHB would issue proceedings in the High Court as soon as practicable to resolve the dispute.

(g) Instead of commencing proceedings, the DHB notified SLH they intended to invoice SLH for additional costs incurred by the DHB as a result of the plaintiffs’ withdrawal of after hours services. And since February 2012 the DHB has been invoicing SLH for the money it has paid to Timaru After Hours Services and transport costs, resulting in corresponding deductions from the plaintiffs’ capitation payments.

(f) On an annualised basis the estimated deductions from the plaintiffs’

capitated funding amounts to:

First Plaintiff $33,000

Second Plaintiff $52,000

Third Plaintiff $38,000

Fourth Plaintiff $43,000

(g) The plaintiffs claim that a serious question arises because the deductions from the capitation payments are in breach of the sub- contract, given that the plaintiffs continue to provide the services specified by the sub-contracts.

[27] In terms of the defendants’ contended right of set off, the plaintiffs submit that the right of SLH to make alternative payments at the plaintiffs’ expense only

arises if the plaintiffs fail to deliver any services described under Parts H or J. The plaintiffs maintain that they are still providing “access” as required by cl H.3 and accordingly the defendants’ right to set off under clause D.19 never arises.

[28] More specifically the plaintiffs contend that the current after-hours arrangements constitute “access” and that this contention is strongly arguable, particularly as the wording of cl H.3 is contrasted with the much more precise description of the required service levels in the agreement between the Ministry and the DHB and the DHB’s after hours contracts with the plaintiffs. In oral argument, the plaintiffs further contended that the qualified nature of the services to be provided is specifically provided for within the contract, and in particular at cl H.1.1, the services are to be provided “to the extent possible within the funding available.” The plaintiffs contend, with the removal of the after hours contract funding, the only feasible service to provide is the referral to the triage line provided by the plaintiffs after hours. The plaintiffs further contend that this is comparable to what occurs elsewhere, albeit from 8 pm onwards.

[29] The plaintiffs further emphasise that the entire purpose of the after hours contract was to make substantive provision of services after hours feasible in a rural context. In contrast the Provision of Primary Health Care Agreement refers to “rural premium” services, which are specifically excluded from the ambit of the back to back contract. Furthermore, the distinction made at cl H.3.2 between normal business hours and after hours is important, as it illustrates the type of service that needs to be provided, namely within 30 minutes travel time within normal business hours but after business hours, within 60 minutes travel time. Provided therefore the enrolled residents of Temuka and Geraldine have access to first level services within

60 minutes, the requirements of the contract are satisfied. Clauses H.3.6 and H.4.1 also affirm that the contract has a level of flexibility inbuilt with the expectation that any service provided must be a practical one, and to the extent possible within the funding available.

[30] The plaintiffs then submit that in terms of cl F.14.1 and dispute resolution in terms of cl D.16 the defendants are obliged to perform their obligations pending any final settlement of the dispute.

[31] The plaintiffs’ case is supported by affidavits sworn by principals of the plaintiffs. Primary among those affidavits is the evidence of Bryan Kieron Moore. Two aspects of his evidence are particularly relevant to this application. Firstly, he describes how “access” to first level services is provided both in urban and rural areas. He notes that it is much more difficult and expensive to provide face to face after hours services in those rural areas and that in recognition of this issue, the Government allocated $5 million in funding to support rural health care after hours services. He confirms that the Temuka and Geraldine practices operated a shared after hours roster which the plaintiffs participated in and that this was a common method for delivery of access to first level services after hours. With the cessation of the after hours rural funding contract, he notes that the plaintiffs consider they are providing “access” through the after hours telephone triage service and referral to Timaru Hospital where necessary. He says this is a common arrangement elsewhere around New Zealand.

[32] The second key aspect of Mr Moore’s evidence is that he details the costs of the cessation of after hours rural funding and the capitation payment reductions. He notes that capitation payments account for approximately 47% of the plaintiffs’ total revenue. He says that if the deductions are not altered and normal capitation payments restored whilst the substantive dispute is determined, there is a serious risk that one of the more plaintiffs’ practices could fail before the substantive dispute is determined.

Argument for the First Defendant

[33] Mr Coates made the following core points on behalf of the first defendant:

(a) The loss of rural after hours funding related simply to the change in status of the Temuka and Geraldine practices (except Dr Scott’s) in May 2011;

(b) Before the after hours rural funding, the plaintiffs were working on rosters and providing access on a 24/7 basis, like all other GPs. This would involve the GPs working one week in four after hours before

the rural after hours contract came into place in 2009;

(c) The plaintiffs now close their doors at 5 pm every week day and are now closed over the weekends and the alleged triage service is in fact a line set up by SLH and the DHB;

(d) Clinics at Timaru agreed to assist on a temporary basis but for a fee for services and this cost needs to be passed on to avoid the DHB and SLH having to pay for the same service twice;

(e) The capitation is based on a 24/7 service, applicable to all GPs throughout the country and there would be catastrophic results were that to break down;

(f) Interim offers have been made to the plaintiffs pending resolution of the substantive dispute and this solution remains open;

(g) As to the alleged loss to the plaintiffs, the first defendant refers to the evidence of Professor Tilyard (which is not rebutted), to the effect that there is no substantial impact on the plaintiffs as a consequence of the cessation of the funding;

(h) The back to back contract is a primary health care service, and as cl H.3.2 and H.4.4 suggest, this involves face to face contact and not simply referral to a telephone service;

(i) The rural after hours service was granted on a conditional basis, namely that the relevant provider already assumed a responsibility to provide 24/7 primary care services and to provide face to face treatment;

(j) A careful review of the correspondence between the parties reveals that the first defendant and the second defendant have done all that they can to secure a proper solution, including an offer to reinstate the full rural after hours funding.

[34] Mr Goldsmith supported Mr Coates’ submissions and added the further key contentions:

(a) There is no evidence that the plaintiffs’ businesses are unsustainable

without the full capitated payments;

(b) The workload sought under the back to back contracts is no different to the workload undertaken by the plaintiffs before the after hours rural service;

(c) In terms of first level services, the only contractual distinction is that the services must be provided within 60 minutes after travel time to the effect that at least one of the medical practices must be on call within 60 minutes;

(d) The back to back contracts include after hours service with a payment mechanism based on a capitation yet the plaintiffs are providing no service at all after hours;

(e) The rural after hours funding contract is not part of the proceedings and not relevant to the dispute;

(f) This is simply a case of the plaintiff GPs making a business call not to do after hours work and there has to be a consequence for the plaintiffs making that election;

(g) The construction sought by the plaintiffs is ludicrous; plainly cl H.3.6 envisages the active involvement of practitioners and until 16 August

2011 that is exactly what was provided.

[35] In order to be able to obtain injunctive relief, the plaintiffs must show: (a) That the plaintiffs have a seriously arguable claim;

(b) The balance of convenience lies with the imposition of an injunction.

[36] An element of this case is that the plaintiffs are seeking a mandatory injunction; that is, they require the defendants to actively make payments. The defendants submit that this demands a higher than normal threshold. The plaintiffs however frame this as an orthodox injunction requiring the defendants to stop making deductions. I agree. The contract requires payment of the full capitated sum. The plaintiffs want to return to that position. Further, the defendants’ primary obligation is to make that payment, but they say that they are entitled to set off. To that extent the defendants are taking the step to depart from the status quo and the plaintiffs want to stop that departure.

[37] In any event, in Fidelity Life Assurance Co Ltd v Pilkington[2] the Court of Appeal stated that the orthodox test in Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd[3] is more than adequate to allow all relevant considerations to be taken into account. I proceed on that basis.

A serious issue to be tried?

[38] I do not consider that the plaintiffs have a seriously arguable claim that they are providing after hours “access” to primary health care services. In reality, they are only providing an automated process of referral to a triage service provided by SLH and the DHB. By contrast cl H.3.1 stipulates that the plaintiffs are to provide access to first level services on a 24 hour a day, 7 day a week basis for 52 weeks a year for all service users. Clause H.3.2 provides that first level services must be available for

_{95% of the enrolled population within 30 minutes travel time during normal business}

hours and within 60 minutes travel time after hours. Clause H.3.3 requires justification in the event the requirements of cl H.3.2 cannot be met. Clause H.4.4 then identifies the relevant first level services. These include urgent medical and nursing services (including stabilisation and resuscitation, assessment and diagnosis, treatment and referral as necessary). Clause H.8 also demands certain quality requirements, namely that the plaintiffs will work and use their best endeavours to implement identified quality requirements including quality improvement. Payment for services is then based on a capitated formula with the underlying premise that the practices subject to the agreement will service their enrolled populations. All of this suggests, consistent with commonsense, that the plaintiffs will provide a physical service of some description to the constituent enrolled members 24/7, unless otherwise agreed with SHL.

[39] In summary, an automated service is not, by itself, providing “access” to

primary health care after hours.

[40] The plaintiffs have however highlighted through argument that the back to back contract expressly contemplates that services under the back to back contract are limited to the extent afforded by the available funding. This is expressly contemplated at cl H.1.1. In addition, cl H.2.3, H.3.1, H.3.3, H.3.6 and H.4.1 all contemplate an evolving relationship whereby the provision of services by the plaintiffs will be modified to achieve agreed workable solutions, within available funding.

[41] Accordingly, approaching the contracts through a wider lens, it is seriously arguable that the plaintiffs are required to achieve health outcomes “to the extent possible within the funding available.” With the removal of the after hours contract I accept that an issue arises about the capacity of the plaintiffs to perform the full services contemplated by the back to back agreement. This might be said to be the justification required at cl H.3.3.

[42] There is also a second issue. As I indicated to counsel, I am troubled by the set off employed by the defendants. There was no evidence before me that the quantum of set off was appropriate and proportionate to the loss actually and

reasonably incurred by the defendants. It appears to me that the defendants proceed on an arguably erroneous assumption that they could simply pay an invoiced amount charged by the alternate provider. This might be convenient, but not necessarily reasonable. And there was evidence that the alternate providers were already obliged to provide an after hours service, including to persons not enrolled with them. In addition, the capitated system appears to include a quantum for base set up costs to service an enrolled population. Commonsense dictates that the greatest demand on practices will be within normal working hours and the majority of the resourcing of the practice will be directed to that period of service. A corollary of this is that the reduction in capitated payments on a fee for service basis could have a disproportionate impact on the practice, impinging on the viability of the practice overall. It might therefore be seriously arguable that the purported exercise of the right to set off is not justified as reasonable in the circumstances.

[43] Having said all of that, and with respect to the very careful argument for the plaintiffs by Mr Jones, it cannot be right that the plaintiffs can simply cease after hours services and at the same time expect to receive the full capitated payments. Rather, the contract contemplates a negotiated process, including if necessary dispute resolution.

Balance of convenience

[44] While I have formed the view that the argument based on “access” to services is not seriously arguable, in light of the serious issues just mentioned, it is appropriate to consider whether the balance of convenience justifies the imposition of an injunction as sought by the plaintiffs.

[45] I have formed the view that it does not, for the following reasons:

(a) When this matter first came to a head, and the plaintiffs indicated that they no longer wished to continue with after hours services, the defendants, responsibly in my view, undertook to continue the after hours rural funding under the DHB contract pending the resolution of the plaintiffs’ primary claim. The effect of this was to return the

plaintiffs to a position they would have been in had the DHB not foreshadowed a review of that after hours rural contract funding. On any account therefore, the defendants cannot be said to be in breach of any agreement reached because they in effect offered to do what they had contracted to do.

(b) With the offer of the after hours funding, the plaintiffs cannot be said to be suffering any contractual loss. They were in effect going to be paid in accordance with contracts that they had executed and moreover, it reflects the course of conduct between the plaintiffs and the defendants over the preceding two years.

(c) The result now sought by the plaintiffs, is in effect a new course. The plaintiffs want to enforce only the back to back agreement, and let the after hours rural funding contract fall away. Put bluntly, that has “a cake and eat it” quality that does not readily attract the Court’s discretionary power to injunct.

[46] It also transpires that neither party is in fact bound by the back to back contract as it has already terminated. Clause A.3.1 states:

This agreement comes into effect on May 1 2010 (the Commencement Date) and expires on October 31st 2010 (the Termination Date), unless terminated earlier in accordance with its termination provisions.

[47] The parties have not executed a roll over agreement. While they have asked me to proceed on the basis as if the contract was on foot, I am not prepared to do so. In assessing that balance I must have an eye to the real contractual position rather than a fictitious one. In reality, it is available to either party to terminate the remaining relationship, including on the basis that the funds are no longer sufficient to carry out the specific requirements of the back to back agreement. That is the obvious remedy available to the plaintiffs if they can no longer operate under the terms of the agreement. It was, however, made plain to me that this result is not sought by either party so the proper outcome here is for the parties to reach a sensible commercial solution to the issues that confront them, rather than obtain orders based on an artifice.

Result

[48] Accordingly, for the foregoing reasons, I am not prepared to grant the interim injunction sought. I do not consider that the plaintiffs have a seriously arguable case that they can demand a full capitated payment while at the same time refusing to make or provide any form of after hours services (other than a triage service by telephone). I accept that there may be a seriously arguable case that the use of the set off provisions in this case is inappropriate or disproportionate, there being insufficient evidence that the alternate fee paid is reasonable in the circumstances. I also consider, were the agreement to be operative, it is seriously arguable that the plaintiffs would be entitled to reduce their services, if there are demonstrably insufficient funds to carry out those services. But any interim remedy is properly a matter for negotiation in terms of the mechanisms provided for by the agreement.

[49] Finally, I record that I have taken into account the defendants’ offer to return to the full capitated amounts together with the funding under the rural contract will remain open.

Costs

[50] Given that the parties agreed that litigation was an agreed course, I am not minded to grant costs. With that in mind the parties nevertheless have leave to seek costs if agreement cannot be reached.

Solicitors:

Lane Neave, Christchurch, for First Plaintiff ([e-mail]) Claro Law, Wellington, for First Defendant ([e-mail])

Goldsmith Law, Dunedin, for Second Defendant ([e-mail]) ([e-mail])

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[1] Refer clause 2.2.3.

[2] _{Fidelity Life Assurance Company Limited v Pilkington [2010] NZCA 424.}

[3] Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.