Bristol-Myers Squibb Australia Pty Ltd v Minister for Health and Family Services

[1997] FCA 907

FEDERAL COURT OF AUSTRALIA

ADMINISTRATIVE LAW - Commonwealth scheme designed to encourage Australian manufacture and export of pharmaceutical products - system of approval of proposals based on published “guidelines” - ultimate decision that of Ministers after recommendation from non-statutory Pharmaceutical Benefits Pricing Authority (“PBPA”) - reference in guidelines to “eligibility” - representations to pharmaceutical manufacturer that no time constraint for lodgment of its proposal that each proposal treated on its own merits rather than “first come first served”, and that no funding problems anticipated - applicants’ case that it did not hasten to lodge its submission with PBPA - by time of lodgment, so many applications received that funds available insufficient to satisfy all “eligible” applicants - change from “individual merits” to “comparative merits” basis of assessment -  application to review Ministers’ decision not to approve applicant’s submission - issues of failure to accord natural justice, failure to take into account relevant considerations, improper exercise of power, estoppel - findings of fact of trial Judge - role of appellate court.

Federal Court of Australia Act 1976 (Cth) s 24

Annand & Thompson Pty Ltd v Trade Practices Commission (1979) 25 ALR 91 (FCA/FC)
Warren v Coombes (1979) 142 CLR 531
Dawson v Westpac Banking Corporation (1991) 104 ALR 295 (HCA/FC)
Brunskill v Sovereign Marine & General Insurance Co Ltd (1985) 62 ALR 53 (HCA/FC)
Devries v Australian National Railways Commission (1993) 177 CLR 472 at 478-479
SS Hontestroom v SS Sagaporack [1927] AC 37
Carter v Geoff Layton & Co Pty Ltd (FCA/FC, 21 June 1993, unreported)

BRISTOL-MYERS SQUIBB AUSTRALIA PTY LIMITED & ANOR v MINISTER FOR HEALTH AND FAMILY SERVICES & ORS

NG 816 of 1996

WILCOX, O’LOUGHLIN, LINDGREN JJ
SYDNEY
8 SEPTEMBER 1997

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 816 of 1996

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	BRISTOL-MYERS SQUIBB AUSTRALIA PTY LIMITED (formerly known as BRISTOL-MYERS SQUIBB PHARMACEUTICALS PTY LTD) (ACN 004 333 322) and BRISTOL-MYERS SQUIBB COMPANY APPLICANTS
AND:	MINISTER FOR HEALTH AND FAMILY SERVICES, MINISTER FOR INDUSTRY, SCIENCE AND TOURISM and COMMONWEALTH OF AUSTRALIA RESPONDENTS
JUDGES:		WILCOX, O'LOUGHLIN, LINDGREN JJ
DATE OF ORDER:		8 SEPTEMBER 1997
WHERE MADE:		SYDNEY

MINUTES OF ORDER

THE COURT ORDERS THAT:

1.        The appeal be dismissed.

2.        The appellants pay the respondents’ costs.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 816 of 1996

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	BRISTOL-MYERS SQUIBB AUSTRALIA PTY LIMITED (formerly known as BRISTOL-MYERS SQUIBB PHARMACEUTICALS PTY LTD) (ACN 004 333 322) and BRISTOL-MYERS SQUIBB COMPANY APPLICANTS
AND:	MINISTER FOR HEALTH AND FAMILY SERVICES, MINISTER FOR INDUSTRY, SCIENCE AND TOURISM and COMMONWEALTH OF AUSTRALIA RESPONDENTS

JUDGES:	WILCOX, O'LOUGHLIN, LINDGREN JJ
DATE:	8 SEPTEMBER 1997
PLACE:	SYDNEY

REASONS FOR JUDGMENT

THE COURT:

INTRODUCTION

The appellants Bristol-Myers Squibb Australia Pty Limited (formerly Bristol-Myers Squibb Pharmaceuticals Pty Ltd, “BMSP”) and its American parent, Bristol-Myers Squibb Company (“BMSC”), appeal from a judgment of a Judge of the Court given on 18 September 1996, dismissing their application for an order of review under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (“the ADJR Act”) and for relief under s 39B of the Judiciary Act 1903 (Cth). The application arose out of a decision of two Commonwealth Ministers on or about 9 December 1993, refusing an application of the firstnamed appellant for funding under a government scheme established to encourage the manufacture and export of pharmaceutical products in and from Australia. BMSP is an Australian pharmaceutical manufacturer. The successors of the two Ministers, the Minister for Health and Family Services and the Minister for Industry, Science and Tourism are the first and second respondents to the proceeding. The third respondent is the Commonwealth of Australia.

The appellants’ complaint is that they were led to believe that any application which might be made by BMSP under the scheme would be dealt with on an individual merits basis, and acted accordingly; but, without advance notice to them, as a result of a reduction in funding, applications were determined on a competitive or “comparative merits” basis.

FACTS

The following account of the facts is based on the account given by the trial Judge and uncontroversial evidence that was before his Honour.

Introduction of “the Factor (f) Scheme”

On 13 September 1987 the Minister for Industry, Technology and Commerce (“the Minister for Industry”) and the Minister for Community Services and Health (“the Minister for Health”) (together, “the Ministers”) announced “policies to encourage the growth of the pharmaceutical products industry in Australia” and that, in association with those new policies, the Pharmaceutical Benefits Pricing Bureau (“the Bureau”) within the Department of Community Services and Health, would be replaced with a non-statutory body, the Pharmaceutical Benefits Pricing Authority (“the PBPA”). (The titles of the Ministers responsible for the “Industry” and “Health” portfolios and of their respective Departments changed several times during the course of events described below, but we shall, for convenience, use the abbreviations “Industry” and “Health” throughout.)

The Bureau used to set prices for products listed under the Pharmaceutical Benefits Scheme (“PBS”). It was not required, when doing so, to take local pharmaceutical manufacturing activity into account. This policy changed in September 1987. When announcing the establishment of the PBPA, the Ministers listed the factors the PBPA would take into account when determining or making recommendations on prices, and these included:

“(f)the level of activity being undertaken by the company in Australia including new investment, production and research and development”

This consideration became known as “Factor (f)”. It came to take on a life of its own, grants in the form of price increases being made by the Commonwealth to some manufacturers, according to how well they performed by reference to Factor (f).

The PBPA was established on 1 January 1988. It comprised an independent chairman, an industry nominee, a consumer nominee, a representative of the Department of Health and a representative of the Department of Industry.

On 25 May 1988 the Ministers published “Guidelines on Pharmaceutical Pricing Arrangements”. In order to qualify for higher prices under the Arrangements, a manufacturer would be required to satisfy all of certain specified performance requirements. One of these was that it was necessary for the manufacturer “to have a minimum export/import ratio of 0.5 in relation to the output of pharmaceuticals, or demonstrate that it intends achieving this within three years”. On 19 November 1990, the Ministers released revised guidelines, described as the “Factor f (Australian activity) guidelines”. The guidelines in relation to “PRICING ARRANGEMENTS” were as follows:

“The maximum price payable for a PBS drug will be the world average price, and prices can range up to this level. 

Actual price levels will be determined by the Authority [the PBPA] having regard to the ex-manufacturer prices in other countries and the likely net benefits to the Australian economy of the increased activity.  The dollar value of the higher prices paid to a company under the activity guideline will generally not exceed 25 per cent of the dollar value associated with the increased Australian activity

·for this purpose, increased Australian activity will be:

a)the increase in value added for domestic sales of pharmaceuticals (excluding the impact of changes in volume or price);

b)the increase in value added and/or volume for export sales of pharmaceuticals; and

c)the increase in expenditure on pharmaceutical research and development

·the Authority has the discretion to vary the 25 per cent ratio if a company is able to demonstrate that a particular project involves larger net benefits that [sic - than] implied by this figure

·in those cases where a company’s research and development expenditure is attracting R&D tax concessions, the cost of price increases granted under the Australian activity guideline will not exceed 50 per cent of the increase in post-tax expenditure on research and development (ie after allowing for the taxation deduction)

·the Authority may recommend higher prices on the basis of either current or planned increases in value added, but any future increases will be discounted to present value using the long term bond rate

·the base year over which increases in Australian activity will be eligible will be 1987.

·price increases will be for three years following approval of the proposal by the Government.

·price increase payments are made quarterly in arrears direct to the manufacturer

·price increases granted will not increase a company’s average PBS price by more  than 10 per cent from one year to the next.

The above provisions will apply to both new and existing drugs.

While firms will have considerable discretion as to the products which attract higher prices, the Authority will normally expect Factor f related price increases to apply to products with a substantial local value added.”

Under the heading “PERFORMANCE MONITORING AND PRICE REVIEW” the Revised Guidelines stated:

“Where a company has benefited from local activity related price increases, its performance, in respect of value added, exports and research and development will be monitored annually to ensure that the relationship between the price increases and the likely benefits is being maintained.”

In October 1990, BMSP lodged with the PBPA a Factor (f) proposal which it amended on 13 November 1990. It was a lengthy document. It asserted that if the proposal were approved, BMSP would continue to manufacture in Australia all products which it already produced in Australia, and would cease importing certain other products which it would commence to manufacture in Australia. As well, it foreshadowed expansion and upgrading of its Australian plant (which was at Noble Park in Melbourne). The proposal contained the following passage under the heading “PERFORMANCE COMMITMENTS” and the subheading “Export/Import Ratio”:

“If this proposal is implemented, exports will increase sharply from 1991 with the export/import ratio improving from 0.08 in 1987 and 0.04 in 1990, to 0.51 in 1993.  The 1991 ratio will improve to 0.33 with the Factor ‘F’ target ratio being reached in 1992.” (emphasis supplied)

The “Factor ‘F’ target ratio” was, as noted earlier, 0.50.

A table annexed confirmed that for 1991 the export/import ratio would be 0.33, for 1992 it would be 0.50, and for 1993 it would be 0.51. BMSP’s financial year ended on 31 December, and the Factor (f) Scheme was planned for a period ending on 31 December 1993. BMSP’s proposal sought a total of $19,399,000 in Factor (f) payments for the period ending 31 December 1993, and it requested payments of 50 per cent, rather than the “standard” 25 per cent, of the dollar value of the increase in post-tax expenditure on pharmaceutical research and development.

The PBPA recommended approval but on the basis that payment be calculated at the standard rate of 25 per cent, and that the approval be subject to BMSP’s meeting the export/import ratio target of 0.5.  The Ministers adopted the recommendation on 11 January 1991. (Primary responsibility for administration of the Factor (f) Scheme had been transferred from the Department of Health to the Department of Industry on 1 January 1991, but recommendations of the PBPA had to be approved by both Ministers.)

The Chairman of the PBPA informed BMSP by letter dated 17 January 1991 of the Ministers’ approval. The letter included the following:

“[BMSP] will be eligible to receive up to $16,213,761.00 in price increases. These will be paid for activity undertaken during the period 1 January 1990 to 31 December 1993 and are subject to the company achieving the forecasts outlined in your proposal.

Details of the price increase calculation and a proposed schedule of payments are attached to this letter.  The major difference between the amount approved and the amount requested in your proposal is a reduction in the payment rate for research and development activity.
........ ........ ........ ........ ........ ........ .....
I look forward to receiving your response to this offer.

The Authority was concerned that your company will only just meet the export/import ratio of 0.5.  To satisfy the Authority that it will be met, the Authority requests some monitoring information on a quarterly basis.  The Factor f Secretariat to the Authority (which is now located in the Department of Industry, Technology and Commerce) will discuss with you the information that will be required.” (emphasis supplied)

It will be recalled that one of the forecasts outlined in BMSP’s proposal was that it would achieve an export/import ratio of 0.5 in 1992. The first paragraph set out above had the effect that notwithstanding the progressive and periodic nature of the payments to be made, BMSP’s entitlement to be paid and to retain any part of the sum of $16,213,761 was conditional upon its attaining each of the forecast ratios, that is to say, 0.33 in 1991, 0.50 in 1992 and 0.51 in 1993. In fact, as will be seen, BMSP did not achieve the ratio of 0.50 in 1992, although it did so by the end of 1993.

On 25 January 1991, Mr Malcolm Eppingstall, the managing director of BMSP, replied to the PBPA that he was “most disappointed” but that he had requested authority from BMSC’s head office in Princeton, New Jersey “to proceed with our proposal based on the lower price grant.”

On 20 March 1991, after obtaining authority from Princeton, Mr Eppingstall wrote accepting the Factor (f) grant as outlined in the PBPA’s letter dated 17 January.

Under the Factor (f) Scheme, BMSP was required to provide quarterly activity reports, upon which payments were calculated and made quarterly in arrears. Payment for the each year’s last quarter was not made until an annual monitoring report was reviewed. Unlike the quarterly information, the information which supported the annual report was required to be audited. BMSP was required to nominate the products on which it wished to take the “price increases”, and provide, in respect of those products, past and predicted sales volumes and information on their world average price.

Extension of the Factor (f) Scheme - the 1992 guidelines for Phase II

On 16 December 1991, Cabinet decided to extend the Factor (f) Scheme from 1 July 1993 to 30 June 1999. On 31 March 1992, the Minister for Industry announced this extension. It became known as “Phase II”. The original phase became called “Phase I”.  Revised guidelines drafted by the PBPA for Phase II were approved by the Ministers on 10 June 1992 and were apparently released in July 1992 (“the 1992 guidelines for Phase II”). The 1992 guidelines for Phase II contained the following:

“TIMEFRAME
Activity undertaken in the period from 1 July 1992 to 30 June 1999 will be eligible for price increases. Companies may be eligible for price increases from and including the company financial year in which their proposal is lodged with the Authority.”

The guidelines for Phase II distinguished between “new entrants” in the Scheme, that is, companies which first participated after 1 July 1992, and “continuing participants”, that is, companies, such as BMSP, which had participated (in Phase 1) prior to that date. Under the heading, “PARTICIPATION IN THE SCHEME”, the 1992 guidelines for Phase II said this:

“To receive price increases under Factor (f), companies must lodge proposals with the Pharmaceutical Benefits Pricing Authority detailing the activity they propose to undertake under the scheme.

...

Once the authority has reviewed a proposal it will make a recommendation on approval to the Minister for Industry, Technology and Commerce and Minister for Aged, Family and Health Services.  If the Government agrees with the Authority’s assessment that a company has demonstrated it can meet the requirements for entry into the scheme, the company will be eligible for price increases under Factor (f).

...

Continuing participants in the scheme will be eligible for additional price increases where they can demonstrate their proposed new activity is internationally competitive and will provide significant net benefits to Australia.  The Authority will discuss appropriate performance targets and price increases with these companies and will make a recommendation to the Minister for Industry, Technology and Commerce and Minister for Aged, Family and Health Services.  Details are provided on page 10 of these guidelines.”

Pages 10 and 11 were as follows:

“New proposals from Participants in Factor (f)
Prior to 1 July 1992

New or revised proposals for price increases under the Factor (f) scheme from companies participating in the scheme prior to 1 July 1992 must include a detailed outline of internationally competitive activity the company proposes to undertake under the extended scheme.  Continuing participants will not be required to meet the entry requirements for new entrants if they have met all their performance requirements under the 1988 guidelines and the 1990 revised guidelines.  However, to continue to receive Factor (f) price increases these companies will be required to demonstrate their continuing commitment to expanding internationally competitive activity by meeting negotiated performance targets or milestones. Continuing participants in the scheme will maintain their existing base year.

Where a company participated in Factor (f) prior to 1 July 1992 and did not meet its performance requirements under the scheme, its eligibility criteria and base year for the extended Factor (f) scheme will be negotiated with the Authority, subject to approval by Ministers, based on the company’s proposed activity for the extended scheme and its actual performance under past guidelines.

The Authority will evaluate the proposals of all continuing participants to determine whether the:

·company is substantially increasing its level of production and research and development activity in Australia;

·company’s proposed performance targets reflect the increased activity proposed by the company;

·proposed activity is internationally competitive; and

·proposed activity will produce significant net benefits for Australia.

If the Authority considers a proposal is insufficient when measured against these criteria, it will discuss additional activity or higher performance targets with the company.

If the Authority determines the proposal is acceptable, it will discuss with the company the payment rate it will recommend to Ministers for approval of the proposal.” (emphasis supplied)

From the time of, or soon after, the announcement of Phase II in July 1992, BMSP understood that the funding allocated for that Phase was of the order of $840,000,000. In fact, the Government approved funding up to $820,000,000 for Phase II, to be spent during the period from 1 July 1992 to 30 June 1999.

The material in the 1992 guidelines for Phase II that we have emphasised above threatened to present difficulty for BMSP, since it was clear by mid 1992 that BMSP would not meet its forecast performance requirement of an export/import ratio of 0.50 by the end of that year.

Discussions concerning BMSP’s participation in Phase II of the Factor (f) Scheme

Ms Helen Cox was the officer of the Department of Industry responsible for the promotion and administration of the Factor (f) Scheme. She was the manager of the Pharmaceuticals Section of the Department. During 1992, she was also proxy for the Department of Industry’s representative on the PBPA, and on 28 January 1993 she was appointed as a member of the PBPA.

On 3 April 1992, some three months before the 1992 guidelines for Phase II were published, Ms Cox wrote to Mr Eppingstall about Phase II. She enclosed a copy of a lengthy “Statement on the Pharmaceutical Industry” of the Minister for Industry dated 31 March 1992. The appellants rely on the terms of Ms Cox’s letter. Omitting formal parts, the letter was as follows:

“You may be aware that the Minister for Industry, Technology and Commerce, Senator John Button made a statement on Tuesday 31 March outlining the steps the Government was undertaking to encourage the future development of the pharmaceutical industry.

In September 1987, the Pharmaceutical Industry Development Program (Factor f) was introduced by the Government to take account of a company’s level of activity in Australia when considering price increases for the company’s products listed on the Pharmaceutical Benefits Scheme (PBS).

Factor f allows for higher prices to be paid in return for increased activity in areas including value added on production and expenditure on R&D. The aim of the scheme is to restore activity constrained by relatively low PBS prices in comparison to other markets.

The Minister announced the extension of the Factor f scheme, with additional funding from 1 July 1992 until June 1999, with some minor modifications.

The Pharmaceutical Benefits Pricing Authority (PBPA) will continue to administer the scheme and recommendations on Factor f price increases will be considered by the Minister for Industry, Technology and Commerce and the Minister for Aged, Family and Health Services.

The membership of the PBPA remains unchanged, consisting of an independent Chairman and representatives of the industry association, consumer interests, the Department of Health, Housing and Community Services and the Department of Industry, Technology and Commerce. Secretariat support for the Factor f scheme will continue to be provided by this Department.

A copy of the new guidelines will be forwarded to you in the near future. In summary, the principles of the extended scheme are that:

.companies must be able to demonstrate significant net benefits to Australia to be eligible to receive Factor f price increases;

.the scheme be directed to internationally competitive activity in the areas of research and development and increased production;

.more sympathetic consideration be given to eligibility of proposals on the basis of qualitative factors; and

.the maximum price a company can receive on a product will generally be the EC (European Community) average however, the PBPA will be able to recommend a price ceiling where a meaningful EC average price increase does not exist.”

The relevant terms of the 1992 guidelines for Phase II were noted earlier.

In October and November 1992 Ms Cox visited the corporate headquarters of current and prospective participants in the Factor (f) Scheme in the United States.  By arrangement, she met with Mr Eppingstall of BMSP and senior representatives of BMSC, at BMSC’s headquarters in Princeton, New Jersey, on 29 October (“the Princeton Meeting”).  Prior to the Princeton Meeting, Mr Eppingstall and officers of BMSC had prepared, and sent to Ms Cox, three questions in writing. The effect of her answers which she gave at the meeting was, first, that there was “no particular time frame” within which BMSP was required to lodge a proposal under Phase II, and that it should not “rush” but should “get it right”; secondly, that each proposal would be treated on its own merits, and that the situation was not one of “first come first served”; and, thirdly, that no funding problems were anticipated. Mr Eppingstall conceded in cross examination that he knew at the time of the meeting that Ms Cox could not speak on behalf of the PBPA, and that he continued to have that belief until the end of 1993.

Although there was no dispute about the content of what Ms Cox said, there has been dispute as to its significance. The appellants contend that it amounted to an assurance, on which they were entitled to rely and did rely, that any Factor (f) application by BMSP under Phase II would, whenever it was lodged, be dealt with on an “individual merits” basis rather than, as ultimately occurred, on a “comparative merits” basis in competition with other applicants. This was a matter that soon became important. By the end of 1992, the Phase II proposals already recommended by the PBPA for approval by the Ministers would, if all were approved, have exhausted the funds allocated for that Phase (proposals recommended would involve payments of approximately $819,000,000 and the funding approved was only $820,000,000), while a number of continuing participants, including BMSP, had not yet even lodged their submissions.

On 24 December 1992, the Department of Industry advised its Minister that exhaustion of funding at such an early stage was a cause for concern, and that “a number of existing participants in the scheme” (including BMSP) were expected to lodge proposals early in 1993 seeking further payments totalling around $185,000,000.

On 19 January 1993, Ms Cox had a telephone conversation with Mr Eppingstall. Mr Eppingstall claimed in evidence that Ms Cox said that the published funding for Phase II was being eroded, that the Department of Industry needed an estimate of BMSP’s “entitlement” under Phase II in respect of the period from 1 January 1994 to 30 June 1999 and that the Department wished to “reserve money” for BMSP for Phase II. Ms Cox denied saying these things.  The trial Judge found that Mr Eppingstall must have been mistaken in his recollection. His Honour noted in support of this conclusion that the Department had not been authorised to “reserve money”.

On the following day, 20 January, Mr Eppingstall wrote an internal memo to Mr S A Hamad, who was President, Intercontinental, of BMSC, and was located in Princeton, New Jersey. The memo referred to the telephone conversation of the previous day and said:

“We will need to accelerate our planning for a Phase II application to the Government for the following reasons.

1.DITAC [Department of Industry, Trade and Commerce] has been flooded with submissions and the budget funds are disappearing - Glaxo, Merck, Astra, Fauldings, CSL and Upjohn have all presented.

2.A federal election is looming as early as late March and if a new Government is elected, or even if labour [sic] is re-elected, new Cabinet Ministers will be involved, possibly influencing the outcome.  For example Senator Button is retiring.

You may recall, Helen Cox said ‘Don’t rush - get it right the first time’. However, yesterday I called DITAC and was told they have been expecting our submission because some of the competitive submissions involve potentially large grants, and they would like a feel for BMS plans so they can see how their A$840 million is holding up.

DITAC would like a rough cut of our expected Factor F Phase II grant before their next meeting on February 14.  A commitment is not necessary - just a best estimate.” (emphasis supplied)

The first numbered paragraph shows that by 19 January Mr Eppingstall, and by the date of the memo, 20 January 1993, Mr Hamad, well understood that funds were limited and that delay by BMSP could result in its missing out on Phase II.

Apparently on 12 or 13 February, Mr Eppingstall telephoned Ms Cox and gave her BMSP’s estimate as being $60,000,000. On 16 February, he wrote to her, confirming the estimate in the following terms:

“Although Bristol-Myers Squibb is not yet in a position to make a firm commitment on continued involvement in the Factor F programme, negotiations are well advanced and should be completed shortly.  It is my understanding that for planning purposes the Pricing Authority would appreciate an order of magnitude estimate of Bristol-Myers Squibb Factor F income for Phase II.

In summary our expectations are as follows:

1.Exports and R&D targets for 1993 are expected to be achieved.

2.The current export programme both in terms of products and countries will be retained in Phase II.

3.Several products not previously manufactured in Australia will be exported in Phase II - this will include products currently in the Bristol-Myers Squibb range and new products not yet launched.

4.Canada, Germany and some Middle East markets will be supplied in Phase II.  These markets have not received Australian manufactured products to date.

5.Funding of the LIPID Study will continue through 1996 and a new R&D programme is likely to commence in 1995.

6.All domestic value added activities will continue.

BMS estimates the above programmes will generate Factor F income of $60 million to mid 1999.”

On 5 March, Mr Eppingstall again wrote to Mr Hamad. The memo included the following:

“A detailed outline on the status follows, but in a nutshell:

*Government funds for Phase II are almost exhausted.

*DITAC is ‘holding’ funds for BMS for Phase II but a formal submission is now urgent. Funds requested to be held - A$60-US$42mill.

*Eligibility for Phase II depends on BMS performance in Phase I.

*BMS performance in Phase I is now heavily dependent on an urgent and favourable decision on the transfer of Kenalog in Orabase for Japan from the UK to Australia. This decision is critical for reasons outlined below.

STATUS OF BMS PERFORMANCE IN PHASE I

There are essentially four target elements of Phase I which should be met if BMS is to automatically qualify for Phase II.

Target  Likely BMS Performance
  by year end 93

1. Total R&D spend.  Will meet target.

2. Total (cumulative)   Will not meet target.
           91-93 exports by A$ value

3. Total 1993 exports by   Will not meet target.
           A$ value.

4. Import/export ratio.            Will not meet target.

In summary we will fail to meet target on three of the four criteria.  In this event we could still qualify for Phase II but not as a continuing Phase I participant, but as a new participant.  This would result in 1993 becoming the base year and would result in a loss of 50-75% of the potential grant in Phase II.  i.e. a potential loss of US$21-$32 mill.

A favourable decision on Kenalog in Orabase for Japan could solve this problem in one hit because -

(i)Along with the new German exports we will go close to achieving total 1993 target exports, BUT ONLY IF WE DECIDE QUICKLY AND MAXIMISE THE 1993 EXPORT VALUE.

(ii)Kenalog in Orabase is a low import content/high value added product, which will take us close to the import/export ratio for the year of 1993.  This is all we need.

(iii)If we achieve the above two targets, the only shortfall will be on total exports for 91-93 which is explainable and which I believe the Pricing Authority would accept.  But they will NOT accept fall short on three of the four criteria.

The other advantages of Kenalog in Orabase as a product are -

*         We make it now.

*         Registration is not a problem.

*         Exports could start quickly.

All we need is a favourable decision.

STATUS OF PHASE II

Submissions from companies for Phase II have taken DITAC by surprise - Helen Cox had no idea of the size and speed of applications when she was at Lawrenceville in October last.  In summary the situation is: [there followed an account of the  numbers of submissions made and approved in Phases I and II.] 

Most of the A$840 mill (US$588 mill) has been allocated but DITAC have requested that A$60 will be ‘held’ pending the BMS submission. 

BMS PHASE II SUBMISSION

In summary -

(i)BMS must do better in Phase I because so many companies wish to be in Phase II - we cannot expect favours. 

(ii)Kenalog in Orabase for Japan is the key to Phase I. 

(iii)BMS/Australia’s R&D proposal which is with Les Soyka must be decided soon or replaced with something of equivalent dollar value.

GENERAL COMMENTS

I realise the problems associated with the transfer of manufacture from one site to another but I’m sure this problem can be solved.  We feel Kenalog in Orabase is the critical decision because, this one is ready to go and the long lead times associated with transfers can be avoided.  More delays will almost certainly eliminate our last chance to meet Phase I targets.” (underlining in original)

The asterisked statements expose an intractable problem which BMSP had, even on the basis of Mr Eppingstall’s apparent understanding of the position. Even if $60,000,000 were to be held for BMSP in respect of Phase II, it was necessary, in order to take advantage of this, that BMSP lodge urgently (measured as at 5 March) a submission for Phase II showing attainment of its forecasts for Phase I. But it was simply not in a position to do this. The export/import ratio of 0.50 had not been achieved. In fact, BMSP did not lodge its Phase II submission until 9 June.

On 11 March 1993, BMSP reported to the PBPA on the year ended 31 December 1992, as required under the annual monitoring requirements of the Factor (f) Scheme. It was a disappointing report. It showed that BMSP’s export/import ratio for 1992 had been only 0.39. The report concluded by stating that BMSP expected to “meet the ratio of export sales to imported content for 1993”.

The PBPA considered the report at its meeting on 22 April. It decided to monitor BMSP’s export/import ratio on a quarterly basis. It wrote to BMSP on 29 April, expressing its concern over the company’s failure to reach the export/import ratio of 0.5 during 1992 as “forecast” in its proposal, and advising that, because of this, it had decided to monitor BMSP’s “progress towards this quantitative requirement during 1993.” The letter also advised BMSP that its cheque for the last quarter of its 1992 year would be forwarded to it within the next few days.

There was a substantial body of evidence showing that during 1993, the appellants spent money, made investments, and relocated the manufacture of certain products from overseas to Noble Park, Melbourne, in order to attain the 0.5 ratio by the end of the year, and thereby meet the target which BMSP had set for itself for 1992 and position itself to apply to participate in Phase II of the Factor (f) Scheme with a base year of 1987. Mr Eppingstall was concerned that BMSP’s Phase II proposal would not be looked on favourably if it did not meet the Phase I target of 0.5 in 1993. In particular, he was concerned that if it did not do so, the PBPA might change the “base year” of any Phase II program to be approved for BMSP from 1987 to 1993, thereby reducing by about US$25,000,000 the amount potentially payable to BMSP.

On 11 May, Ms Cox telephoned Mr Eppingstall and advised him that BMSP should lodge its Phase II proposal as soon as possible if it wished to have the proposal considered at the next meeting of the PBPA, which was scheduled for 21 June. A meeting with Ms Cox at BMSP’s offices in Melbourne was arranged for 21 May. Ms Cox attended, accompanied by Mr Alan Brindell, the executive officer of the Department of Industry’s Factor (f) Secretariat (“the Secretariat”). Accompanying Mr Eppingstall were a consultant and several BMSP staff, including Mr Damian O’Reilly, BMSP’s director of finance. The four named individuals gave evidence of the discussion which took place. On the matter of the availability of funding for Phase II, the trial Judge said this:

“Mr Eppingstall accepts that Mr Brindell told him payments sought by companies under the extended scheme were likely to exceed current funding and that DITARD was preparing a proposal for additional funding in the upcoming August Budget. (Mr Eppingstall already knew that funds for Phase II were ‘almost exhausted’.  He had faxed BMS [BMSC] much earlier, on 5 March 1993, a well-informed status report on this topic, although he seems to have been under the misapprehension that funds were being ‘held’ for BMSP.)  Mr Brindell says that he also told Mr Eppingstall that the consequence was that BMSP might receive approval for a ‘significantly lower level of payments’ than requested or, indeed, that it might not get any money at all. Mr Eppingstall denies this alleged part of their conversation.  I am satisfied that Mr Brindell's recollection is to be preferred. In his evidence he explains convincingly how he recalls the conversation. He was concerned about the propriety of telling BMSP about DITARD's seeking extra funding in the Budget process. It would only make sense to raise that subject at all in order to mention its impact on a proposal from BMSP.”

BMSP’s application to participate in Phase II of the Factor (f) Scheme

On 9 June 1993, BMSP lodged its Phase II submission with the PBPA.  It requested Factor (f) payments totalling $80,220,000 for the period from 1 January 1994 to 30 June 1999. At a meeting of the PBPA on 21 June, Mr Brindell informed those present that BMSP was “aware of the current Factor (f) funding situation”. Ms Cox noted that the PBPA could not make a decision on the submission until “the funding situation” was “resolved”.  On 22 June, Mr Eppingstall wrote to the Hon Michael Duffy, MP, expressing concern

“that funding for new Factor (f) projects is in doubt including for companies like BMSP who [had] submissions lodged and in the pipeline”.

(It will be observed that BMSP had in fact lodged its application only 13 days earlier.) Mr Eppingstall outlined to Mr Duffy what Mr Eppingstall suggested to be the ramifications of the uncertainty for the pharmaceutical industry and for BMSP’s operations in Australia. On 25 June, Mr Duffy forwarded a copy of the letter to the Minister for Industry.

On 6 July, Mr Eppingstall wrote to the Chairman of the PBPA, Mr Graham Glenn, outlining the difficulties resulting from the “delay” in the making of a decision on BMSP’s proposal.  The letter included the following paragraphs:

“Since October of 1992 and following Helen Cox’s visit to Princeton,[BMSP] has proceeded to negotiate with US headquarters, new proposals under Phase II.  We have proceeded in good faith and with an understanding that all applications would be reviewed and decisions reached on the same basis.  Rumours are now circulating (and I must stress they are rumours) that funds are limited and that as a consequence proposals not yet approved or reviewed may be effected. 

BMS planning is at a particularly critical stage, with some elements of Phase II on hold until the funding issue is clarified.  As a consequence we run the risk of losing some exports to other BMS supplying locations.  In addition the BMS budget process for Australia must be completed by July 27.  The uncertainty is creating major problems for us and although I realise PBPA could not provide definitive comment until Ministerial approvals are received, some indication from PBPA of the merit of our submission would enable [BMSP] to proceed with Phase II plans.”

The Secretariat recommended payments to BMSP for Phase II of up to a maximum of $72,397,615.

On 19 July, Mr Eppingstall wrote to the PBPA enclosing BMSP’s quarterly report for the period 1 April to 30 June 1993. He stated that for the first six months of 1993 the export/import ratio achieved was 44.2%, that this was in line with BMSP’s expectations, and that it should enable BMSP to achieve its latest forecast of at least 53.6% in the second six months of 1993. The letter concluded,

“This significant improvement in the second half is due to the start up of exports to Germany and will enable us to meet the 50% hurdle for this year.”

(It will be noted that when BMSP had lodged its Phase II application on 9 June and had pressed for an early decision on it on 6 July, the 0.50 export/import ratio had not been attained but remained a matter of prediction.)

Mr Glenn replied to Mr Eppingstall’s earlier letter to him dated 6 July by a letter dated 20 July (received by BMSP on 23 July) to the effect that the PBPA had to await the Government’s funding decision before dealing with outstanding applications. The letter said:

“The Authority appreciates the problems that the current uncertainty is causing you and others, but at this stage we are not in a position to give definitive responses to companies with Factor (f) applications before us.  The reason for this is that the Government is considering the funding arrangements for the Scheme in the context of the August Federal Budget, at which time we expect a decision will be announced.  The Authority is of the view that it must have that decision before it can properly deal with the outstanding applications.

In these circumstances the Authority concluded that it could not really advance your company’s application in the way you would like, and expressed a clear preference not to comment at all on the merits of it at this stage  I can say, however, that the Authority’s Secretariat has informed us that the proposal meets the general guidelines of the Phase 2 Factor (f) Scheme.

I regret that the Authority cannot be more helpful and we hope that you and your principals can accept a short delay in the Government’s decision making process.  I can assure you that the deferral of consideration of the merits of your company’s application will not in itself affect any decisions we take in relation to it.  I should confirm though that yours was the last application received by the Authority so far.” (emphasis added)

The letter should have conveyed to Mr Eppingstall that it was possible that BMSP would receive nothing in Phase II.

At a meeting of the PBPA on 12 August, Ms Cox reported that no more Factor (f) funding would be available in 1993, although it might be available in future years. Before the meeting was a paper headed “OPTIONS FOR DISBURSEMENT OF REMAINING FACTOR F FUNDS” to which we refer in some detail later in these Reasons. The PBPA decided “to assess the remaining company proposals on their relative merits and to impose a cut-off date for further applications as of the Budget, 17 August”. Later the same day, the PBPA invited BMSP and three other companies to make presentations at a meeting to be held on Monday 16 August. On Friday 13 August, Mr Eppingstall wrote the following memo to Mr Hamad in BMSC’s Princeton office:

“I still cannot give you a definite answer on our Factor F proposal and frankly cannot see a definitive answer coming before Budget. ...

Yesterday I received an urgent call to attend a special PBPA meeting in Canberra on Monday August 16 at 3.00pm.  My understanding is that four companies will present and that following the meeting the PBPA will make the hard decision on how to allocate funds across the various proposals.

I understand that the Glaxo and Fauldings proposals alone could take up all remaining funds and that they have been sitting awaiting Ministerial approval since February...  There now seems to be support for spreading funds across companies rather than have it concentrated heavily with a few companies.  Such a decision would no doubt cause a storm of protest from Glaxo and Fauldings.

Additional budget funds in the near term seems very unlikely if not impossible but pressure on the Government from many sources may eventually succeed. ...

My current best estimate is that we will receive money but not at the A$80 mill level. ...

We may get some indication of the pay out at the presentation on Monday but I think this is unlikely. The PBPA will have to consider its options, discuss them with relevant Ministers and then advise each company.  This could take some weeks.  Meantime I feel we should press on with the assumption that the outcome is still attractive to us.”

The memo establishes that at least from the time of the meeting on the preceding day, 12 August 1993, Mr Eppingstall understood that because of the limited funds available, there was a possibility that BMSP would receive nothing in Phase II (see later).

On 16 August, Mr Eppingstall made the presentation on behalf of BMSP to the PBPA. The minutes of the meeting record the following:

"Mr Glenn asked Bristol-Myers Squibb what level of funding was crucial for the company to achieve critical mass.  Mr Eppingstall replied that if the company is offered less than $60 million in funding, both capital and R&D investments will be at risk.

Mr Eppingstall emphasised that he hoped the current shortage of Factor (f) funding would not prevent Bristol-Myers Squibb's proposal from being considered on an equitable basis and that the company will not be put in the position of needing to meet the same targets for a reduced level of Factor (f) funding.  Mr Glenn replied that their concerns were unnecessary."

The next day, 17 August, the Department of Industry announced that the Government had not increased funding for the Factor (f) Scheme.  In the light of this decision, the Secretariat submitted new recommendations to the PBPA on 18 August, including a recommendation that the BMSP proposal be rejected due to the insufficiency of available funds.  The PBPA accepted that recommendation on 19 August and recommended accordingly to the Ministers on 27 August. In a letter to the Minister for Industry of that date presenting the recommendations of the PBPA, Mr Glenn noted that the PBPA had had nine applications before it, resolution of several of which had been delayed due to the federal election and the PBPA’s request for additional funding from Government. Mr Glenn continued:

"The PBPA considers that the activity proposed by each of the 9 new applications has merit, is internationally competitive and would provide significant net benefits for Australia.  Further, the proposed programs of achievement by each company are consistent with the objectives of the Government's policy of encouraging the development of the pharmaceutical industry in Australia.  On the PBPA's assessment of the value of these proposals, in excess of $630 million would be required to fund them fully, ie $328 million more than is available.

A number of scenarios have been considered including distributing the available funds on a strictly pro-rata basis to all remaining applicants.  This option is simply not viable.  In some cases it means that the really significant benefits will be lost, while in others the proposals are predicated on the Australian subsidiary establishing itself as the regional manufacturing centre for the corporation.  Providing these companies with less than half of the allocation requested is not likely to provide sufficient leverage for this objective to be achieved.

The PBPA considers that a more appropriate use of the available funding is to invest in those proposals which will realise the maximum benefit for Australia, particularly in terms of ensuring that we are putting in place the infrastructure to ensure the industry will, in the longer term, have the capacity to develop and commercialise local research.  On that basis the proposals of Glaxo Australia and F.H. Faulding & Co select themselves albeit at substantially lower levels of funding than that requested by the companies.

By adopting this course there will be a substantial loss of activity and the opportunity for some companies to establish Australia as the corporation's regional manufacturing centre will be lost. However, the benefits to be gained by supporting [Glaxo and Faulding] substantially outweigh, in both a qualitative and quantitative sense, this lost activity."

On 31 August, the Minister for Industry received a brief from his Department concurring in  the PBPA’s recommendations. 

On 9 September, still awaiting advice of a decision on BMSP’s Phase II proposal, Mr Eppingstall wrote to Mr Hamad:

“Irrespective of the decision on Phase II we have to focus our immediate attention on finding ways to cover our 1993 shortfall in Phase I.  We must find a way to increase our exports for the following reasons:

(i)We must not give PBPA any excuses for not approving our Phase II - such as failing to meet our most recently submitted (June 93) commitments/targets for 1993.

(ii)In a worst case scenario where we receive no Phase II allocation we must still try to maximise our income from Phase I ...” (emphasis supplied)

...”

Mr Eppingstall added:

“To achieve what is required will necessitate bringing exports into 1993 from 1994.  I realise that this will have inventory implications but there is no alternative”.

On 11 October, the Minister for Industry visited BMSP’s plant in Melbourne.  On 29 October, he wrote to the Minister for Health, indicating his agreement with the PBPA’s recommendation that BMSP’s proposal be rejected due to insufficiency of funds. On 24 November Mr Eppingstall wrote to Mr Glenn:

“As you will be aware Bristol-Myers Pharmaceuticals (“BMSP”) lodged an application for Factor (f) price increases on 9 June 1993.  We understand that our application complies with the general guidelines for the Phase 2 Factor (f) Scheme.  In August 1993 we made a presentation to the Authority which was favourably received and are now anxious for confirmation of approval of the application so we can proceed with the plans.

BMSP has undertaken significant investment commitments in reliance on the Government's Factor (f) Scheme.  Among other things we have constructed a new plant at Noble Park in Victoria, we have closed plants in Canada and Germany and have greatly increased the level of research and development being conducted in Australia.  In addition, we have recruited staff and have entered into export obligations in the Asia-Pacific region and beyond.

Accordingly, BMSP, like the other companies approved under the Scheme, is entitled to have its proposal considered and processed in accordance with the Guidelines published in relation to the administration of the Scheme.  As a recommendation on BMSP's proposal has been made to [the] Minister I wish to arrange to meet with the Authority in accordance with the Factor F Guidelines (p.11) to discuss the payment rate which the Authority has recommended to Ministers for approval of the proposal.”

On 30 November, the Minister for Health advised the Minister for Industry that he also agreed with the recommendation of the PBPA. The Minister for Industry announced on 9 December that Glaxo Australia and F H Faulding & Co had “received the go ahead” to participate in Stage II of the Factor (f) Scheme. By a letter of the same date, Mr Glenn advised Mr Eppingstall of the decision in these terms:

“I refer to your company’s application to participate in Phase 2 of the Factor (f) component of the Pharmaceutical Industry Development Program. 

As you are aware, a number of applications from other companies were considered by the Government and decisions taken on them earlier in the year.  The Minister for Industry, Technology and Regional Development and the Minister for Health have now considered the recommendations of the Pharmaceutical Benefits Pricing Authority (PBPA) on all the remaining applications. 

You will recall that when the extension of the Factor (f) scheme was announced in 1992, the Government indicated that, in addition to the $198 million for Phase 1 of the scheme, it was making available a further $820 million for Phase 2.  Since the announcement of the extension there has been a rapid take up of program funds, and as a result the Government had before it applications for funding that in total exceeded the available funds by a considerable margin.  This situation was explained to you when you met with the PBPA on 16 August 1993. 

In the circumstances it has been necessary on this occasion, unlike Phase 1 of the Factor (f) scheme, to consider the relative merits of company’s applications and to determine the allocation of the remaining funds based on those merits. While your company’s application has merits in its own right, the Government has given a higher rating to others.  I regret therefore that we are unable to offer your company any price increases under Phase 2 of the Factor (f) Scheme.”

This advice prompted Mr Eppingstall to write the following letter dated 15 December to the Ministers (identical letters were sent to both Ministers) expressing the gravamen of the complaint made by the appellants in this proceeding:

“On 9 December [the PBPA] advised [BMSP] that it was unable to offer BMSP any price increases under Phase 2 of the Factor (f) scheme.

The letter asserts that unlike Phase 1 of the Factor (f) scheme it has been necessary to consider the relative merits of applications and to determine allocation of the remaining funds based on those merits.

I am astounded by the decision which you state has been made and by the explanation you give about that decision.

BMSP made significant business decisions and entered into substantial financial commitments in reliance on the scheme.  I assume the other companies to which you refer did likewise.  BMSP relied also on the statements and assurances made to us by various Commonwealth officers.

...

We were assured that there would be adequate funds for our proposal and there would be no priority given to Phase 2 applications by reference to their date of lodgement.  We would not have made those commitments if there had been any suggestion that funds were or would be limited or that the allocation of funds would be dependent on the relative merits of company applications.  Specifically, those assurances were given to us in a meeting between senior executives of BMSP and a senior officer of the Department of Industry, Technology and Commerce in Princeton, New Jersey, US in October 1992 and were consistent with assurances given to BMSP both before and after that time.  Those assurances were given in the context of our known plans and the plans proposed and being undertaken by other companies.

The scheme was never a scheme about considering relative merits, nor of rating companies, nor of allocating funds based on relative merits.

...”

REASONING OF THE TRIAL JUDGE

BMSP and BMSC sought an order setting aside the decision of the Ministers to refuse BMSP’s application for price increases for its products listed on the PBS under Part VII of the National Health Act 1953 (Cth) (“the First Decision”), and their decision to refuse its application to participate in Phase II of the Factor (f) Scheme (“the Second Decision”). They also attacked the conduct of the Ministers, and each of them, engaged in for the purpose of making the First Decision and the Second Decision (“the Conduct”). As against the Commonwealth, they sought an order that BMSP had a “right” to have its proposal approved and was entitled to payments in accordance with the 1992 guidelines for Phase II, or an order that the Commonwealth was obliged to offer to enter into a contract with BMSP in the standard form for companies participating in Phase II of the Factor (f) Scheme, and, if the offer were accepted by BMSP, to enter into such a contract with it. In the alternative, they sought an order compelling the Ministers to consider BMSP’s proposal without reference to “insufficiency of funds”.

BMSP and BMSC relied on breaches of the rules of natural justice and improper exercise of power in connection with the making of the First Decision and the Second Decision, and on the former in connection with the Conduct. They claimed also that the Commonwealth was estopped from denying BMSP’s entitlement to be offered by it, and to enter into with it, a contract of the kind described above.

His Honour dismissed the application.  He accepted that the Court had jurisdiction to entertain the applicants’ claims under the general law, though not under the ADJR Act. However, he held that BMSP did not have a legitimate expectation that its proposal would be judged on an “individual merits” basis rather than on a “relative merits” basis, and, accordingly, that the natural justice ground of attack on the decision-making process failed.

His Honour rejected a submission that the Ministers’ decision was an improper exercise of power by reason of a failure to take two relevant considerations into account, namely, what Ms Cox had said at the Princeton meeting and the fact that, according to the submission, BMSP had until 31 December 1993 to obtain its Phase I export/import ratio target of 0.5. His Honour held that the policy evinced in the 1992 guidelines for Phase II did not require those considerations to be taken into account.  His Honour also rejected a case of “improper exercise of power” based on “abuse of power” arising from the allegedly inconsistent application of the 1992 guidelines for Phase II to different proposals.  His Honour considered, on the contrary, that those guidelines had been applied consistently to all proposals, albeit at different times. 

Finally, his Honour held that the 1992 guidelines for Phase II did not constitute representations by the Commonwealth that it would offer to enter into any particular contract with a continuing participant, and that nothing said by Ms Cox or Mr Glenn had converted the guidelines into such representations. It followed, for his Honour, that there was no basis for holding that the Commonwealth was estopped as claimed.

OUTLINE OF PARTIES’ SUBMISSIONS ON THE APPEAL

Outline of appellants’ submissions

The Commonwealth made written representations and commitments that if BMSP and BMSC undertook a certain level of activity in Australia, including new investment, production, research and development, the Commonwealth would pay BMSP price increases in respect of its drugs listed on the PBS. The Commonwealth made oral representations and commitments that each proposal would be considered on its merits, irrespective of the time of lodgment, that there was no particular time frame within which BMSP should apply, and that no funding problems were anticipated.  In reliance on these representations, BMSP and BMSC arranged to source products in Australia and incurred associated capital expenditure.  Without the Factor (f) Scheme, BMSP would have closed its Melbourne plant at the end of 1987 and imported all products from other BMSC locations. BMSP and BMSC acted reasonably in relying on the representations. 

Further written representations were made by the Commonwealth in the 1992 guidelines, which do not refer to the funding of the Scheme or any closing date for applications.  Nor do the guidelines suggest a competition between companies submitting proposals.  On the contrary, the guidelines refer only to a company’s ability to demonstrate that it fulfils the requirements for entry to the Scheme, and indicate that Phase II would continue to be based on the individual merits of proposals. 

Ms Cox’s visit to BMSC in the United States was for the purpose of encouraging parent companies to participate in Phase II, and her statements made during that meeting  were authorised by the Commonwealth. Ms Cox represented that there was no particular time frame within which BMSP should apply, that each proposal would be treated on its own merits, and that no funding problems were anticipated.  As a result of these representations and commitments, BMSC decided that BMSP would participate in Phase II.  This decision is not attributable to concern that the Commonwealth would seek to recover payments made to BMSP due to a failure to meet the export/import ratio required under Phase I. Phase I required that this ratio be met by 31 December 1993, and BMSP met this requirement. 

The Commonwealth knew that it was common for companies to commence activity prior to proposals being approved. In fact, the long lead times made this inevitable. Specifically, Ms Cox knew that as a result of what she had said during the meeting with BMSC, decisions would be made in favour of BMSP’s participating in Phase II, and that it was necessary for BMSC and BMSP to undertake certain activities during 1993 in order to participate in Phase II from 1 January 1994. 

Preparatory activities undertaken by BMSC included identification of programs and activities to be incorporated in BMSP’s Phase II application, and the making of decisions about new products to be manufactured by BMSP in Australia.  Specifically, BMSC decided to manufacture certain products in Australia rather than in Canada, Germany and England, notwithstanding that costs were significantly higher in Australia.  These decisions would not have been made but for the benefits available under Phase II of the Factor (f) Scheme. Preparatory activities undertaken by BMSP also included the preparation of financial forecasts and models for the manufacture of various products in Australia; the making of decisions about the volume and timing of manufacture of products; the identification of necessary plant modifications and planning and design work to implement those modifications; the making of “Capital Appropriation Requests” to BMSC to cope with the increase in export costs; research relating to the regulatory requirements of new countries to which it was proposed to export the products; and the upgrading of BMSP’s Melbourne plant. While some of this preparatory work would have enabled BMSP to meet the requirements of Phase I, there were also options available to it to meet those requirements which it would have chosen if it had not been planning to participate in Phase II.

The Full Court should reverse Whitlam J’s finding that no representations by the Commonwealth encouraged any assumption by BMSP or BMSC that BMSP’s proposal would be approved.  The Full Court should find that BMSP and BMSC relied on the Commonwealth’s representations to their detriment.

The Full Court should also overturn Whitlam J’s findings that Ms Cox had not told Mr Eppingstall in their telephone conversation on 19 January 1993 that the Department of Industry wished to “reserve money” for BMSP; that Mr Brindell informed Mr Eppingstall at the meeting on 21 May 1993 that as a result of the funding situation, BMSP might receive a significantly lower level of payment than requested, or indeed no payment at all; and that Mr Eppingstall knew by the time he came to give his presentation to the PBPA on 16 August 1993 that BMSP was competing against other companies for the remaining available funds on a relative merits basis.  These findings are based not on the credibility of witnesses, but on inferences drawn by Whitlam J for the reasons he gives.  The Full Court can and should draw other inferences and overturn the findings. 

The Commonwealth was estopped from refusing to offer to enter into a standard Phase II contract with BMSP. BMSP and BMSC spent money and took other steps in reliance on representations made by the Commonwealth, and the Commonwealth intended and encouraged them to do so. Whitlam J failed to distinguish between the underlying equity and the terms of any remedy. Equity will come to the aid of a plaintiff who has acted to his or her detriment on a basic assumption where the other party to the transaction has played such a part in the plaintiff’s adoption of that assumption that it would be unconscionable if he or she were able to ignore it. The detriment suffered by BMSP and BMSC must be considered having regard to the fact that their competitors were given approval for their Phase II proposals, involving payment to them of very large sums of money. BMSP and BMSC are entitled to enforce an estoppel against the Commonwealth: cf s 64 of the Judiciary Act 1903 (Cth). There is no statute in the present case the operation of which would be affected by the estoppel. A mandatory order is appropriate to give effect to the estoppel.

Whitlam J erred in finding that there was no improper exercise of power by reason of the inconsistent application of the guidelines to BMSP on the one hand and many of its competitors on the other hand, and by reason of the failure to take into account relevant considerations, namely the representations and the fact that BMSP’s Phase I commitments did not end until 31 December 1993.  The inconsistent application of the guidelines, particularly the failure to negotiate with BMSP and BMSC at all in relation to partial funding (negotiations were held with other applicants), was an abuse of power. 

The Ministers breached the rules of natural justice in rejecting BMSP’s application for price increases under Phase II.  BMSP and BMSC were entitled to natural justice. They had a legitimate expectation, arising from the representations made by the Commonwealth and the Minister for Industry and from the fact that BMSP’s application was in the nature of a renewal, that their application would be judged on its individual merits and that, if it complied with the guidelines, it would be approved and payments would be made under Phase II.  It is sufficient to show that the expectation was reasonable in the sense that there is material to support it; it is not necessary to establish that BMSP actually entertained the expectation. BMSP and BMSC were not given notice of, or an opportunity to be heard in relation to, the change to a relative merits basis, or an opportunity to vary or supplement their application to take the new basis for the decision into account.  It follows that the Ministers’ decision should be set aside. 

Outline of respondents’ submissions

The respondents filed a notice of a contention that the trial Judge erred in holding that the Court had jurisdiction to entertain the appellants’ claim under the general law, whether under s 39B of the Judiciary Act 1903 (Cth) or otherwise, but the contention was not pressed.

The Full Court should not overturn the findings of fact made by Whitlam J which are challenged by the appellants.  An appellate court should generally defer to the trial Judge’s assessment of the general credibility of witnesses and the reliability of their evidence.  While an appellate court may decide the proper inference to be drawn from primary facts, it must reverse the inference drawn by the trial Judge only where it considers his or her judgment to have been wrong.  In any event, the evidence supports Whitlam J’s finding that Ms Cox did not say during the telephone conversation on 19 January 1993 that funds had been “reserved” for BMSP, and there is no basis for disturbing his Honour’s finding that Mr Brindell told BMSP at the meeting on 21 May 1993 that it might not receive money as a result of the funding shortfall.

BMSP failed to achieve an export/import ratio of 0.5 by 31 December 1992 as proposed in its Phase I Factor (f) application.  This gave rise to a risk that the Government would seek recover payments already made under the Scheme. BMSP brought forward some of the projects it was considering for its Phase II program in order to meet its export/import ratio under Phase I, and avoid having to repay funds already received. 

The Factor (f) guidelines make it clear that, even if the criteria for eligibility were met, the PBPA and the Ministers retained a discretion as to whether an application would be recommended for approval or approved. The appellants could not have regarded anything said by Ms Cox at the Princeton Meeting as binding on the PBPA or the Commonwealth.  Both Mr Eppingstall and Mr Hamad realised that the PBPA was the body that made recommendations to the Ministers, and that Ms Cox could not speak for the PBPA.

Any decision made by BMSC after the meeting with Ms Cox was not a final decision that BMSP should lodge a proposal under Phase II of the Scheme. 

BMSP knew from the outset that there was a budget for Phase II.  Prior to lodging its Phase II proposal, it knew, or ought to have known, that funds for Phase II were limited, that therefore delay in lodging its application could prejudice it and that the proposal had to be competitive with submissions from other companies. 

The appellants were not aware of the existence of the form of agreement for successful Phase II applicants before lodging their Phase II proposal.  This disposes of ground 19 of the amended notice of appeal.

The appellants were aware of the shortage of funds for Phase II when the decision to manufacture some products in Melbourne rather than Canada was made. The decisions to manufacture non-cardiovascular solids and Kenalog-in-orabase in Melbourne was made in order to maximise benefits under Phase I, not as part of any proposed Phase II program. The reason for the decision to manufacture steroids in Melbourne is not clear from the evidence.  If the decision was made in reliance on any representations made by the Commonwealth, the appellants have not suffered detriment; the appellants are still manufacturing steroids profitably in Melbourne. BMSC approved capital expenditure for BMSP in the knowledge that funding for BMSP’s Phase II proposal had not been approved and depended upon the Federal Budget.

BMSP’s proposal was assessed in accordance with the guidelines.  The precise way in which the Ministers would approve or disapprove applications was always left open under the guidelines.  Even if there were a change in policy concerning the way in which the guidelines were to be applied, natural justice did not require that the appellants be given an opportunity to be heard first. 

The appellants did not have a legitimate expectation that BMSP’s proposal would be approved if it came within the terms of the guidelines. A legitimate expectation must be reasonable, in the sense that there is adequate material to justify the expectation objectively.

“Abuse of power” is simply an illustration of Wednesbury unreasonableness. The Ministers’ decision was not unreasonable in the sense that no reasonable person could have made it.

The Ministers were not bound to take any particular considerations into account in deciding whether to approve BMSP’s Phase II proposal; the decision was an exercise of executive power. Furthermore, there is a real argument that ministerial decisions to allocate funds within the constraints of Commonwealth fiscal policy are not justiciable.

The appellants have not made out an estoppel. No representation or promise by the Commonwealth encouraged any relevant assumption by the appellants. The appellants have not shown that they acted to their detriment as a result of any assumption that their Phase II proposal would be approved, or would suffer any detriment, beyond not obtaining funds, as a result of not obtaining approval. The appellants were not treated in a manner that was unfair, unjust, or unconscionable. The approach taken by the respondents was necessitated by the scarcity of public funds. An estoppel cannot preclude the Executive from adopting a new policy or hinder the exercise of Executive discretion in the public interest. Section 64 of the Judiciary Act 1903 (Cth) does not affect this principle.

REASONING

This Full Court’s role in relation to findings of fact made by the trial Judge

The appellants attack numerous findings made by the trial Judge and his failure to make other findings. Therefore, it is appropriate to note at the outset the principles which define this Full Court’s role in relation to findings of fact made by a trial Judge.

The appeal is not limited to an appeal on a question of law: Federal Court of Australia Act 1976 (Cth) s 24; Annand & Thompson Pty Ltd v Trade Practices Commission (1979) 25 ALR 91 (FCA/FC) at 110 per Northrop J. The Court must reach its own conclusions as to the inferences properly to be drawn from primary facts which are undisputed or are found by the trial Judge: Warren v Coombes (1979) 142 CLR 531; Dawson v Westpac Banking Corporation (1991) 104 ALR 295 (HCA/FC) (“Dawson”) at 304 (Mason CJ, with whom Deane J and McHugh J agreed). The approach to be taken was expressed in the familiar and oft-cited passage in the judgment of Gibbs ACJ, Jacobs and Murphy JJ in Warren v Coombes, supra, as follows (at 551):

“... in general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge.  In deciding what is the proper inference to be drawn, the appellate court will give respect and weight to the conclusion of the trial judge, but, once having reached its own conclusion, will not shrink from giving effect to it.”

But a distinction is drawn. In relation to the making of findings of primary fact, an appellate court must pay due respect to the fact that the trial Judge enjoyed the advantage of seeing and hearing the witnesses give their evidence. In those cases where a trial Judge’s assessment of a witness’s demeanour or conclusions about a witness’s credibility have played a substantial role in the making of a finding of fact, an appellate court must not interfere, unless the finding is inconsistent with admitted or proved fact or is glaringly improbable: Dawson at 304, citing Brunskill v Sovereign Marine & General Insurance Co Ltd (1985) 62 ALR 53 (HCA/FC) at 57; Devries v Australian National Railways Commission (1993) 177 CLR 472 at 478-479 (Brennan, Gaudron, McHugh JJ) and 479-481 (Deane, Dawson JJ); Warren v Coombes, supra, at 537 (Gibbs ACJ, Jacobs, Murphy JJ). In SS Hontestroom v SS Sagaporack [1927] AC 37 Lord Sumner said:

“... not to have seen the witnesses puts appellate judges in a permanent position of disadvantage as against the trial judge, and, unless it can be shown that he has failed to use or has palpably misused his advantage, the higher court ought not to take the responsibility of reversing conclusions so arrived at, merely on the result of their own comparisons and criticisms of the witnesses and of their own view of the probabilities of the case.  The course of the trial and the whole substance of the judgment must be looked at, and the matter does not depend on the question whether a witness has been cross-examined to credit or has been pronounced by the judge in terms to be unworthy of it.  If his estimate of the man forms any substantial part of his reasons for his judgment the trial judge’s conclusions of fact should, as I understand the decisions, be let alone.” (at 47)

In Rennie v Commonwealth of Australia (1995) 61 FCR 351 (“Rennie”), Burchett J discussed this passage from Lord Sumner’s speech:

“What Lord Sumner said was set out in the context of his statement that the ‘course of the trial and the whole substance of the judgment must be looked at’.  If, in substance, the judgment does not depend upon the credibility of the witness, but upon inferences drawn from the surrounding circumstances, it cannot be said that the trial judge has used the advantage of seeing and hearing the witness; and if the trial judge rejects evidence (whether referring to it or not) because of inferences of this kind which the appellate court regards as misconceived, it may be held that ‘he ... has palpably misused his advantage’, in the sense in which Lord Sumner used this expression.” (at 356)

Even where the trial Judge does not refer to the demeanour or credibility of a witness, “the subtle influence of demeanour on his or her determination cannot be overlooked”: Abalos v Australian Postal Commission (1990) 171 CLR 167 at 179 (McHugh J, with whom the other members of the Court agreed).

Inferences of fact of trial Judges are rejected on appeal from time to time. It is necessary to refer to only two recent cases. In Carter v Geoff Layton & Co Pty Ltd (FCA/FC, 21 June 1993, unreported) a Full Court reversed the trial Judge’s finding that the applicant had not relied on a particular representation when making a decision to which that representation was directed.  The Court held that the facts relied on by the trial Judge did not lead logically to the conclusion that the applicant had not relied on the representation. The judgment of the Court included the following passage:

“In considering the correctness of the conclusion drawn by the learned trial judge we bear in mind that for the appellant to succeed on a question of fact his Honour’s decision must be shown to be clearly wrong on grounds which do not depend merely on credibility; for example, on the ground that the evidence which was accepted was inconsistent with the established facts or was glaringly improbable... [Their Honours referred to Abalos and quoted the passage from the judgment of Gibbs ACJ, Jacobs and Murphy JJ in Warren v Coombes set out above.]

In the present case we have differed from his Honour’s conclusion on matters of inference from primary facts which he found.  This does not involve a departure from his assessment of the credibility of the witnesses.  Those of his Honour’s conclusions from which we differ are entitled to weight and respect as those of the trial judge but we consider they are not supported by the primary facts for the reasons outlined.”

In Rennie, a Full Court reversed a trial Judge’s findings, also in relation to an issue of reliance, on the basis that he had drawn incorrect inferences from findings of primary fact.

We turn next to consider the particular findings of the trial Judge which are in issue. In relation to all of these findings, the appellants make the following general submission:

“These findings are not said by his Honour to turn on credit - there is no suggestion that Mr Eppingstall or Mr O’Reilly is an unreliable witness.  The adverse findings are based on inferences drawn by the trial judge for reasons which he gives.  The appellants submit that the Full Court can and should draw other inferences and overturn the findings complained of particularly because, it is submitted, the reasons given by Whitlam J do not sustain his Honour’s conclusions.”

The respondents submit that the findings should not be overturned, relying on the authorities discussed above.

Trial Judge’s finding that guidelines were not inconsistently applied

The trial Judge said:

“... the same guidelines have been applied to all applicants, although the decisions have been taken at different times.  To the extent that the decision announced on 9 December 1993 took into account budgetary considerations that did not inform the earlier decisions, there cannot be said to have been any ‘inconsistent’ application of the 1992 guidelines.” (Reasons for Judgment, at 30)

Paragraphs 5 and 18 of the appellants’ amended notice of appeal read:

“5         His Honour erred in finding that there had been no inconsistent application of the 1992 guidelines to [BMSP’s] application.

...

18His Honour erred in holding that there was no inconsistent application of the 1992 guidelines in circumstances where [BMSP’s] application was rejected for a reason equally applicable to each of the other applicants whose proposals had been approved under Phase I and who formed part of a group whose entitlements were thought to be destructive of [BMSP’s] claim.”

The appellants submit that the options paper (“OPTIONS FOR DISBURSEMENT OF REMAINING FACTOR F FUNDS”) which was before the meeting of the PBPA on 12 August 1993 is evidence of the discriminatory treatment afforded to them. Indeed, they submit that “there was no scenario which was equitable given that there were already firms participating in Phase 2”. The options paper began by recording that only $309,000,000 of the $820,000,000 allocated by the government for Phase II remained. The paper stated that the PBPA:

“... needs to:

·determine the principles on which it will base its handling of outstanding applications; and

·decide today on recommendations on the final disbursement of funds, based on the agreed principles.”

The options paper noted a number of considerations relevant to determining the principles to be applied, including:

“2.        Equity - Non participants and some phase 1 participants have not been formally advised of a deadline for lodgement of submissions.  While firms which have expressed interest in lodging a proposal have been advised informally of the possibility of funds running out, no general or formal announcement has been made.  The Secretariat considers that there is no scenario which is equitable - those firms (which responded quickly) already participating in phase 2 are better off.”

“It should be noted that for the first six months of 1993 the export to import ratio achieved 44.2% which is exactly in line with our expectations and should enable us to meet our forecast of at least 53.6% in the second six months.  This significant improvement in the second half is due to the start up of exports to Germany and will enable us to meet the 50% hurdle for this year.” (emphasis supplied)

The transfer of the manufacture of “Kenalog-in-Orabase” from the United Kingdom to Melbourne was also intended to assist BMSP attain the Phase I 0.50 target. In a memorandum to Mr Hamad dated 5 March 1993, Mr Eppingstall said:

“... this memo will update Mr Di Fazio and yourself on the current status of BMS participation in Factor F.

A detailed outline on the status follows, but in a nutshell:

...

·Eligibility for Phase II depends on BMS performance in Phase I.

·BMS performance in Phase I is now heavily dependent on an urgent and favourable decision on the transfer of Kenalog in Orabase for Japan from the UK to Australia.  This decision is critical for reasons outlined below.”

(The “reasons outlined below” were that, while BMSP would meet its Phase I target for total research and development expenditure, it would not meet its targets for total value of exports for the period 1991-1993, total value of exports for 1993, or the export/import ratio.)  The memorandum continued:

“A favourable decision on Kenalog in Orabase could solve this problem in one hit because -

(i)Along with the new German exports we will go close to achieving total 1993 target exports...”

Mr Eppingstall explained in oral evidence that the terms of this memorandum were exaggerated in order to induce Mr Di Fazio, who had a reputation for being slow to make decisions, to act. The memorandum is, nonetheless, evidence of Mr Eppingstall’s concern over the likely under-performance of BMSP in Phase I, and of his perception that the manufacture of Kenalog in Orabase in Melbourne would improve that performance. A memorandum dated 26 March 1993 from Mr Eppingstall to Mr Steve Freier seeking formal approval for the relocation of manufacture of Kenalog in Orabase to Melbourne confirms this:

“I have been asked to make a formal request seeking approval from the Sourcing Committee to agree to the relocation of manufacture for Kenalog in Orabase from the UK to Australia.

... in summary the rationale is as follows:-

1)To qualify for Phase II improvement in our Phase I performance is critical.

2)To improve Phase I performance we must have Kenalog in Orabase manufactured because;

a)we can transfer the product quickly and maximise exports;

b)the import/export [sic] ratio is very favourable.”

According to BMSP’s audited final report dated 21 February 1994 for the year ended 31 December 1993, the company achieved an export/import ratio of 58.1% for that year.

On the other hand, the evidence shows that BMSP’s expected participation in Phase II was also a motivating factor underlying the relocation of manufacturing activity. In particular, relocation was necessary in order to make BMSP eligible for approval of its Phase II proposal with a 1987 base year, rather than a 1993 base year.  The importance of this was emphasised in an internal memo from Mr Eppingstall to Mr Hamad dated 24 May 1993:

“(vii)BMS MUST achieve what it commits to in the second half of 1993.  Failure to do this means that 1993 becomes the base year not 1987.  This would be disaster for Phase II as our new programmes are mainly mature products with little growth or declining sales trends.

The message is very clear - we must make certain that everything goes right in terms of

Kenalog in Orabase transition
  Canada transition

Germany transition

If we have one delay, or lower than forecast offtake with any one of these markets/products, then we are dead!” (underlining and emphasis in original)

Mr Eppingstall explained in oral evidence that BMSP “chose for those activities in 1993 projects that would both achieve [BMSP’s] Phase I requirements and also qualify as new projects for Phase II”.  BMSP had other options which it could have chosen if it had wished to meet its Phase I targets without participating in Phase II. Mr Eppingstall said that BMSP did not use those other options because there was insufficient time (Phase II was to begin on 1 January 1994) and because they would not have provided “a seamless move into Phase II”. Mr Anthony Russ, who was at the relevant time Director, Pharmaceutical Pricing and Sourcing, of BMSC, said that participation by BMSP in Phase II was “the overriding factor” behind his approval of the transfer of the manufacture of products to Melbourne.

In addition to being concerned about maximising its receipts under Phase I and obtaining approval for its participation in Phase II with a base year of 1987, BMSP was also concerned that the Commonwealth might seek to recover Factor (f) payments already made to it if it did not achieve the 0.50 target by the end of 1993. Messrs Eppingstall and O’Reilly had been warned of this possibility in a meeting with the PBPA on 15 November 1990 in relation to BMSP’s Phase I proposal. The minutes of the meeting held on that date record:

“The chairman made it clear that if export targets were not met in the event that the proposal was accepted, then the Government through the Authority, may have to seek recovery of factor (f) payments made.”

On 9 September 1993, Mr Eppingstall wrote to Mr Hamad the memo note earlier which contained the sentences “Irrespective of the decision on Phase II we have to focus our immediate attention on finding ways to cover our 1993 shortfall in Phase I”.

BMSP failed to meet its own forecast export/import ratio of 0.50 for 1992 in that year. Aware of this, the PBPA approved of payment to BMSP in respect of the period down to 31 December 1992. But it remained a condition that BMSP attain the required ratio by the end of 1993. Failure to do so would give rise to the possibility in relation to Phase I, not only that BMSP would not maximise its receipts under that Phase, but worse, that the Commonwealth would seek to recover payments already made. This Court should not interfere with the trial Judge’s findings on the present issue.

Before considering the next finding challenged by the appellants, we digress to note two further aspects of the evidence.  First, during 1992, BMS was engaged in developing a “global manufacturing strategy” involving restructuring and rationalisation of the Bristol Myers group throughout the world, including the closure of some plants, a process which was instituted independently of the Factor (f) Scheme. The investment and manufacturing decisions said to have been made on account of BMSP’s expected participation in Phase II may also have been influenced by the global manufacturing strategy.  Secondly, Mr Hamad said in cross examination that there would have been no manufacturing activity in Melbourne at all but for Phase I of the Factor (f) Scheme and BMSC’s expectation that the Government would continue to provide incentives to the industry in the future. BMSC held this expectation at least as early as July 1992, long before the Princeton Meeting (29 October 1992). BMSC’s Sourcing Sub-committee was considering a proposal to move the manufacture of certain low volume tablets from Germany to Australia as early as July 1992.

Trial Judge’s finding as to BMSP’s knowledge that it was competing with other companies

The trial Judge found:

“In any event, by the time Mr Eppingstall received his telephone call after the PBPA meeting on 12 August 1993 [inviting him to make a presentation on 16 August] he cannot have been in any doubt that BMSP was engaged in what might colloquially be called a ‘beauty contest’.  This is reflected in his fax to [BMSC] on 13 August 1993.  It was on this basis that Mr Eppingstall conducted BMSP’s presentation to the PBPA on its Phase II proposal.” (Reasons for Judgment, at 28)

Paragraph 16 of the amended notice of appeal reads:

“16His Honour erred in finding that by 12 August 1993 Mr Eppingstall knew that [BMSP] was engaged in a ‘beauty contest’ and that it was on that basis Mr Eppingstall conducted [BMSP’s] presentation to the [PBPA] on its Phase II proposal.”

The appellants submit that this Court should substitute for his Honour’s finding, a finding that Mr Eppingstall made the presentation on 16 August 1993 with the understanding that BMSP’s application met the criteria in the 1992 guidelines for Phase II, that the application would be approved for an amount of not less than $60,000,000, and that, due to the funding difficulties, the PBPA would assess the application and recommend to the Ministers the amount, if any, above $60,000,000 which should be approved. The appellants submit that it should be found that they had no notice or indication that the PBPA had decided to determine the remaining applications, including that of BMSP, on a “relative merits” basis. It is put, on the contrary, that during BMSP’s presentation on 16 August Mr Glenn responded to Mr Eppingstall’s statement that BMSP’s proposals would be put at risk if it were offered less than $60,000,000, by saying “Your concerns are unnecessary”. The appellants point out that neither Mr Glenn nor Ms Clarke, a senior officer in the Department of Industry, were called by the respondents, and submit that the Court should proceed on the basis that their evidence would not have assisted the respondents’ case.

The respondents’ submissions, on the other hand, emphasise different aspects of the exchange between Mr Glenn and Mr Eppingstall at the meeting on 16 August 1993:

“Mr Glenn sought information from BMSP as to, ‘what level of funding was crucial to the company to achieve its critical mass’.  Mr Eppingstall replied that ‘if the company (was) offered less than $60 million in funding, both capital and R & D investments will be at risk’.”

The respondents submit that Mr Glenn’s statement, “Your concerns are unnecessary”, was directed to a concern on the part of BMSP that it might be required to meet its proposed Phase II targets with a lower level of funding. They submit that the possibility that BMSP would be offered a lower grant to meet lower targets was left open.

Mr Eppingstall deposed in his affidavit sworn 27 May 1994 that he was aware that three other companies would be given an opportunity at the meeting on 16 August to make presentations in support of their Phase II proposals, and that, having attended meetings with the PBPA in relation to BMSP’s Phase I proposal, he did not consider the meeting to be unusual or “in any way out of the anticipated course of events leading to approval of [BMSP’s] application under Phase II...”.  His affidavit continued:

“75At the 16 August meeting Mr Glenn stated to me that the funds remaining for allocation from the original budget for Phase II of the Factor (f) Scheme were insufficient to satisfy the total entitlements sought by the outstanding applicants.

76The presentation I made on behalf of the Applicant at the 16 August meeting was prepared and presented on the basis and understanding of the applicant that its application under Phase II of the Factor (f) Scheme met the quantitative criteria set out in the Phase II Guidelines, that the Applicant’s application under Phase II of the Factor (f) Scheme would be approved for entitlements not less than $60 million and that by reason of the funding difficulties, the PBPA was to make an assessment and, accordingly, a recommendation to the relevant Ministers, of the amount in excess of $60 million (if any) for which the Applicant was to be approved under Phase II of the Factor (f) Scheme.

77The only notice I received of the 16 August meeting was the telephone call I received on 12 August 1993.  The Applicant prepared for the 16 August meeting and made its presentation at the 16 August meeting on the basis that the Phase II Guidelines were applicable and were the sole means by which eligibility for participation in Phase II of the Factor (f) Scheme was to be determined.  At no time ... was I or was the Applicant given any notice or indication that the purpose of the 16 August meeting was any purpose other than a further step in the procedures contemplated by the Phase II Guidelines.  Certainly, I was given no notice or indication that the PBPA had determined or had been directed to determine the outstanding applications under Phase II of the Factor (f) Scheme on a ‘relative merits’ basis or upon any other basis or by reference to any other criteria than as set out in or contemplated by the Phase II Guidelines.”

However, Mr Eppingstall wrote to Mr Hamad on 13 August 1993, the day after receiving the invitation to present BMSP’s proposal to the PBPA on 16 August, a memo, the relevant parts of which were set out earlier in these Reasons. They are relevant, in their entirety, to the present submission but it is not amiss to repeat the following:

“My understanding is that ... following the meeting the PBPA will make the hard decision on how to allocate funds across the various proposals.

I understand that the Glaxo and Fauldings proposals alone could take up all remaining funds and that they have been sitting awaiting Ministerial approval since February - ....

Additional budget funds in the near term seems very unlikely if not impossible but pressure on the Government from many sources may eventually succeed. ...

My current best estimate is that we will receive money but not at the A$80 mill level. ...” (emphasis supplied)

In cross examination Mr Eppingstall maintained that:

“... I did not at any point consider Bristol-Myers Squibb to be in competition with any other company for phase 2 funds.  My understanding was that what we were required to do is meet the phase 2 criteria and that we would receive a price increase which is what the pricing guidelines stated.”

Mr Eppingstall insisted that although he knew that available funds were insufficient to cover all the proposals which were before the PBPA, he did not think BMSP was competing for funds.

The learned trial Judge’s “beauty contest” finding is not to be read in isolation. There is to be taken into account the background afforded by Mr Eppingstall’s memos to Mr Hamad dated 20 January and 5 March (referred to earlier) as well as that dated 13 August. In the light of all the evidence, it was clearly open to the trial Judge to reject Mr Eppingstall’s evidence and to find that he did know by 12 August that BMSP was in competition with other companies for funds and might receive none.

Trial Judge’s finding as to whether the Commonwealth represented that a contract would be entered into

The trial Judge’s Reasons for Judgment contain the following passage:

“The trouble with the above ‘representations’ teased out of the 1992 guidelines is their selectivity.  In particular, there is no reference to the ‘negotiated performance targets or milestones’.  This is a central concept in the extended Factor (f) Scheme. It is simply not possible for a continuing participant to lodge a proposal and claim the so-called ‘higher prices’ as an entitlement.  Its proposed performance targets must be agreed.  (BMSP well knew this from its grudging acceptance of the offer in Phase I.) Most importantly, overarching the whole scheme is the requirement for Ministerial approval.

It follows that I do not consider that the Commonwealth represented that it would offer to enter into any particular contract with a continuing participant.  Nor is this view altered by reference to what Ms Cox or Mr Glenn said.  I have already found that Ms Cox did not tell Mr Eppingstall that any moneys would be ‘reserved’ for BMSP.  Further, whatever is meant by the cryptic remark attributed to Mr Glenn in the minutes of the PBPA meeting of 16 August 1993, it could not mean, as submitted by the applicants, that BMSP’s proposal would be recommended for payments of not less than $60 million.” (Reasons for Judgment, at 32)

Paragraphs 19 and 20 of the amended notice of appeal read:

“19His Honour erred in finding that the Commonwealth did not represent that it would offer to enter into any particular contract with a continuing participant.

20His Honour should have held that the [Commonwealth], in announcing and publishing in July 1992 the extended Factor (f) Scheme, represented to [BMSP and BMSC] that it would offer to a continuing participant in the scheme which established its eligibility in accordance with the scheme a contract of agreement in the form or substantially in the form of MFI 1 and that it would enter into with such a continuing participant the said contract of agreement.  His Honour should also have held that, in reliance on those representations [BMSP and BMSC] spent money and took other steps, including investment decisions, to establish the eligibility of [BMSP] in accordance with the scheme and did establish that eligibility; and that the [Commonwealth] intended that [BMSP and BMSC] would expend money and take other steps, including investment decisions, in reliance on those representations, encouraged them to do so and knew that they were doing so.”

The respondents submit that, although there was a practice according to which successful Phase II applicants were required to enter into a written contract with the Department of Industry in accordance with a particular form, BMSP was not aware of this before it lodged its Phase II proposal. Indeed, in cross-examination Mr Eppingstall agreed that he had not seen the form of agreement until after the commencement of the proceeding.

We find no error in the trial Judge’s observations in respect of the construction and effect of the 1992 guidelines for Phase II. Nor do we detect any error in the second paragraph of the passage quoted above from his Honour’s Reasons. In particular, we accept the respondents’ submission that BMSP’s lack of knowledge of the existence of any form of contract to be entered into by successful applicants precludes a finding that it relied on a representation that such a contract would be entered into.  It follows that the trial Judge did not err in failing to make that finding.

Natural justice

The appellants claim that they had a legitimate expectation that BMSP’s proposal would be judged on its individual merits and approved if it complied with the 1992 guidelines for Phase II, irrespective of how well or ill its merits compared with those of the proposals of other manufacturers. The appellants submit that if, contrary to this expectation, the PBPA intended to assess proposals on the basis of their relative merits, BMSP had a legitimate expectation that it would be notified of, or given an opportunity to be heard on, this change of approach. Accordingly, they submit that his Honour erred in failing to find that they had been denied natural justice in relation to the First Decision and the Second Decision which, it will be recalled, the Minutes made on or about 9 December 1993.

In our opinion, BMSP initially had a legitimate expectation that its proposal would be judged on an individual merits basis. Phase I proposals had been assessed by the PBPA on that basis, and Ms Cox made statements at the Princeton Meeting to the effect that Phase II proposals would be judged in the same way. However, the funding problems, of which BMSP became aware as early as 19 January 1993, caused BMSP to revise its expectation.  For the reasons outlined above, we think that long before Mr Eppingstall presented BMSP’s Phase II proposal to the PBPA at the meeting on 16 August 1993, he knew that BMSP was competing for Phase II funds. BMSP, having been notified, albeit informally, of the change, no longer had the legitimate expectation to which the appellants’ submission refers, and was not denied natural justice.

It is noteworthy that the lack of any opportunity for BMSP to be heard in opposition to the change to a comparative merits basis appears not to have had any consequences for BMSP. It could hardly be suggested that as a result of its being “heard”, it would have received a grant. There were limited funds available. At its meeting on 12 August, the PBPA considered at length the options open. The PBPA asked Mr Eppingstall in the course of his presentation on 16 August “what level of funding was crucial for the company to achieve critical mass” and the reply was, in substance, $60,000,000. There appears to have been no real prospect that the PBPA and the Ministers would have been persuaded to make a grant of that size to BMSP to the detriment of Glaxo Australia and F H Faulding & Co, having regard to the detailed consideration which the PBPA had given to the options available and the fact that BMSP had not, as at August 1993, achieved an export/import ratio of 0.50.

Moreover, the relocation of manufacturing in Australia appears not to have caused loss.  Mr Eppingstall agreed that since its Phase II proposal was rejected, BMSP has continued to manufacture Kenalog in Orabase profitably in Australia. He accepted that no capital expenditure had been required to move the manufacture of the German products to Melbourne, and that BMSP has continued to manufacture most of those products in Melbourne profitably.  In the case of the Canadian products, he acknowledged that BMSP has continued to manufacture most of them in Melbourne profitably, although the larger volume products came to be manufactured in the United States because the duties are lower for products supplied to Canada from the United States than for the same products supplied to Canada from Australia.  BMSP has also continued to manufacture the steroid products in Melbourne because Melbourne is the only plant of the Group world-wide which is equipped to manufacture those products according to BMSP’s manufacturing standards. The decision was taken in the first half of 1992 to designate the Noble Park, Melbourne plant as the plant to be equipped for these products, as that plant was then being extended as part of BMSP’s Phase I program.

In sum, there was no evidence before the trial Judge that if the requirements of natural justice had been observed, BMSP would have received a grant, or would not have incurred loss, which it did not receive or did in fact suffer, in consequence of the non-observance of those requirements.

BMSP submits that the award of contracts involving payments of millions of dollars to its competitors is a “detriment” for present purposes. It is not: it does not constitute conduct by BMSP to its detriment.

Improper exercise of power - failure to take into account relevant considerations

The appellants submit that the Ministers failed to take into account two relevant considerations, namely, the representations allegedly made by the Commonwealth and the fact that BMSP’s approved program for Phase I did not end until 31 December 1993.

Let it be assumed that the Commonwealth is to be taken to have made the representations which were in fact made by Ms Cox at the Princeton Meeting. Nonetheless, they ceased to be effective from as early as 19 January 1993, when Mr Eppingstall became aware of the funding problem. The Ministers were not bound to take into account a representation which had long since ceased to be operative. This conclusion disposes of the first matter.

The appellants submit that the second consideration, in conjunction with the fact that BMSP operated on the basis of a financial year ending 31 December, resulted in its submitting its proposal later than other companies did. However, not all of BMSP’s competitors had financial years ending on 30 June. If it had wished to do so, BMSP could have commenced planning and preparing a proposal for Phase II when the extension of the Factor (f) Scheme was announced in March 1992. Furthermore, BMSP was not restricted by the fact that its Phase I program did not finish until 31 December 1993. Other companies started their Phase II program prior to the end of their Phase I program.  BMSP could have submitted its Phase II proposal earlier and planned overlapping programs. In cross examination, Mr O’Reilly conceded that BMSP might have prepared its Phase II proposal in 1992 if it had been performing in 1992 to its Phase I forecasts. 

For these reasons, the second supposed consideration is not one that the Ministers were bound to take into account.

Improper exercise of power - abuse of power

We have reached the conclusion, for reasons given above, that the trial Judge’s finding that the 1992 guidelines for Phase II were not applied inconsistently, should not be overturned. It is therefore unnecessary to consider this complaint further.

The appellants submit that there was a failure to negotiate with them with a view to partial funding and that this constituted an improper exercise of power. But PBPA did consider the possibility of partial funding. It rejected that option on the ground that it would generate insufficient benefit, and could provide insufficient funds for companies to achieve their proposals, thus failing to achieve the objectives of the Factor (f) Scheme. As noted earlier, Mr Eppingstall told the PBPA that BMSP needed at least $60,000,000. It would have been futile to explore partial funding further with BMSP.

Estoppel

We have reached the conclusion, for reasons given above, that the trial Judge’s finding that the appellants did not act to their detriment on the faith of the relevant assumption. should not be overturned. It is therefore unnecessary to consider this ground of appeal further.

CONCLUSION

For the above reasons, the appeal should be dismissed with costs.

I certify that this and the preceding sixty-four (64) pages are a true copy of the Reasons for Judgment herein of the Court

Associate:

Dated:            8 September 1997

Counsel for the Appellants:	Mr D H Bloom QC with Mr A Robertson SC
Solicitor for the Appellants:	Mallesons Stephen Jaques
Counsel for the Respondents:	Mr B G Shaw QC with Mr S J Gageler
Solicitor for the Respondents:	Australian Government Solicitor
Dates of Hearing:	24 February, 25 February 1997
Date of Judgment:	8 September 1997