Astra Pharmaceuticals (New Zealand) Ltd v Pharmaceutical Management Agency Ltd

IN THE COURT OF APPEAL OF NEW ZEALAND

CA72/00

BETWEEN	ASTRA PHARMACEUTICALS (NZ) LIMITED
Appellant

AND	PHARMACEUTICAL MANAGEMENT AGENCY LIMITED
Respondent

Hearing:	1 and 2 August 2000
Coram:	Thomas J Keith J Blanchard J Tipping J McGrath J
Appearances:	J R F Fardell and K J Gibson for Appellant C F Finlayson, D A Laurenson and M B McCarthy for Respondent
Judgment:	23 November 2000

JUDGMENT OF THE COURT DELIVERED BY MCGRATH J

Table of Contents

Paragraph Number

Introduction ................................................................................. [1] - [2]
The background circumstances.................................................. [3] - [16]
High Court judgment................................................................ [17] - [20]
The basis of the appeal....................................................................... [21]
First Issue: Application of reference pricing............................ [22] - [29]
Second Issue: Confidentiality obligations................................................
     The nature of the claim..................................................... [30] - [31]
     The Confidentiality Clause............................................... [32] - [37]
     Confidentiality clause: the High Court’s interpretation... [38] - [40]
     The forecasts..................................................................... [41] - [52]
     H2 antagonist price........................................................... [53] - [55]
     Early termination price..................................................... [56] - [59]
     Disclosure of reference pricing terms............................... [60] - [62]
Third Issue: Fair Trading Act............................................................. [63]
Damages................................................................................... [64] - [80]
Summary and Conclusion................................................................... [81]

Introduction

The Health Funding Authority is responsible, under the Health and Disability Services Act 1993, for reaching agreements for the provision of public health services in New Zealand. Pharmaceutical Management Agency Limited (Pharmac) is a company which in practical terms is a subsidiary of the Health Funding Authority, acting as its agent in the management of public funding of drugs and medicines. Pharmac discharges its functions without the assistance of statutory powers. It operates on a commercial basis entering contracts with distributors by which their rights to have drugs prescribed by medical practitioners for their patients are set.
This appeal concerns such a contract. It is brought by Astra Pharmaceuticals (NZ) Limited (Astra) against a decision of the High Court dismissing an action for damages brought against Pharmac for breach of contract in relation to Astra’s anti ulcerant drug Losec.

The background circumstances

For the purpose of its subsidisation arrangements Pharmac lists medicines on what is called the Pharmaceutical Schedule. This sets out the pharmaceuticals, medicinal devices and related products (in this judgment referred to as drugs) that are subsidised from public funds. The Pharmaceutical Schedule classifies drugs into therapeutic groups and subgroups. A therapeutic group comprises drugs which treat the same or similar conditions. A therapeutic subgroup comprises drugs which produce similar therapeutic effects in the treatment of the same or similar conditions.
The appeal concerns Pharmac’s actions in managing the subsidisation of drugs in the anti-ulcerant therapeutic group in which there are two main types: H2 antagonists (H2As) and proton pump inhibitors (PPIs). They form separate therapeutic subgroups. Of the two, PPIs are considered the more effective medicines but they are also the more expensive. Pharmac subsidises both types of drugs. However, in order to limit expenditure across the anti-ulcerant group, it had placed restrictions on subsidisation of drugs in the PPI subgroup to the extent that they were only subsidised if the patient had first been treated with H2As, had seen a specialist, and had an endoscopy. This of course made the prescription of PPIs subject to threshold expense for the patient. The effect was to impose a control on the level of public expenditure on the higher cost drug.
Within each therapeutic subgroup, Pharmac runs what is known as a reference pricing system. The level of subsidy for each drug in the subgroup is set at the cost of the cheapest drug listed. This price is calculated as the average daily cost (ADC) of that drug. All the drugs in a subgroup are subsidised to the extent of the lowest ADC. If a particular drug in the subgroup has a higher ADC the extra cost will result in a part charge to the patient prescribed the drug. As indicated Pharmac operates as a company which enters into contracts with distributors through which mechanism it discharges its public functions.
At 1 December 1995 the PPI subgroup comprised two drugs: Losec and Zoton. Astra distributes and markets Losec. Astra was concerned to get lifted, if it could, the restrictions on public subsidy for the prescription of Losec. It approached Pharmac in May 1997 seeking to negotiate what it described as a “price-volume agreement”. For the purposes of its negotiations with Pharmac, Astra developed and supplied to Pharmac financial forecasts of the impact of its proposals on overall public expenditure on anti ulcerant drugs. The forecasts included data sourced from the IMS database, which is derived from records of supply from wholesalers to pharmacies. Astra had access to that data but Pharmac did not. Astra at the time made a number of assumptions and projections based on the data. Prior to receiving the Astra forecasts, Pharmac had not done any independent modelling of the anti‑ulcerant market, but to facilitate its negotiations, upon receipt of the Astra forecasts, Pharmac developed forecasts, based in part on those of Astra, but incorporating Pharmac’s own adjustments. Astra had access to data from governmental sources including Health Benefits Limited, another company owned by the Health Funding Authority. Its database is derived from records of claims by pharmacies for reimbursement from public funds of prescriptions. These forecasts were supplied to Astra by Pharmac in August 1997 and were used in the course of their negotiations for an agreement.
On 28 October 1997 Astra entered into a contract with Pharmac in relation to the subsidy of Losec (the Losec Agreement). Astra thereby secured from Pharmac the lifting of restrictions on authority to prescribe Losec. Accordingly when the Losec agreement was ratified by Pharmac’s board and came into force, doctors would become free to prescribe it without threshold cost to their patients. In return for Pharmac’s lifting of prescription restrictions on Losec, Astra agreed to lower the ADC of the drug. Through the reference pricing system this automatically lowered the level of public subsidy required for all drugs in the PPI sub‑group. Astra also agreed to guarantee a cap on the level of total Pharmac expenditure across the entire anti‑ulcerant therapeutic group: that it would not exceed $26.5million each year. The effect of this was to insulate Pharmac from the cost of any surge in the prescription and use of the PPI’s, now that the most effective drug in the more expensive of the two subgroups was available on prescription without the costly restrictions. The term of the Losec agreement was from 1 January 1998 to 31 December 2003.
The Losec Agreement provided, in clause 10, that, in general, reference pricing should continue, but there would be an exemption from the reference pricing system where any reduction in the ADC of Losec’s subgroup was the outcome of a cross deal by Pharmac with another company. The Losec agreement also provided, in clause 23, for a confidentiality clause in respect of information each party provided to the other in the course of negotiating the agreement. Each of these provisions will be examined later in this judgment.
The general terms of the Losec agreement were made known to the industry in accordance with Pharmac’s consultation policies. Pharmac thereby disclosed to Astra’s competitors that Losec was to be de‑restricted, and that Astra had agreed to lower the ADC of Losec and manage an expenditure cap across the anti‑ulcerant group. However the fact that there was some exemption from reference pricing was not disclosed to the industry.
Meanwhile, on 1 July 1997, Pharmacy and Upjohn Ltd (P&U) and Pharmac had entered into a listing agreement (the Somac listing agreement), for the listing on the Pharmaceutical Schedule, in its own therapeutic subgroup, of a PPI drug distributed by P&U called Somac. The basis of listing was that Somac would be subject to the same prescription restrictions in relation to its right to be subsidised as other PPI’s. The Somac listing agreement also provided that three other drugs distributed by P&U would be listed, and that P&U would use its best endeavours to secure Ministry of Health approval for P&U to distribute an H2A drug called Famitidine, which would be listed at a price lower than the current ADC for the H2A subgroup. Pharmac anticipated it would thereby achieve a further reduction in Pharmac’s overall expenditure in that subgroup.
On 1 December 1997, P&U received Ministry of Health distribution approval for Somac. Pharmac then listed Somac in the PPI sub-group. It was accordingly reference priced against Losec and Zoton, but was still subject to the prescription restrictions on PPIs. In order to become competitive with Losec, P&U had to have the restrictions on prescribing Somac lifted. To negotiate that outcome P&U had to demonstrate there would be significant benefit to Pharmac and to that end P&U decided that it should lower the ADC of Somac, thereby lowering the subsidy payable for all PPI’s in the group.
P&U knew that any price reduction for Somac would have to produce a significant saving for Pharmac beneath the expenditure cap agreed to by Astra. Otherwise there would be no benefit to Pharmac in lifting restrictions. In its negotiations with P&U, during April 1998, Pharmac supplied P&U with forecasts of the anti‑ulcerant and, in particular, the PPI market expenditure. These were based on the forecasts supplied by Astra to Pharmac during its negotiations in August 1997 but were prepared in a revised and expanded form. Pharmac’s purpose, in providing the forecasts, was to assist P&U to determine the extent of the Somac price reduction that would be necessary to generate sufficient savings in the PPI subgroup and so to secure Pharmac’s agreement to lift the prescription restrictions on Somac.
P&U were anxious to obtain information about the Losec agreement which, however, was the subject of the confidentiality clause. P&U wanted to know, in particular, whether Losec had been granted an exemption from the normal reference pricing system or not, so that it could formulate a proposal for de‑restriction of Somac. To this end P&U made a request under the Official Information Act 1982 for information about the Losec agreement which Pharmac refused. P&U sought the review of that decision by the Ombudsman. Before the Ombudsman made a decision, Pharmac changed its mind about refusing disclosure and, despite Astra’s objection, released details of the Losec agreement to P&U, and later to the industry generally. Thus informed, on 19 June 1998, P&U made a further proposal which was accepted by Pharmac. Their agreement (the Somac derestriction agreement) included a 40% reduction in the ADC of Somac to $1.30 and an expenditure cap for Somac subsidies. It also removed the restrictions on Somac, allowing it thereafter to compete on an equal footing with Losec for a share of the PPI market.
Meanwhile Losec sales had increased dramatically following its de‑restriction at the beginning of 1998, to the point where by August 1998 expenditure across the anti‑ulcerant market was already only $3.5 million short of the $26.5 million cap for the entire year. Astra developed plans to manage the expenditure cap it had guaranteed, among which was the introduction of an H2A to the market. Astra sought to control the H2A price and thereby the expenditure for this part of the anti‑ulcerant subgroup. Astra at this point predicted it could manage the expenditure blow-out within $1.5 million of the expenditure cap.
However, following the coming into force of the Somac de‑restriction agreement, Astra was forced to reduce the price of Losec to match that of Somac. This was to avoid patients prescribed Losec incurring a part‑charge. As a response to this problem Astra instigated a wholesaler Bonus Scheme under which 40% of the Losec on the market was provided free to retailers. This was, in effect, a 40% reduction in the price of Losec in order to meet the Somac price reduction. By the end of 1998 Astra had not instigated its expenditure management plans, and the expenditure cap under the Losec agreement was exceeded by well over the predicted $1.5 million.
Astra issued proceedings in the High Court against Pharmac in July 1998. At trial it argued, first, that under the Losec agreement reference pricing did not apply to Losec in the circumstances in which Somac reduced the ADC of the PPI subgroup. Secondly, it claimed damages for breaches by Pharmac of confidentiality obligations under the Losec agreement. These complaints concerned the provision of forecasts of expenditure by Pharmac to P&U which were said to disclose Astra’s confidential information and the disclosure to P&U of the Losec agreement and in particular the clause dealing with application of reference pricing. A third cause of action alleged breach of the Fair Trading Act 1986 in relation to disclosure of reference pricing provisions in the Losec agreement.

High Court judgment

In the High Court, before Gendall J, Astra argued first that, on the interpretation of the Losec agreement, Pharmac was not entitled, as a result of the reference price reduction caused by the listing of Somac in the same subgroup as Losec, to reduce the subsidy it paid Astra for Losec. The question turned on clause 10(c) of the Losec agreement. Under it, the general application of reference pricing to Losec was excluded when a reference price reduction was caused by certain types of transactions, known in the industry as “cross deal agreements”, in which a listing of a drug at a particular price in a subgroup is part only of a composite arrangement, which secures other listing benefits for the distributor in a different subgroup or sub-groups. On this claim Gendall J held the exclusion provisions did not apply, with the consequence that the ADC of Somac became the reference price which fixed the subsidy payable to Astra for Losec.
Astra, secondly, argued that Pharmac in its dealings with P&U while negotiating the Somac derestriction agreement, breached obligations as to confidentiality under clause 23 of the Losec agreement. These were alleged to arise first, from Pharmac’s provision to P&U of forecasting models which incorporated confidential information of Astra, and secondly, Pharmac’s release to P&U of information concerning Astra’s intended marketing of Losec, including the reference pricing exception provision in clause 10(c). These allegations were also pleaded in a third cause of action as breaches of the Fair Trading Act 1986.
Gendall J held that none of these allegations were made out. Accordingly he dismissed all Astra’s claims. Astra appeals against Gendall J’s findings on all causes of action.
The Judge also held that, in any event, because Astra had agreed in the Losec agreement to cap public expenditure in the anti-ulcerant market, no loss resulted from the entry by Pharmac and P&U into the Somac derestriction agreement. He accepted the evidence of an expert witness, Mr Taylor, that even before the lifting of restrictions on Somac, the PPI market had grown so much that there was nothing Astra could have done to manage it within the expenditure cap. Any extra revenue Astra would have received in the absence of a breach would have to be paid back to Pharmac.

The basis of the appeal

The first issue in the appeal is whether in the circumstances in which the price of Somac was reduced Clause 10(c) of the Losec Agreement excludes application of reference pricing to Losec. The second issue is whether Pharmac breached contractual obligations as to confidentiality owed to Astra under clause 23 of the Losec agreement. Astra contends such breach arose first by provision to P&U of Pharmac’s forecasts, which incorporated or were based on material originally provided to Pharmac by Astra. Secondly, it was a breach of the confidentiality obligation to release to P&U information concerning terms in the Losec agreement over and above what had been made known to the industry in the public consultation process without first informing Astra. One aspect of this was the release of the reference pricing exception provision in clause 10(c) of the Losec agreement. The third issue in the appeal is whether the actions of Pharmac alleged to be breaches of confidentiality obligations were also breaches of sections of the Fair Trading Act 1986.

First Issue: Application of reference pricing

At the heart of Astra’s first ground of appeal is its contention that steps taken by Pharmac in relation to Somac, during the currency of the Losec agreement, were of a kind which the parties had agreed should not lead to a reduction in the subsidy payable to Astra for Losec. The context is an agreement varying the basis of listing of Losec, under which Astra agreed to reduce the cost of the drug, and to guarantee a cap on Pharmac’s total expenditure on drugs in the group. In return Pharmac agreed to lift restrictions on medical prescription on the drug which inhibited its marketing. The issue turns on clause 10 of the Losec agreement.
Clause 10, so far as relevant for the purposes of this appeal, provides:
10 (a)Subject to subparagraph (c) of this paragraph 10, if the reference price for the therapeutic sub-group of which Losec, in any of its forms and strengths, is a member is reduced for any reason, then the subsidy payable for that strength of Losec is to be reduced, with effect from the date on which the reduction in the reference price comes into effect, to such amount as is equal to the new reference price for that therapeutic sub-group, and the Pharmaceutical Schedule is to be amended accordingly.
(b)You acknowledge and agree that PHARMAC will continue to review the Average Daily Dose for the therapeutic sub-group comprising Proton Pump Inhibitors as at 31 December of each year in accordance with its current practice in that regard and that the reference price for that therapeutic sub-group may be reduced as a result.
(c)The subsidy payable for a form and strength of Losec will not be reduced under paragraph 10(a) as a result of a reduction in the reference price for the therapeutic sub-group of which that form and strength of Losec, is a member if:
(i)the reduction in that reference price comes into effect in
one of the first three 12 Month Periods in the Contract
Period;and
(ii)the reduction is a direct result of:
(aa)a cross deal agreement; or
(bb)a pharmaceutical which was initially listed on the
Pharmaceutical Schedule (as part of a cross deal
agreement) in a different therapeutic sub-group from
the sub-group which Losec is a matter subsequently
being listed by PHARMAC in the same therapeutic
sub-group as Losec.
For the purposes of this letter, a “cross deal agreement” is an agreement between PHARMAC and a pharmaceutical supplier other than you under which:
(iii)that other supplier agrees to reduce the price at which it supplies a pharmaceutical which is already listed on the Pharmaceutical Schedule in a particular therapeutic sub-group; or
(iv)that other supplier agrees to supply a pharmaceutical, and PHARMAC agrees to list that pharmaceutical on the Pharmaceutical Schedule in a particular therapeutic sub-group at a price which is lower than the then current reference price for that therapeutic sub-group,
in consideration for PHARMAC’s agreement:
(v)to list a pharmaceutical supplied by that other supplier in a different therapeutic sub-group; or
(vi)to vary the terms or basis on which a listed pharmaceutical is listed on the Pharmaceutical Schedule where that pharmaceutical is listed in a different therapeutic sub-group.
…..

Clause 10 reflects that Astra and Pharmac had generally agreed that Losec was to be subject to reference pricing in its subgroup. However the subsidy payable by Pharmac to Losec would not be reduced by reference price reductions occurring in the first three years of its term (as was the case here) if the reduction was the “direct result” of either of the two circumstances stipulated in clause 10(c)(ii). Broadly, these covered composite arrangements in which the element causing a reduction in the reference price in Losec’s sub‑group was only part of what had been agreed on by Pharmac with another drug distributor. The commercial purpose of clause 10(c) was to restrict the application to Losec of reference pricing during the term of the Losec agreement where reference price reductions were the direct result of such composite agreements.
We turn to the terms of clause 10(c). To take advantage of the Losec agreement’s exclusion of reference pricing, Astra has to show that the reduction in the reference price in the PPI subgroup, that became effective when Somac’s pricing proposal was accepted, and the prescription restrictions on Somac were lifted, was the direct result of a composite agreement or of a variation in the basis of listing of Somac which falls within subclause (aa) or (bb) of clause 10(c)(ii). That provision, despite its inelegant drafting, incorporates sub-clauses (iii) to (vi) of clause 10(c).
Clause 10(c)(ii)(aa) is satisfied if the reference price reduction on 19 June 1998 was the direct result of “a cross deal agreement”. Clause 10(c)(ii)(bb) is satisfied if the initial listing of Somac on the Pharmaceutical Schedule in a different sub‑group to that of Losec was part of a “cross deal agreement”, and, Somac subsequently was listed in the same sub‑group as Losec.
The element of a cross deal agreement is accordingly common to both subclauses. It is a term defined in the latter part of clause 10(c). Putting the effect of subclauses (v) and (vi) before that of subclauses (iii) and (iv), the first element of “a cross deal agreement” is that it is one entered into between Pharmac and a drug distributor under which Pharmac agrees to list a drug in a particular sub‑group, or to vary the terms or basis of its existing listing. Secondly, and in return, the distributor agrees to reduce the price of another drug, already listed in a different sub‑group, or to supply a new drug for listing at a price lower than the current reference price of its sub‑group.
Applying these provisions to the circumstances of the reference price reduction that followed the removal of restrictions on Somac, it is convenient to start with clause 10(c)(ii)(bb). Somac was initially listed in its own sub‑group, and thus in a different therapeutic sub‑group to that of Losec. The Somac listing also provided that Pharmac was to list other drugs. In return, in relation to Famitidine, P&U agreed to provide a new drug for listing at a price lower than the current reference price for its sub‑group subject to securing distribution approval. While this was a contingent agreement, in our view that is not of consequence. It follows that the original listing of Somac was part of a cross deal agreement as defined in clause 10(c), and that the circumstances stipulated by subclause (bb) are met. The issue then becomes whether the reference price reduction in Somac was a “direct result” of those circumstances, that is of the transfer of listing of Somac from a different sub‑group so that it is “…listed by Pharmac in the same therapeutic sub‑group as Losec”. This is what Mr Fardell contended was the position.
The facts of this case are that P&U achieved its initial listing of Somac on 1 July 1997. At that time P&U did not have approval to market Somac. It obtained that approval on 1 December 1997. Even then Somac remained subject to the prescription restrictions recently lifted from Losec. P&U needed more than its listing to be able to market Somac effectively in the PPI market. It needed to free itself from the restrictions on prescription of Somac by medical practitioners. It only achieved this when its price proposal was accepted by Pharmac on 19 June 1998 and the two companies entered into the Somac derestriction agreement. This sequence plainly demonstrates the transfer in the listing of Somac to the same sub‑group as Losec was only a step along the way to the reduction in the reference price. That reduction was a direct result of the Somac derestriction agreement, but that was a discrete event and an intervening one. In those circumstances the reference price reduction was not a direct result of Somac being listed by Pharmac in the PPI sub‑group in which Losec was listed in terms of clause 10(c)(ii)(bb). For the same reasons it was not the direct result of a cross deal agreement in terms of clause 10(c)(ii)(aa). The Somac derestriction agreement was not of a composite kind nor did it even provide for the listing or variation of listing of a different pharmaceutical by Pharmac. Accordingly we hold, in agreement with Gendall J, that clause 10(c)(ii)’s exclusion of the application of reference pricing to Losec has no application in the circumstances of this case.

Second Issue: Confidentiality obligations

The nature of the claim

Astra’s claim is that Pharmac, in the course of its negotiations with P&U over the lifting of restrictions on prescribing Somac, breached the confidentiality clause in the Losec agreement. The agreement stipulated that information passing between Astra and Pharmac pursuant to or in the period leading up to the Losec Agreement was confidential, and not to be disclosed by the parties other than pursuant to the narrow authorising provisions of the Losec agreement. In the course of negotiating the Losec agreement information had passed from Astra to Pharmac between April and October 1997. Between April 1998 and June 1998 material in a similar format, derived in part from the earlier material, passed from Pharmac to P&U. Astra argued that certain coincidences between the two sets of information, coupled with direct acknowledgements of the link between them in correspondence and evidence proved breaches by Pharmac of its confidentiality obligations.
Gendall J accepted that some material provided by Pharmac to P&U had initially come from Astra, but he held that the forecasts were Pharmac’s work, incorporating its own data and the judgments of its analyst Mr Sharplin. The forecasts in question were in the nature of opinions and estimates of future trends to which individual judgments had been applied. The High Court accordingly held Pharmac’s provision of such material to P&U involved no disclosure in breach of the confidentiality clause.

The Confidentiality Clause

Clause 23 of the Losec agreement provides as follows:
All information exchanged between us under the terms of this letter or during the negotiations preceding this letter and relating to the existence of this letter or to its terms and conditions is confidential to us, our employees, legal advisers and other consultants (including PTAC) and may not be disclosed by either of us (and each of us must use our best endeavours to ensure that none of our employees, legal advisers or other consultants disclose this information) to any person except where the other party has been reasonably informed prior to any such disclosure and the disclosure is:
(a)for the purposes of this letter agreement:
(b)required by law, whether pursuant to the Official Information Act 1982 or otherwise:
(c)of information that is generally and publicly available without any cause attributable to the disclosing party; or
(d)in a form, and of content, agreed to by you and PHARMAC.
PHARMAC will not, however, release any information in relation to this letter agreement, or its terms, to any person (other than its advisers and other of consultants) for the purposes of consultation unless it has consulted with you before releasing that information.
The context is a contract which gives Astra, the distributor of Losec, the benefit, in terms of eligibility for subsidy, of the lifting of restrictions on the prescription of Losec by general medical practitioners for their patients. This removed impediments to the marketing of Losec as a treatment for gastro oesophageal reflux disease (GORD) conditions. Pharmac was entering the contract as the manager of public funding of prescription drugs. By the agreement it sought to secure certain fiscal benefits in relation to drugs of the same therapeutic nature as Losec. It sought to pass certain expenditure risks, in relation to those drugs, to Astra. In this context, the interests of both parties called for a mutual exchange of information, including some information confidential to the interests of each party. Each needed to be fully informed, prior to contracting, of matters that might impact on the commercial outcome of any agreement they reached. In this context the commercial purpose of clause 23 is clear. It protects each party disclosing its confidential information to the other under the terms of the Losec agreement or in the course of negotiations preceding it. It does so by imposing a contractual obligation as to confidentiality The confidentiality clause accordingly serves the joint interest of the parties by facilitating the mutual exchange of information.
Read literally, and on their own, the words of clause 23 might be understood as imposing obligations of confidentiality on a provider of information, as well as the recipient, in relation to what it had provided the other party. However such an interpretation is inconsistent with the context of the Losec agreement. As a drug distributor Astra was aware, in particular, that Pharmac’s public function in managing public funding of prescription drugs was a continuing one. Pharmac would, in discharging its function in the future, need to be able to enter agreements with other distributors, in relation to public funding of drugs, which would be competing with Losec. The language of clause 23 can be read as imposing an obligation on each party to treat as confidential only such information as the other supplied it, and should be so read.
The obligation is to refrain from disclosure. Clause 23 is not expressed as a prohibition on general use of information received for purposes outside the agreement. Nor is there any basis for implication of such a prohibition. However methods of use of confidential information in dealings with third parties may amount to disclosures controlled by the clause. That will be the case where material has been used in a way which communicates to others what the parties had agreed should remain secret. In this appeal it is necessary to consider whether the dealings by Pharmac with P&U, prior to their entry into the Somac derestriction agreement, amounted to such a prohibited disclosure, bearing in mind that Pharmac is entitled under clause 23 to use information received from Astra for its general purposes in a way which does not constitute disclosure.
To qualify for protection, information must, first, be exchanged “under the terms of….or during the negotiations preceding” the Losec agreement. Secondly, it must relate “to the existence of (the agreement) or to its terms and conditions”. That language is not however to be read restrictively. The Losec agreement contemplated further steps would be taken by the parties, including the listing of other drugs, to give the Losec agreement full effect. Information exchanged after the parties entered into the Losec agreement, relating to matters contemplated by its terms, would qualify for protection.
Finally, the obligation is expressed as prohibiting disclosure of confidential information other than, first, in accordance with a process (in essence requiring prior notice of intention to disclosure) and, secondly, in stipulated circumstances (in particular where a legal duty to make disclosure arises under the Official Information Act). The purpose of the obligation to reasonably inform the other party of an intention to disclose confidential information is, in our view, to allow the other party a reasonable period of time in which to consider its position, and take such steps as are open to it. These might be to make submissions to Pharmac (which however has public responsibilities under the Official Information Act which might require disclosure) or to seek redress, including injunctive relief, in the Courts. The clause requires that the other party be given sufficient notice of when information will be released to have a genuine opportunity to take such action prior to release. Properly understood it is not in conflict with the provisions of the Official Information Act.

Confidentiality clause: the High Court’s interpretation

Gendall J held that clause 23 did not prevent Pharmac at any time in the future, from providing any distributor with its own forecasts, updated so as to be relevant to the circumstances of the time. It followed, as we understand the judge’s view, that Pharmac was not restrained from providing such forecasts to third parties. Otherwise Pharmac could not enter into informed negotiations with such parties and that was not part of the intention of clause 23.
We agree that it was not part of the intention of clause 23 to prevent Pharmac from continuing to exercise its function of managing the funding of prescription drugs. Pharmac’s continuing role can certainly be seen as part of the context or factual matrix in which the contract is to be interpreted; but that is the extent of its assistance in interpretation of the contract. Pharmac’s ability to continue to discharge its function was not made a term of the Losec agreement. Nor is it contended that Pharmac’s role is supported by a statutory scheme or process. In short, in interpreting clause 23 no legitimate reason has been given for departing from the starting point that the words used by the parties are taken to be expressing their contractual intention (Benjamin Developments Ltd v Robert Jones Investments Ltd [1994] 3 NZLR 189,196,203; Boat Park Ltd v Hutchinson [1999] 2 NZLR 74). Accordingly there is no argument before us that, if Pharmac enters contracts which inhibit the future exercise of its public function, it is immunised from the consequences of any breaches of its contracts on the ground that they inhibit the future exercise of its public functions. And, in the present case, if Pharmac has disclosed confidential information to P&U by the provision of forecasts during the course of its negotiations over lifting restrictions on Somac, Pharmac will be liable for damages caused by its breach of contract.
Because we have departed to some extent from the High Court’s interpretation of clause 23 we must turn to the evidence on this branch of the case to consider, first, Mr Fardell’s submission that forecasts provided by Pharmac to P&U in April 1998 made disclosures of Astra’s protected information. Our approach is that where, in the course of negotiations, Astra’s data was altered by Pharmac, following evaluation and consideration of its own material, the data concerned was not covered by clause 23. The mere fact that in a particular forecast a relationship, in terms of data, can be identified with an earlier forecast in a sequence is not enough to give information protection. It must be established that in a particular forecast which was communicated to a third person information of Astra was disclosed by Pharmac.

The forecasts

In May 1997 Astra made a submission to Pharmac seeking removal of restrictions on prescription of Losec by general medical practitioners. Public subsidy of Losec was, at that time, only available on the prescription of specialists who performed endoscopies. In return for the proposed lifting of restrictions, Losec offered price reductions for Losec 20mg strength, the introduction of 10mg and 40mg strengths and an annual cap on public funding of Losec.
The Astra proposal included a table which was a calculation of forecast total public expenditure on drugs for GORD conditions, that is public expenditure covering all PPIs and H2As if the proposal were accepted. The period covered by the forecast was each year from 1996 to 2002. The basis of the calculations shown by the table was:
[a]Assumptions were made of the number of GORD patients likely to be treated nationally each year from an actual base figure for 1996;
[b]Assessments were then made of the percentage of those patients respectively treated over the forecast period by PPIs, H2As and antacids;
[c]An assessment was next made of the percentage of the PPI market Losec (and H2As and antacids) would obtain during the period of the forecast;
[d]This enabled a calculation to be made of the number of GORD patients who would be treated by Losec during the forecast period;
[e]The split of Losec’s share of the PPI market, between the three strengths of Losec that would be available, was assessed over the forecast period.
[f]A calculation was then made of the total forecast expenditure on Losec each year based on its proposed price.
[g]An estimate of the forecast expenditure on the share of PPI market which it was estimated others would secure over the forecast period was then calculated.
[h]An estimate of total forecast expenditure on the GORD market was then calculated for each year of the forecast by adding figures in [f] to those in [g].
We take the view that the structure of the model or framework in which Astra first presented its market forecast and which was subsequently the framework for subsequent forecasts is not protected by clause 23. It is simply a straightforward tabular calculation of forecast market expenditure, replication of which would present no difficulty or delay.
Astra’s May 1997 table included certain actual 1996 data from which assessments for future years were projected. For example Losec’s figure indicating it had 93% of PPI market share in 1996 was derived from IMS data available to Astra. Pharmac did not have direct access to that data. However for later years than 1996 the table incorporated Astra’s judgments as at May 1997 as to likely movements in its share of the PPIs market in future years if its proposals were accepted. Its assessment was that Losec’s share of the PPI market would drop to 91% in 1997 but rise in the following year to 95% and thereafter remain constant at that figure through until the end of 2002. This forecast reflected Astra’s assumption that Losec alone, in the PPI market, would be derestricted. Overall Astra predicted total GORD segment market expenditure would move from $17,110,434 in 1997 to $26,781,913 in 2002.
Pharmac’s analyst, Mr Sharplin, gave evidence that, on receipt of Astra’s May 1997 proposal forecast, he set out to create a Pharmac forecast, using Astra’s format, and its data when that seemed reasonable, but departing from that data when he thought appropriate. Gendall J accepted Pharmac’s characterisation of this process as Pharmac’s forecast, one which it developed itself from its own data.
However Pharmac’s forecast in response, prepared on 11 July 1997, did incorporate some data that was unchanged for each year of the forecast period. This included projections for Losec’s percentage share of the PPI market and, correlatively, those for the share of the market it was assessed would be taken by other PPIs. There were some other coincidences in the data, in particular the split between strengths of Losec in both 1996 and 2001, but not in intervening years. Mr Sharplin acknowledged in a letter dated 8 August 1997 that in relation to his forecast: “using a mix of (Astra’s) suggestions and (Pharmac’s) expectations we have derived forecasts for H2s and PPIs under both the status quo and Losec proposal scenarios”. He made an affidavit in the proceedings and was cross-examined on it. In re-examination he acknowledged that Astra data he used was the Losec share of the PPIs and by implication the correlative share of others in PPIs. He acknowledged also the use of Astra data in the breakdown between 10mg, 20mg and 40mg strength. In all other respects he said he used Pharmac’s own data and knowledge. Overall only where they agreed with it did Pharmac use Astra data. As indicated above the Losec agreement was entered into on 20 October 1997.

On 3 and 23 April 1998, during the course of negotiations over the Losec competitor, Somac, Pharmac provided P&U what it described as “our revised forecasts for expenditure in the Ulcer Healing Agent market”. This was to assist P&U to make a proposal enabling it also to secure lifting of prescription restrictions on Somac. There were coincidences between the data in this table and that of Pharmac’s forecast of 8 August 1997. These were that:
[a]Both the August 1997 and the April 1998 forecasts recorded 5% as the market share of antacids for the entire period from 1996 to 2002.
[b]Both forecasts also recorded as nil the number of patients on triple therapy between 1996 and 2002.
[c]Both forecasts recorded Losec’s share of PPI market as 95% in the years 2000 to 2002.
[d]Correlatively the others’ share of the PPI market was recorded as 5% for each those years (2000 to 2002).
[e]Both forecasts recorded those treated respectively in 20mg, 10mg and 40mg strengths recorded as 100%, 0% and 0% respectively for each of the years 1996 and 1997.
However, while there is a coincidence in the 5% market share of antacids in the Pharmac’s forecast of August 1997 provided to Astra, and that of April 1998 provided to P&U, there had been different data in Astra’s forecast provided to Pharmac in May 1997. Superficially this might suggest the 5% figure was not information provided by Astra. Secondly, while the May 1997, August 1997 and April 1998 forecasts included projections of Losec’s share of the PPI market at 95%, there were other significant differences. The two 1997 forecasts were for a 91% share in 1997 and a 95% share from 1998 through to 2002. The April 1998 forecast data departed from the earlier two providing for 86.7% market share in 1997, 90.25% in 1998 and 93% in 1999. Arguably this suggests the 95% prediction in 2000, 2001 and 2002 was also freshly considered in the April 1998 forecast provided to P&U. Thirdly the coincidence in the split between the strengths of Losec coincided in the two 1997 forecasts for 2001 at 52%, 38% and 10% for 20mg, 10mg and 40mg respectively. But in the April 1998 forecast this had become 100% for 20mg. It is true that each table showed 100% 20mg in 1996, this being an actual figure.
The issue is whether Pharmac disclosed to P&U information that came from Astra in the sense that directly or indirectly Pharmac passed on to P&U what it had received from Astra.
The high risk forecasts that were provided to P&U by Pharmac on 23 April 1998 included data concerning Losec’s share of the PPI market which originally came from Astra. They also included the correlative data for the market share of PPIs other than Losec. This data had been carried through to the “Pharmac” forecasts of 11 July 1997 and 8 August 1997. The forecast in early April 1998 indicated a departure from Astra’s data but the 23 April forecast repeated the figures of 95% and 5% for the years 2000, 2001 and 2002. In our view the coincidence clearly points to use and in practical terms disclosure of Astra’s original data and this was in substance confirmed by the oral evidence of Mr Sharplin. In our view that was in breach of clause 23.
The 5% market share of antacid was carried forward consistently from the forecast of 11 July 1997, although it differed from that in Astra’s original May 1997 forecast. Nevertheless Mr Sharplin acknowledged that this data was sourced from Astra. We hold that the inclusion of that data in the 27 April 1998 forecast was also a disclosure of Astra data which was in breach of the clause.
In relation to the split among different strengths of Losec the 23 April 1998 forecast did not include any share for Losec 10mg or Losec 40mg. The only Astra data carried forward was for the 1996 and 1997 years when there was no split. Nevertheless to that extent it is established that Astra’s data was used and wrongly disclosed in the 23 April forecast. For the sake of completeness we should add that we see no significance in the nil forecasts of patients on triple therapy.

H2 antagonist price

Astra also contended there was a wrongful disclosure of its proposed H2A price of 35cents. In its initial proposal to Pharmac, P&U based its calculations of forecast H2A expenditure on a daily cost of between 57cents and 41cents over the period 1998 to 2003. In reporting internally on that proposal in April 1998 Mr Sharplin observed that H2As were expected to fall in price later in 1998 to around 35cents per day. Pharmac provided that report to P&U and P&U's next forecast incorporated a revised daily cost figure of 35cents for H2As from 1999 through to 2003. This contributed to the level of savings in that forecast so P&U was clearly assisted by Mr Sharplin’s opinion.
Astra argues the release of Mr Sharplin’s report to Pharmac involved a disclosure of its confidential information. To establish this claim Astra had to prove the 35cents figure was derived from its data. It pointed to a facsimile sent to Ms McCombie of Pharmac on 19 December 1997 in which Dr Gravatt of Astra expressed a view as to future pricing of H2As. Dr Gravatt’s view was that prices of H2As would equate to an ADC of around 55cents when Astra’s current H2A product was launched in August 1998 on expiry of a patent. Thereafter Astra anticipated the ADC would reduce to either 30cents or “around 37cents” by 2000, depending on whether preferred supplier status was allowed. On this basis Astra asserted that by conveying to P&U on 23 April 1998 Mr Sharplin’s view that in 1998 H2A prices would drop to 35cents Pharmac was disclosing confidential information derived from the 19 December 1997 facsimile message. Astra argued the 35cents figure was a mid-point between its 30cents and 38cents prices.
There are a number of difficulties in the way of this contention. First Astra’s confidential opinion was that the ADC of H2As would be 55cents from August 1998 reducing to either 30cents or 38cents by 2000. Mr Sharplin’s opinion was that the 35cents ADC would commence in 1998. There is no great coincidence in this. Nor is there any other evidence that suggests Mr Sharplin drew on the 30cents and 35cents alternative prices for his 35cent figure. In cross-examination he was asked if he had contemplated P&U might achieve through H2A price reductions the savings necessary for Pharmac to find attractive a further agreement concerning Somac but he insisted he had not been thinking about where the savings might be made. It was not his responsibility to do so. It was not directly put to him that Dr Gravatt’s facsimile had any link to his views. Insofar as Mr Sharplin was asked to address reductions in prices of H2As he observed that with generic competition there would be large reductions in their prices. That of course was common ground and not confidential. Mr Sharplin’s evidence that forecasts provided to P&U were Pharmac’s forecasts developed from its own data was accepted by Gendall J. It is plainly consistent with all the evidence on this issue. The contention on appeal that Pharmac breached confidentiality by sending its letter of 23 April 1998 with Mr Sharplin’s report enclosed was not proved and accordingly fails.

Early termination price

The Losec agreement included provisions for early termination on notice. If Astra terminated the agreement it had a continuing obligation to supply Losec at an ADC of $1.30. Astra maintains that Pharmac disclosed to P&U that term as to price on termination in breach of clause 23 of the Losec agreement.
The significance of such a disclosure was that, while P&U needed to offer a proposal to Pharmac that provided price reductions in the GORD market, it did not wish to pitch the price of Somac so low that Astra would not meet it. If P&U captured too much of the market that would require substantial rebate payments from P&U to Pharmac under a cap provision in their agreement. The basis of this cause of action, accordingly, was that by providing P&U with information signalling to it the low price acceptable to Astra on termination, Pharmac had assisted P&U to fix its proposal price for Somac at a level it could confidently anticipate Astra would match. The price P&U offered was $1.30, which Astra maintained was a telling coincidence with its identical termination price.
The issue on appeal is whether Astra has proved this breach. Here the coincidence is not so striking that it carries the day in itself. Certainly Astra has demonstrated P&U wanted the price to be brought down no lower than to a level Astra would match. It also is true P&U’s initial proposal price was dropped to $1.30 in response to it receiving Pharmac forecasts of March 1998. But Astra was not able to take the matter significantly further than that. It was not able to show Pharmac had in mind the termination price under the contract when it prepared its forecasts. Astra has its suspicions but it has simply failed to prove these forecasts involved disclosure of the termination price. Mr Sharplin’s evidence, accepted by the Judge, was that the high risk forecasts which led P&U to decide to offer the price of $1.30 were projections formulated by Pharmac not linked to the termination price under the Losec agreement. We agree with that conclusion.
The extent of the breach of clause 23 by Astra through disclosure of confidential information, accordingly comes down to the provision to P&U in April 1998 of data in forecasts concerning the 5% antacid market share data, Losec’s percentage market share and the strengths split for Losec (or rather lack of them) in 1996 and 1997.

Disclosure of reference pricing terms

Astra contended there was a separate breach of clause 23 when Pharmac failed to give it prior notice of its release on 12 May 1998 to P&U of clauses in the Losec agreement dealing with exemptions from reference pricing. Gendall J accepted there was a breach of the procedural obligation under the clause, in that Astra had not been reasonably informed prior to disclosure. The Judge also accepted that, had it been duly informed, Astra would have been able to take steps to try and halt or impede negotiations over lifting the restrictions on prescribing Somac, although he doubted whether Astra would have done more than register an objection. In any event, in the Judge’s view, P&U would have reached agreement on the same terms as it later did, albeit perhaps conditionally, on continuing application of reference pricing. The result was that he held no loss was caused by the breach and the claim failed accordingly.
Mr Finlayson, in support of Pharmac’s cross-appeal, argued that there was no breach for two reasons. First, Pharmac was protected against such a claim by s48 of the Official Information Act which provides no proceedings shall lie in respect of the making available of official information in good faith, or for any consequences that follow from making it available. We do not agree. Astra’s claim does not arise from making available official information or consequences that follow therefrom. It rather arises from failure to notify in advance it will be made available. Section 48 is not relevant to that.
Pharmac’s second argument on the cross-appeal was that the confidentiality clause did not give Astra a right to be informed to any greater extent than was needed to put a case against disclosure to Pharmac. We have already indicated in paragraph [37] of this judgment that in our view this interpretation is inconsistent with both the language and commercial purpose of clause 23 which gives a party the right to be adequately informed within a timeframe that reasonably enables it to seek to exercise its legal rights should it so wish. Clearly that was not done. Accordingly we agree with Gendall J that the failure to give prior notice was in breach of contract.

Third Issue: Fair Trading Act

Astra alleges that Pharmac is in breach of s9 of the Fair Trading Act by reason of misleading and deceptive conduct surrounding the release of confidential information. Astra relies on circumstances wider than those alleged to have breached confidentiality and in his oral submissions Mr Fardell emphasised the failure of Ms Della Barca to inform Astra of the release of clause 10(c) of the Astra agreement in particular during a telephone conversation on 30 June 1998. However, as Mr Fardell accepted, the matters raised on this ground of the appeal can clearly add nothing to Astra’s position beyond what it is able to achieve under the allegations of breach of confidentiality. Accordingly we make no finding on this cause of action.

Damages

In this case the following general approach to compensation for an improper headstart applies:
This review shows that the headstart approach to damages or other relief is not based on some artificial or arbitrary doctrine, to be applied regardless of the facts of the case. It is a principle applied in conformity with the more general principle that a person misusing confidential information must answer for his default according to his gain. A headstart may often be the gain in these cases. If it is the gain, damages will be assessed accordingly and any other relief, such as injunction will be moulded.
Hospital Products v U.S. Surgical Corporation [1983] 2 NSWLR 157, 233 (CA).

See also the decision of the High Court of Australia on appeal (1984) 156 CLR 41 at 112 per Mason J.

In relation to Pharmac’s breaches of clause 23 by disclosure of Astra’s data in forecasts given to P&U, Mr Fardell argued that if P&U had not had the resulting springboard benefit, there would have been a delay in concluding the Somac derestriction agreement and in the lifting of restrictions on Somac. In relation to the breach of the procedural obligation to reasonably inform Astra prior to disclosures of confidential information about reference pricing terms in the Losec agreement, Mr Fardell likewise argued that, had Astra received due notification, the entry into and coming into force of the Somac derestriction agreement would have been delayed. The overall consequence, he submitted, would have been that Pharmac would not have implemented the subsidy reduction on 1 September 1998. In his written submissions Mr Fardell argued that Astra’s loss should be compensated by reference to the amount of reduction in the public subsidy from 1 September 1998 for the period of delay. Before us, however, he recognised that, because Gendall J had accepted the evidence of Pharmac’s financial expert, in preference to the expert called by Astra, he was unable to advance that submission with any force. He rather emphasised loss in terms of the opportunity cost of the premature impact of the subsidy reduction.
Mr Laurenson, for Pharmac, contested the proposition that any breaches of the confidentiality clause would have resulted in delay in the conclusion of the Somac derestriction agreement on 19 June 1998 or its coming into force on 1 September 1998. He emphasised that, in any event, the Judge had accepted Mr Taylor’s evidence that Astra did not suffer any loss as a result of not receiving after 1 September 1998 the level of subsidy it had previously received. In relation to the breaches through disclosure of reference pricing exceptions without first informing Astra, he argued that Astra would not have taken any steps to prevent or delay the release of the clause, and the agreement listing restrictions on Somac would have been concluded on the same terms and at the same time.
We first address the argument that, but for the breach of confidentiality in the forecasts provided by Pharmac to P&U, there would have been a delay in concluding the Somac derestriction agreement. This is largely a matter of impression. Because of his view on liability it was not the subject of a finding by Gendall J. There are a number of matters we have taken into account. First, the limited extent of what we have found to be Pharmac’s breach relative to what was alleged. Secondly the fact that to have avoided improper disclosures in forecasts in April 1998 Pharmac would probably have had to seek out some new data on Losec which, while probably available from its own sources, would have taken time to retrieve. Thirdly, we have noted indications in the evidence of the time it takes to negotiate such agreements as that of 19 June 1998. Fourthly, and conversely, we also recognise that there was some sense of urgency in this particular case. Our overall conclusions are that there would have been a short delay, in the order of a few months, in both the completion and the coming into effect of the agreement and that the agreement immediately resulted in a sharp reduction of the reference price for Somac.
The situation in relation to breach by the failure of Pharmac to reasonably inform Astra prior to the disclosure of reference pricing is more complex. It concerns, in part, the loss resulting from an omission to act by Pharmac, in breach of contract, where causation of loss depends on the hypothesis that Astra would have sought injunctive relief had Pharmac duly informed Astra of Pharmac’s intention. In those circumstances Astra must prove on the balance of probabilities that it would have taken that hypothetical action thereby establishing causation. If causation is proved then the quantum of damages must be estimated by the Court consistently with principles applicable for the loss of a chance (Martelli McKegg Wells and Cormack v Commbank International NV (1996) 10 PRNZ 153, Allied Maples v Simmons and Simmons [1995] 1 WLR 1602 CA).
Mr Fardell took issue with Gendall J’s findings in this part of his judgment. Gendall J held that in the absence of any breach Pharmac would still have entered into the agreement with P&U to lift restrictions on Somac. Had P&U been unable to get information about the application of reference pricing under the Losec agreement it would have made its offer concerning Somac conditional on the usual reference pricing formula applying. He held that while prior warning of intended disclosure may have enabled Astra to take steps to try to halt or impede the negotiations for a short time, that would have only delayed the inevitable.
Mr Fardell challenged this factual finding arguing there was no evidence to support the notion of a conditional bid and that it was inconsistent with actions of a P&U executive at the time. We do not accept this contention. Gendall J saw and heard the relevant witnesses and his findings, including that about the probable contingent offer, are inferences which were open to him. In our view, the only means by which the Somac delisting agreement would have been delayed, had Astra been given prior warning, would have been if Astra had sought to restrain its release by seeking an injunction in the High Court.
Gendall J was not persuaded that Astra would have taken such positive steps to prevent the release of the reference price exclusion clauses in the Losec agreement had it received timely notice of Pharmac’s intention to release them. On this issue he was influenced by what he saw as Astra’s failure to take such steps when told on 30 June 1998 the whole Losec agreement was to be released. At that time Astra was unaware of the earlier disclosures.
We take the view that Gendall J was wrong on this point. Dr Gravatt’s evidence was that he was “certain Astra would have taken formal steps to prohibit Pharmac from releasing the information”. Astra had previously, in the context of Official Information Act requests, made plain to Pharmac that it regarded the reference price exception clauses as highly confidential in that disclosure would be likely to prejudice Astra’s commercial position. Indeed, the possibility of seeking injunctive relief is contemplated in the agreement. Had it had the opportunity to do so on 12 May 1998, Astra would have assessed the prospect of the release of those clauses in that light. We do not regard the circumstances of the period between 30 June and 2 July 1998 (when Dr Gravatt was at a disadvantage in deciding what to do overnight due to absence overseas of Astra’s legal counsel) as indicative of Astra’s likely attitude at the earlier stage. Astra, in our view, would have perceived a high risk of damage to its commercial position. It would also have been influenced by its understanding, at the time, that it had an Ombudsman’s ruling in its favour. We find it would probably have sought to restrain the release of the reference price exemption clauses by applying to the High Court for an injunction and seeking urgent interim relief.

On that basis causation is established and whether Astra would have achieved a delay in the Somac derestriction agreement being completed and coming into force is to be determined on loss of a chance principles. As to those principles, this Court has previously adopted the approach of Lord Diplock, who speaking of the need “to form a view upon….matters each of which is in a greater or less degree one of speculation”, said in Mallet v McMonagle [1970] AC 166,176:
In determining what [happened] in the past a court decides on the balance of probabilities. Anything that is more probable than not it treats as certain. But in assessing damages which depend upon its view as to what will happen in the future or would have happened in the future if something had not happened in the past, the court must make an estimate as to what are the chances that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards.
(See Cee Bee Marine v Lombard Insurance Co Ltd [1990] 2 NZLR 1,6, and Takaro Properties Ltd v Rowling [1986] 1 NZLR 22, 63-64)
In this case the estimate to be made is the extent to which legal proceedings taken by Astra would have delayed the process of implementation of the Somac Agreement. Provided Astra can show that on the evidence the possibility of such a delay was real, rather than fanciful, it is the Court’s responsibility to fix the appropriate period. In assessing the extent of any such delay the Court must take into account the relevant contingencies and discount the delay appropriately. The two primary contingencies in this instance are the likelihood of the success or failure of the hypothetical litigation and the finding that P&U would have submitted its proposal at some point on a conditional basis.
Applying this approach, it is of importance that Astra would have faced real difficulty in securing an interim injunction on terms that would have delayed the lifting of restrictions on Somac beyond 1 September 1998. It may well not have secured ex parte relief. In any event an early hearing and decision on its interim injunction application would no doubt have eventuated. The High Court would have been concerned that an injunction would delay a new medicine from coming on to the market. The Judge would also be aware that Pharmac had its own Official Information Act responsibilities to discharge in releasing information and have taken that into account. There was also a strong argument available to Pharmac that damages would be an adequate remedy. The terms of any restraining order would have been restricted to the release of information concerning the Losec Agreement by Pharmac to P&U. It would have been highly unlikely to have prevented the parties proceeding with negotiations or taking other steps towards the submission of the Somac proposal. Overall, the more likely outcome would be that the application would be dismissed prior to 1 September and without causing significant disruption to Pharmac. But we cannot exclude as fanciful the possibility of some delay resulting from the probable injunction application.
Accordingly, applying loss of a chance principles as discussed above, the period of delay to be allowed must be heavily discounted. It must be considered together with the delay arising from breach of confidentiality in the forecasts to reach an overall likely delay.
Our overall conclusion, taking into account all contractual breaches, is that Astra has established that, had there been no breaches of its confidentiality obligations by Pharmac, the agreement to lift prescription restrictions on Somac would have taken effect four months later than it did, that is on 1 January 1999.
Astra is not entitled over this four month period to the subsidy at the level prevailing prior to the reduction to $1.30 of the reference price. This is because the Judge accepted the evidence of Mr Taylor and held that Astra had not established it incurred any loss by reason of the coming into force of the Somac derestriction agreement. Damages are accordingly to be assessed in terms of the opportunity cost of the reduction over the four month period.
We are not able, however, to reach a final decision on that loss. Indeed we understood Mr Fardell to recognise we could not take the matter further than we have on the argument put to us. He did suggest the measure of damages might include interest on subsidy funds initially received, but which would have to be subsequently repaid, for the period those funds were held by Astra. There may also be some claim for interest on costs of the wholesaler bonus scheme. Appendix 20 to Mr Taylor’s evidence appears to indicate that interest on $3,798,000 is involved although we are unclear for what component sums over which period or periods. There may, however, be a set off, given that, again based on Mr Taylor’s evidence, the Judge was of the view that Astra was probably advantaged by the lifting of restrictions on Somac. Appendix 20 also appears relevant to that issue. However, as we were not addressed on, nor taken to the relevant evidence on these matters in submissions it is not appropriate for us to express any views on them at this stage.

Summary and Conclusion

The Court finds that:
[a]The exemption from reference pricing provided for by clause 10(c) of the Losec agreement did not cover the terms of the Somac derestriction agreement nor the circumstances in which the reference price applicable to Losec was reduced on 1 September 1998.
[b]Pharmac was in breach of its obligations as to confidentiality under clause 23 of the Losec agreement in:
[i]disclosing Astra data in its April 1998 GORD market forecasts provided to P&U concerning the 5% antacid market share, Losec’s percentage market share and the estimated strengths split for Losec in the market; and
[ii]disclosing on 12 May 1998, without first reasonably informing Astra, the provisions for exemption from reference pricing of Losec in the Losec Agreement.
[c]Had there been no breach of its confidentiality obligations by Pharmac an agreement to lift restrictions on Somac would have come into effect four months later than it did, that is, on 1 January 1999.
[d]Astra is entitled to be compensated for the breaches on the basis that Pharmac had an improper headstart in entering the Somac derestriction agreement which, when it came into effect, reduced the subsidy payable from public funds to Losec.
[e]Because Astra has not established it had incurred loss due to the reduction in subsidy, damages are to be assessed in terms of the opportunity cost to Astra of the reduction.
We would like to think that what has been decided in this judgment will be sufficient for the parties to resolve all remaining issues. In case that is not possible we reserve the parties leave to apply. As the ultimate outcome of the appeal is at this point uncertain we also reserve the question of costs.

Solicitors

Russell McVeagh, Auckland, for Appellant
Bell Gully, Wellington, for Respondent

[2000] NZCA 345

23 November 2000