Diagnostic Medlab Ltd v Auckland District Health Board HC Auckland CIV 2006-404-4724
[2007] NZHC 177
•20 March 2007
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EMBARGOED FROM RELEASE OTHER THAN TO PARTIES AND EMPLOYEES AND COUNSEL FOR 3 HOURS AFTER DELIVERY BY REGISTRAR
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2006-404-4724
BETWEEN DIAGNOSTIC MEDLAB LTD Plaintiff
AND AUCKLAND DISTRICT HEALTH BOARD, WAITEMATA DISTRICT HEALTH BOARD, COUNTIES- MANUKAU DISTRICT HEALTH BOARD
First Defendants
AND LAB TESTS AUCKLAND LTD Second Defendant
AND HARBOUR PRIMARY HEALTH ORGANISATION
Intervener
Hearing: 12, 13, 14, 15, 16, 19, 20, 21, 22 and 23 February 2007
Appearances: J Hodder, A Ross, K Anderson and M Wisker for Plaintiff
G Illingworth QC, C Browne and A Holmes for First Defendants
P Davison QC, M Gavin and S Cook for Second Defendant
B Gray QC and H Janes for Intervener
Judgment: 20 March 2007 at 11:00 am
JUDGMENT OF ASHER J
This judgment was delivered by me on 20 March 2007 at 11:00 am pursuant to Rule 540(4) of the High Court Rules
………………………………………..
Registrar/Deputy Registrar
………………………………………..
Date
DIAGNOSTIC MEDLAB LTD V AUCKLAND DISTRICT HEALTH BOARD, WAITEMATA DISTRICT HEALTH BOARD, COUNTIES-MANUKAU DISTRICT HEALTH BOARD AND ORS HC AK CIV 2006-
404-4724 20 March 2007
Table of Contents
Paragraph Number
Introduction [1]
Is the ARDHBs’ decision to enter into the Lab Tests contract reviewable?
[7]
Brief history [16] First head of claim: Dr Bierre’s wrongful involvement [41] The nature of this head of claim [41]
Relevant facts: The involvement of Dr Bierre in the lead up to the Request for Proposal
[57]
Conflict of interest [122]
Conflicts of interest in administrative law [122]
Conflicts of interest in the relevant statutes [129]
Did Dr Bierre have any conflicts of interest and, if so, when did they arise?
Did Dr Bierre adequately disclose his conflicts of interest?
Did the ARDHBs adequately deal with Dr Bierre’s conflicts of interest?
[135] [143]
[152]
Conclusion on conflicts of interest [156]
Use of the ARDHBs’ information for private purposes [161]
The concept of misuse of the ARDHBs’ information [161]
What information, if any, was acquired by Dr Bierre as an ADHB member?
How it was used to the advantage of the Lab Tests proposal?
[177]
[190]
What the ARDHBs should have done [207] Was the stand-down by Dr Bierre sufficient? [209] Did Dr Bierre’s information advantage disappear? [211] Conclusion as to the use of information by Dr Bierre [225]
General conclusion on Dr Bierre’s involvement [230]
Second head of claim: failure to consult with
DML/legitimate expectation
Conclusion on failure to consult with DML/legitimate expectation
[234] [245]
Third head of claim: failure to consult adequately with the
PHOs
[247]
Introduction [247]
Documents relevant to any duty to consult [253]
Conclusion as to duty to consult [264]
Did the RFP process and subsequent Lab Tests agreement amount to a change significant enough to require consultation?
Steps actually taken by the ARDHBs to consult with the
PHOs
No requirement to move to general practitioner collections
Claim that it was too late to consult on significant changes
[265]
[271] [291] [292]
The ability to consult further before change [296]
Conclusion on obligation to consult with PHOs [300] Fourth head of claim: Unreasonableness/Irrationality [301] Is a “hard look” warranted? [309]
Was this decision unreasonable in a Wednesbury sense? [315] Mistake of fact [323] A surprising aspect of the decision-making process [326] Conclusion as to unreasonableness/irrationality [329]
Consequences [330]
Was the ARDHBs’ decision ultra vires? [330]
What is the effect on the ARDHBs’ decision of its being ultra vires?
[334]
The effect of s 87 of the PHD Act [338] The effect of ss 19–21 of the Crown Entities Act 2004 [347] Can the contract be declared invalid? [356] Application of discretion [362] DML’s “clean hands” [366] Prejudice to third parties [371]
Position of the defendants [373]
Proportionality and the wider implications of a finding of invalidity
[375]
The various claims [381]
Particular orders [382] Summary [386] Relief granted [391] Costs [394]
Introduction
[1] Between December 2005 and June 2006 the three District Health Boards in the Auckland region, the Auckland District Health Board, the Waitemata District Health Board and the Counties-Manukau District Health Board (the Auckland Regional District Health Boards or “ARDHBs”) conducted a Request for Proposal process to choose a contracting party to provide community pathology services in the Auckland region from 1 July 2007. The contract was awarded to Lab Tests Auckland Ltd (“Lab Tests”).
[2] The other contender had been Diagnostic Medlab Ltd (“DML”). DML had been the primary provider of community pathology testing services to the DHBs in the Auckland region for some years. The contract for those services comes to an end on 30 June 2007.
[3] In these proceedings DML challenges the decision to enter into the Lab Tests contract and the contract itself. Orders are sought that the decision and contract are invalid and of no effect.
[4] The plaintiff’s submissions involve four broad heads of claim. The first is based on Dr Tony Bierre’s involvement with the ARDHBs and the implications of his involvement and knowledge. The second relates to DML’s right to be consulted during the process and its legitimate expectation as to what was involved in the RFP process. The third alleges that the ARDHBs failed to consult with the Auckland public and general practitioners. The intervener has presented the argument and evidence in support of this head of claim. The fourth alleges the ARDHBs’ decision was unreasonable or irrational, and relies particularly on mistakes allegedly made during the decision-making process.
[5] Extensive evidence and submissions have been filed. There are 68 affidavits and 11,905 pages of documents in 14 volumes. In excess of 700 pages of submissions have been presented. I am not critical of the quantity of material that has been put before the Court (although many of the affidavits have not been referred to). The factual background covers the actions of a number of bodies and persons
engaged in an important public process over a considerable period of time. The legal issues are not straightforward. From the perspective of both the plaintiff and the second defendant there are substantial investments and many jobs at stake. The allegations concern the good administration of a service that is vital to the health of Aucklanders. All these factors have also resulted in this judgment being of unusual length.
[6] The plaintiff is supported in its endeavour by the Harbour Primary Health Organisation (“Harbour PHO”), which was granted permission to intervene in a judgment of Lang J of 18 October 2006: Diagnostic Medlab Limited v Auckland District Health Board & Ors HC AK CIV-2006-404-472 18 October 2006. Harbour PHO was permitted to file affidavits, cross-examine and make submissions at trial in relation to the issues of consultation, the potential effect on it of the new contract, the likely consequence if the ARDHBs’ process is found to have been flawed, the issue of potential shift in volumes, costs and finally the issue of relief. The right to intervene was granted on the basis that the interests of Harbour PHO did not differ from the interests of the other Auckland PHOs representing the other general practitioners in the larger Auckland area. Leave was granted on the assumption that Harbour PHO would be able to adequately represent the other PHO interests in the region. Further, the grant of leave contemplated that the interests of individual general practitioners could be raised through the plaintiff or Harbour PHO.
Is the ARDHBs’ decision to enter into the Lab Tests contract reviewable?
[7] The defendants have accepted that the ARDHBs’ decision to grant the contract to Lab Tests is amenable to judicial review. It is desirable, however, to put the Court’s role in this case in context.
[8] The Court’s power of review evolved as an attempt to ensure that decisions made by a public body are made according to law even if the decision does not otherwise involve an actionable wrong: Mercury Energy Ltd v Electricity Corporation of New Zealand Ltd [1994] 2 NZLR 385 (PC) at 388. The focus of judicial review is not on the quality of the decision made but rather the process that led to that decision, although the line between the two is becoming less distinct.
Thus judicial review involves the Court sitting in judgment on the decision-making process, whereas an appeal involves sitting in judgment on the decision itself: Chief Constable of the North Wales Police v Evans [1982] 1 WLR 1155 (HL) at 1174.
[9] The Judicature Amendment Act 1972 supplements but does not derogate from the power of the Court to grant judicial review at common law pursuant to its inherent supervisory jurisdiction: Mercury Energy Ltd v ECNZ at 388. Thus the definition of “statutory power”, the phrase in s 4 of the Judicature Amendment Act 1972, is not controlling in a determination whether a body is subject to judicial review. Whether a body is subject to judicial review necessitates a consideration of the source of the power exercised by decision-makers and, increasingly, the consequences of the power exercised. It has recently been observed that the Courts are now less concerned with the source of power exercised by decision-makers and are more willing to review the exercise of any power having public consequences: Wilson v White [2005] 1 NZLR 189 (CA) at [21].
[10] The power at issue in this case is a power to enter a contract. The power of District Health Boards (“DHBs”) to enter into service contracts is expressly provided for in s 25(2) of the New Zealand Public Health and Disability Act 2000 (“the PHD Act”), which states that:
25 Service agreements
…
(2) A DHB may, if permitted to do so by its annual plan and in accordance with that plan,—
(a) negotiate and enter into service agreements containing any terms and conditions that may be agreed; and
…
[11] It has been clear since Webster v Auckland Harbour Board [1983] NZLR 646 (CA) that the exercise of contractual powers by public authorities is open to review on public law grounds in an appropriate case. This approach has since been confirmed in Royal Australasian College of Surgeons v Phipps [1999] 3 NZLR 1 (CA).
[12] Whether a contractual power exercised by a Crown Health Enterprise (the commercially oriented predecessor to DHBs) was susceptible to judicial review was considered in Southern Community Laboratories Limited & Ors v Healthcare Otago Ltd & Ors HC DUN CP30/96 19 December 1996. Eichelbaum CJ concluded at 17 that the statement of claim was an attempt to incorporate administrative law concepts into a commercial decision-making process, and that the issues were not justiciable. He struck out the statement of claim.
[13] The defendants have not sought to rely on Southern Community Laboratories v Healthcare Otago to argue that the decision in these proceedings is not susceptible to judicial review. The Southern Community Laboratories v Healthcare Otago decision was made in the context of the Health and Disability Services Act 1993, which expressly brought a commercial edge to public health. Section 11(2)(d) of that Act provided that Crown Health Enterprises should be as successful and efficient as comparable businesses that are not owned by the Crown. That legislation, and with it the emphasis on efficiency and profitability, was swept away by the PHD Act. There is no reference in the new Act to the new DHBs being comparable to businesses. The primary focus for DHBs under the PHD Act is now the improvement of the health of the New Zealand public.
[14] The commercial context present in Southern Community Laboratories has gone, and the DHBs’ power to enter into contracts with service providers should be subject to judicial review. DHBs are clearly public bodies. DHBs’ ability to enter into contracts with major service providers goes to the heart of their statutory duty to protect and improve public health. The Lab Tests contract relates to the provision of all laboratory-testing services for the Auckland region and, as will be discussed later in this judgment, has significant public consequences. I therefore conclude that the decision to enter into the contract with Lab Tests is reviewable.
[15] Before considering the plaintiff’s various claims, it is necessary to first set out a brief history of the events leading up to the Lab Tests contract. To assist in the reading of this judgment I have set out at Appendix A a list of some of the organisations and persons referred to, and at Appendix B a list of acronyms and abbreviations commonly used.
Brief history
[16] The PHD Act provided a new legislative framework for the management of public and personal health services. It reorganised the public health and disability sector by creating 21 DHBs, each of which was responsible for the efficient and effective delivery of health services to the population within its specified geographic region.
[17] The Act makes it clear that the DHBs are statutory entities rather than companies: s 5(3). The purposes of the Act include achieving for New Zealanders the improvement, promotion and protection of their health and providing a community voice in matters relating to personal health services: s 3(1). These objectives are to be pursued to the extent that they are reasonably achievable within the funding provided: s 3(2).
[18] Under the PHD Act DHBs each receive funding through a Crown funding agreement, by which they fund the purchase of health services in its region. The DHBs nationally have a budget of around $8 billion and fund approximately 80% of New Zealand’s public health services. They also provide health services through public hospitals.
[19] Prior to the enactment of the PHD Act in 2000, funding and provider roles in the health industry were kept separate. Funding had been the responsibility of a separate entity, the Health Funding Authority, which purchased health services.
[20] When the PHD Act was enacted the funding role of the Health Funding Authority devolved to the relevant DHBs in particular regions. The DHBs took over the existing contracts, and as those contracts ended the DHBs assumed responsibility for purchasing and funding the health services that had previously been the responsibility of the Health Funding Authority.
[21] One of the services that must be provided within a health region is the collection and testing of laboratory test samples. In 2000 the Health Funding Authority had entered into contracts for such services in the Auckland region,
including a contract for community laboratory services with DML. That involved the three DHBs in the Auckland region: the Auckland District Health Board (“ADHB”), the Counties-Manukau District Health Board (“CMDHB”) and the Waitemata District Health Board (“WDHB”).
[22] At the time the DHBs were established there were two types of laboratories: commercial laboratories that undertook specimen collection and testing in the community, generally at the request of general practitioners, and hospital laboratories that serviced a particular hospital. DML had around 91% of the market share; a competitor, Southern Community Laboratories (“SCL”) had about 6.7%, and the combined hospital laboratories had about 2.3%. When the Health Funding Authority was disestablished in 2001, the DML regional contract devolved to the ADHB, which held that contract on behalf of itself, CMDHB and WDHB. All of the pre-2001 Health Funding Authority contracts nationwide concluded by
30 December 2005. The DML and SCL contracts expired on 30 September 2005.
[23] It is part of the function of DHBs to ensure the delivery of efficient and effective health services to their communities. With only limited funding available, it is necessary for them to make decisions as to priorities. It is an essential part of their task to ensure that they get value for money by obtaining services of an acceptable quality at the best possible price.
[24] From at least 2002 the DHBs had had concerns about the provision of laboratory services. In 2002 a report had been prepared for all DHBs by a Dr Reinhard Pauls on options for reform of diagnostic laboratory services markets. Another paper had been prepared by France and Lawrence on the “Costs of New Zealand Pathology”. Various further papers canvassed options for a reform of New Zealand laboratory services, including a paper by Dr Bierre prepared prior to his becoming an ADHB member.
[25] In 2004 the ARDHBs initiated a project to review the options for laboratory services in the Auckland region. It was led by Dr Bjorn Pilstrom. The purpose was to evaluate any potential benefits from reorganising the region’s laboratory services from the perspective of a supplier. Parallel to this the three ARDHBs laboratories
had started work to identify opportunities for a closer collaboration between them. The preparation of the report reflected the general concern felt by the ARDHBs, in particular the ADHB, about laboratory services in the region.
[26] The final report was produced in January 2005. It stated that, while providing a very good service, Auckland had an unusually large number of collection sites for its population. The study evaluated options for their cost-saving potential and strategic fit. These were:
a) consolidation of DHB laboratories;
b) a DHB absorption of community laboratory testing; and
c) a consolidated public-private joint entity service for a competitive tender of all the similar functions.
The report concluded that there was a lack of transparency in the costs of testing, and deficiencies in demand management. The report recommended that a public-private joint entity would give the best combination of financial and strategic benefits. This was not, of course, what actually eventuated.
[27] Following the Pilstrom Report, the regional chief executive officers of the Boards decided to consolidate Auckland pathology services into one entity. They commissioned a Dr Bruce Gollop to lead an Auckland Metro Laboratory Project, which was to implement the consolidation plan. The ARDHBs were mindful of the fact that both the DML and the SCL contracts expired during 2005. Dr Gollop described his task as being to evaluate critically the Pilstrom Report, to review and, if necessary, to renegotiate existing contracts, to consult with various parties, and to recommend an appropriate way forward. He was to be the project manager for this task.
[28] Dr Gollop was an experienced independent consultant. He had both engineering and medical qualifications and described himself as a “health management consultant”. His experience included periods as the chief executive of
Northland Health Ltd, as general manager of Auckland Hospital, and as the inaugural chief executive of District Health Boards NZ.
[29] One of the matters Dr Gollop had to consider was the expiry of the community laboratory service contracts with DML and SCL later in 2005. Ultimately he recommended that the DML contract be extended for two years to
30 June 2007 but that the SCL contract be allowed to terminate. The ARDHBs ultimately accepted his recommendation and renewed the DML contract when it expired for two years and did not renew the SCL contract. There was now an opportunity for a full and considered Request for Proposal (“RFP”) process to take place over the next year to decide on the appropriate long-term contracting party to take over in July 2007.
[30] As part of the ARDHBs’ attempt to decide on the contents of and strategy behind the RFP, Dr Gollop set up a workshop in October 2005 to consider the RFP and an RFP working group was developed. The work of that group led to a discussion document being prepared. An evaluation panel for the RFP process was set up, consisting of various persons with expertise. Its members were not members of the particular ARDHBs. Dr Gollop was on that panel.
[31] On 30 November 2005 the discussion document was circulated in the Auckland region. Expressions of interest from proposers were sought. These were duly received, and in early February 2006 the ARDHBs’ Request for Proposal, known as RFP 577 (“the RFP”), was distributed to those parties who had registered expressions of interest. On 10 April 2006 proposals were received from DML and the Auckland Pathology Consortium Ltd (“the Consortium”).
[32] DML is a New Zealand private company. Its origins lie in various local laboratory companies, but these were bought out in December 1999 by Sonic Healthcare Pty Ltd (“Sonic”), which now owns all its shares. Sonic is a significant Australian public company with interests in hospitals and laboratories in Australia. It has four subsidiary community laboratory testing companies in New Zealand, including DML.
[33] The other proposer, the Consortium, comprised four shareholding groups. The first was Gribbles Pathology NZ Ltd (“Gribbles”), which at the time of the proposal had a 75% shareholding. That company was part of the diagnostic division of Healthscope Ltd (“Healthscope”), another significant Australian public company listed on the Australian Stock Exchange in 1994. Healthscope’s core business was private hospitals and diagnostic pathology. Gribbles Group Pty Ltd, the Australian subsidiary of Healthscope, is the third largest provider of pathology services in Australia, while Healthscope Hospitals are the second largest provider in the private hospital sector. Gribbles had until that point included a veterinary division with operations in both Australia and New Zealand, and Northland Pathology Laboratory Ltd, which provided private pathology services to the Northland DHB.
[34] The second shareholder was LabTests Auckland Limited, a company owned by Dr Bierre and his family interests. At the time of the proposal it held 15%. The third shareholder was a company LabTest Support Limited, that included the interests of an experienced private and public health sector nurse and administrator, Lee Mathias, who at the time of the proposal held 5%. The fourth shareholding of
5% was reserved for pathologists and senior management to be appointed.
[35] Evaluation panel meetings and discussions with the proposers took place throughout April and May 2006. DML submitted amended proposals as a consequence of those discussions. In May 2006 the evaluation panel recommended that the Consortium be selected as first preferred provider, and in early June 2006 the ARDHBs met and approved that recommendation. The proposers were notified.
[36] There were then further negotiations between the ARDHBs and the Consortium. A new company was formed by the Consortium to be the contracting party, Lab Tests Auckland Ltd (“Lab Tests”), which is the second defendant in these proceedings. Lab Tests is a different entity from Dr Bierre’s company of the same name, which was changed to Taupehi Holdings Ltd. On 14 July 2006 a contract was signed by the ARDHBs and Lab Tests. DML filed these proceedings on
8 August 2006.
[37] DML at present receives specimens from approximately 10,000 patients a day. Each patient’s request involves between three and four tests so that approximately 35,000 tests are carried out each day. DML employs 750 staff to do this, with 300 laboratory staff, including scientists and technologists, and 35 pathologists, being 23.5 full-time equivalents (“FTEs”), doing the relevant pathology work. Samples are collected from DML’s 83 collection rooms, or through house calls or collection at the general practitioner’s surgery. At present 6.9% of all blood samples are collected by general practitioners. DML pays general practitioners
$4.50 for each blood sample taken.
[38] The new service to be operated by Lab Tests will involve approximately
47 collection rooms (the number has increased from 43 since the contract was signed), all of which will be at different premises from those leased by DML. Instead of 23.5 FTE pathologists being employed, Lab Tests will employ 17, resulting in a salary saving of approximately $2 million per annum. Instead of employing 236 FTE nurses and couriers, Lab Tests will employ 172, resulting in a saving of approximately $2.6 million per annum. The exact numbers of FTEs actually employed by Lab Tests has been something of a moveable feast through the hearing.
[39] There is some debate about the exact amount of savings between the Lab
Tests and DML contracts. The initial difference per annum was approximately
$16 million. The Consortium’s proposal was based on a cost of $333.533 million over five years, and DML’s was based on $427.357 million. Although the Consortium’s proposal has now extended to eight years, the Consortium’s final offer of 12 May 2006 over a five-year period of $334.869 million and DML’s offer of
$403.439 million leaves a difference of approximately $68.57 million.
[40] It is now appropriate to begin by considering the most serious of the plaintiff’s claims, the allegation that the decision-making process was unfair and unlawful because of the involvement of Dr Bierre, who was an ADHB member, in the successful bid. This head of claim involves an extensive review of ARDHB activities since the PHD Act came into force in January 2001.
First head of claim: Dr Bierre’s wrongful involvement
The nature of this head of claim
[41] The essence of DML’s complaint under this head is not complex. Dr Bierre was a pathologist and ADHB member who wished to secure a contract with the ARDHBs for laboratory testing work. Dr Bierre later became an instrumental part of the Consortium’s ultimately successful proposal. DML submits that Dr Bierre did not properly declare his conflict of interest and obtained an improper “insider” advantage in the RFP process by virtue of his position as an ADHB member. The issue arises as to whether Dr Bierre’s involvement and, more crucially, the ARDHBs’ failure to address it, tainted the decision-making process.
[42] DML makes a number of specific claims. DML alleges that as an ADHB member Dr Bierre was an insider to the ARDHB deliberations and policy development that led to the decision to seek proposals, and to the distribution of the discussion document at the end of November 2005. DML claims that Dr Bierre was instrumental in formulating the thinking behind the RFP and was privy to the wishes and concerns of the evaluation panel (those who eventually considered the bids). It alleges that Dr Bierre’s position enabled him to access information useful to formulating a bid in line with the ARDHBs’ thinking. DML claims that it had none of these advantages and as a consequence, unlike the Consortium, was unable to present a bid attuned to the ARDHBs’ thinking. Thus DML submits that the Consortium bid, formulated as it was by Dr Bierre, was given an unfair advantage, to the detriment of DML and the public, both of whom were entitled to a bid process where no party had an insider advantage.
[43] Mr Ross, who presented this part of the argument for the plaintiff, immediately acknowledged that DML’s complaint about Dr Bierre’s involvement did not fall neatly under one of the usual administrative law headings. He readily agreed that there was no allegation of actual bias against the ARDHBs, into which category a conflict of interest would traditionally fall. Mr Ross did call in aid four administrative law concepts in pursuing his argument, namely:
a) want of good faith (although not implying dishonesty);
b) breach of statute;
c) breach of a legitimate expectation of fair treatment; and d) apparent bias.
[44] The plaintiff correctly did not strain to find an administrative law label that might apply to the sort of conduct complained of. Judicial review does not depend on a particular set of facts satisfying a particular precedent or falling under a particular sub-heading. The fact that the conduct complained of in these proceedings does not appear to fall into any established sub-categories of procedural impropriety is not determinative. There is now a presumption that administrative law imposes a general requirement of procedural fairness on public decision-making, and I intend to approach the plaintiff’s submissions on Dr Bierre’s involvement from that point of view.
[45] Indeed, Mr Illingworth for the ARDHBs had no quarrel with the proposition that there must be procedural fairness on the part of DHBs in exercising a function susceptible to judicial review, such as a decision to enter into a significant commercial contract for services. As he acknowledged, s 27 of the New Zealand Bill of Rights Act 1990 requires public authorities to observe the principles of natural justice.
[46] Mr Illingworth did not accept, however, that the conduct complained was remotely suggestive of procedural unfairness. He submitted that inequities of the sort alleged in the present case are inevitable in commercial proposal situations. He argued that the incumbent DML itself enjoyed a significant advantage over any other potential provider because of its intimate knowledge of the commercial realities of the market. Therefore, to endeavour to paraphrase his submission, as inequities are inevitable in commercial proposal situations, the Court cannot censure them under the heading of procedural unfairness.
[47] I do not accept Mr Illingworth’s proposition. DML’s advantage over other potential providers was simply part and parcel of having an incumbent provider tender to continue to provide a service. It was inescapable. The advantage naturally enjoyed by an incumbent does not affect in any way the need to apply ordinary principles of procedural fairness. The commercial context may be relevant to the standard of procedural fairness to be imposed, but it does not mean that the rules of natural justice should not apply with appropriate force to the decision-making process.
[48] I consider that DML’s complaint about Dr Bierre’s involvement is essentially a complaint about the probity of the decision-making processes adopted by the ARDHBs. As it is not in dispute that the decision-making processes of a public body are very much subject to the requirement that they be procedurally fair, I therefore consider it appropriate to consider Dr Bierre’s involvement and the ARDHBs’ response to it under the heading of procedural fairness.
[49] Mr Illingworth argued that a low standard of scrutiny should be applied to this decision-making process when assessing procedural fairness.
[50] The Courts are able to determine appropriate standards of procedural fairness in a judicial review exercise once the context of the exercise of the power is fully understood. The Courts have traditionally, directly and fully, exercised such a power: Discount Brands Ltd v Westfield (New Zealand) Limited [2005] 2 NZLR 597 (SC) at [54]. Deference to the administrative body is not required in matters of procedure, as it is, in contrast, in respect of the quality of a decision. While Courts are not necessarily well qualified to assess the merits of an administrative decision, Courts are well equipped to assess the adequacy of an administrative procedure.
[51] I accept that the standards of natural justice required by the Court will vary with the nature of the power exercised. Cooke J noted as much in CREEDNZ Inc v Governor General [1981] 1 NZLR 172 (CA) at 186-187. What is required of a Court or quasi-judicial body in terms of procedural fairness will clearly be more onerous than what is required of a government minister making a decision that has a strong policy element.
[52] Two matters support Mr Illingworth’s argument for a low standard of procedural fairness. First, the public elects seven of a DHB’s 11 members, while the remaining four members are Government-appointed. Appointees can be expected to have existing connections with DHB activities, or policies and philosophies that they will actively pursue, which would not be appropriate for someone acting in a judicial or quasi-judicial capacity. This is recognised in cl 36 of Schedule 3 of the PHD Act. Second, this was a commercial decision. DHBs must be able to act in a commercial and robust manner when deciding to award commercial contracts. They will necessarily have to deal with the usual puffery encountered in commercial contract negotiation and respond in a commercially appropriate way, or risk paying far too much for services.
[53] However, the subject of the decision-making in this case was the award of a monopoly contract for community laboratories in the Auckland area. All laboratory services in Auckland would depend on the outcome of the ARDHBs’ decision. This is a subject extremely important to the Auckland public. It is the people of Auckland, most of whom are likely to require laboratory testing at some point in their lives, who have the biggest interest in a fair decision-making process. Insofar as a fair decision-making process helps to ensure that the best decision is reached, the Auckland public was entitled to that.
[54] A failure to adopt fair procedures means that the process of making a merits- based decision is disrupted. An unfair process may allow decision-makers to be swayed by matters that should not have swayed them. It may encourage decision- makers to view parties in a light in which they would not otherwise have viewed them. It may prevent decision-makers from adequately assessing information presented to them. It may cause decision-makers to place emphasis on, or disregard, matters that would not ordinarily have deserved that treatment. An unfair process can mean that a party who knows the decision-maker’s thinking and expectations can unfairly use that knowledge to its advantage and to the disadvantage of other worthy candidates.
[55] The need for good procedures is recognised in the statutory imperatives against conflicts of interest and the misuse of the ARDHBs’ information that exist in
the PHD Act (cl 6 of Schedule 2 and cl 36 of Schedule 3) dealing with disclosure of interest and in ss 62 to 72 of the Crown Entities Act 2004. Further statutory provisions of the Crown Entities Act set out duties on the DHB members and on the DHBs themselves as to the way in which they should act (ss 49-52), including acting with honesty and integrity, in good faith and not at the expense of the entity’s interest, and with reasonable diligence and skill and not to disclose information: (ss
53-57).
[56] These provisions, coupled with the importance of the ARDHBs’ tasks, all indicate that the legislature expects more than minimal or cursory standards of procedural fairness, although obviously the standard expected of judicial or quasi- judicial decision-makers is not required.
Relevant facts: The involvement of Dr Bierre in the lead up to the Request for
Proposal
[57] Dr Bierre is an experienced pathologist. He is a member of the Royal College of Pathologists of Australasia, has had overseas experience, and was a shareholder in Diagnostic Laboratory Ltd from 1990 to 1999.
[58] When Sonic purchased all the shares in DML in December 1999, Dr Bierre sold his shares to Sonic. He remained employed at DML until 31 January 2001, by which time he was the clinical director of cytopathology and chairman of the DML board of management. He had not had any involvement up to that point in the negotiation of laboratory service contracts with funding authorities.
[59] Employment Court proceedings took place following Dr Bierre’s departure from DML. These were subsequently resolved in a confidential settlement. Prior to leaving DML Dr Bierre had commenced an executive MBA course run by the University of Otago. He continued his studies after leaving DML and prepared a finance paper on the diagnostics laboratory industry in New Zealand. Later, as part of the MBA program, he co-wrote a project report entitled “The Laboratory Services Industry in New Zealand: Methods of Diagnostic Test Purchasing.” The paper was completed around August 2004.
[60] In the meantime, after having left DML, Dr Bierre had had some difficulties in obtaining a satisfactory job as a pathologist. Through his research projects he had had some contact with Andrew Coe, a project manager with the Northern DHB Support Agency Ltd (“NDSA”). The NDSA is a company set up by the ARDHBs to co-ordinate their activities and provide support.
[61] Dr Bierre then formed two companies. The affidavit documents disclose some confusion as to their exact history, but it is not material. It appears that on
26 November 2003 Dr Bierre incorporated Labtests Auckland Ltd, a company which would later become a 15% shareholder in the Consortium, which was ultimately the successful proposer. Labtests Auckland Ltd later changed its name to Taupehi Holdings Ltd, and the Labtests name was used to form a new company, Lab Tests Auckland Ltd, which signed the contract with the ARDHBs in July 2006. Dr Bierre also formed LabTests New Zealand Ltd on 4 December 2003. He and his family interests owned the shares in both companies. At first the companies did not trade.
[62] On 10 December 2003 Dr Bierre met with Brian Watson, the managing director of Gribbles. He also met the laboratory manager and clinical director of LabPlus Ltd, the hospital laboratory company owned by the ADHB. The purpose of the meetings was to see whether a boutique laboratory business that Dr Bierre was proposing relating to the national breast cancer screening programme could work with the laboratory support of Gribbles or LabPlus.
[63] In 2004 Dr Bierre and a research partner, Mr Halls, devised a pilot project for the establishment of a histopathology and cytopathology laboratory in Auckland. A written paper was prepared dated 29 July 2004, arguing that there was an under- capacity in the histology and cytology areas and proposing open-book accounting and an agreed cost of capital return to providers. They put the project, seeking ADHB funding, to Mr Dennis Jury, the general manager of funding for the ADHB. He stated that he would pass the proposal on to Mr Coe at the NDSA. Some follow- up emails and meetings took place but the proposal for funding for a pilot project was eventually rejected.
[64] Dr Bierre did some temporary work, including pathology work in Sydney, in the latter half of 2004. He also met with Dr Pilstrom in July 2004, who was a Swedish medical practitioner and researcher who was working in the area of laboratory services in New Zealand and Sydney. Dr Bierre also did part-time work from July 2004 as a lecturer in anatomical pathology for the Department of Molecular Medicine and Pathology at the University of Auckland School of Medicine. Also, late in the year, he did some consultancy work for a laboratory provider in relation to Otago and Southland RFPs.
[65] In July 2004 Dr Bierre was approached about standing for election to the ADHB. In his affidavit Dr Bierre stated that he was at this point concerned about a conflict of interest, as his employment was likely to be reliant on DHB funding in the future. It was explained to him that many people who worked or could potentially work for DHBs were nevertheless Board members, and that conflicts could be managed appropriately. He was selected to stand on the Citizens and Ratepayers ticket.
[66] Candidates were required to make a statement to the electoral officer of any conflicts. On 7 August 2004 Dr Bierre submitted a conflict of interest statement, which is set out later in this judgment (para [143]). He advised of his work as a pathologist and said he was not employed by or in a contractual relationship with the ADHB, but that there was a possibility that this might change. Voting took place in mid-September/early October 2004 and Dr Bierre was elected.
[67] In his affidavit Dr Bierre stated that he revived the possibility of opening a boutique laboratory in Auckland at the end of 2004. He decided this time to establish the laboratory first and then seek funding from the ADHB. He saw the expiry of DML’s contract in September 2005 as an opportunity for his laboratory. In November 2004 he made a note in his diary to commit his boutique laboratory to an entry in the telephone book. On about 13 December 2004 he went on a fact- finding trip to the USA to look at boutique laboratories there and examine equipment and systems that they were using. After the Christmas/New Year break he placed orders for some equipment from the USA using his company LabTests Auckland Ltd. He decided that he would personally fund the laboratory in the short term and
continue to look for alternative sources for funding. He employed a laboratory technician, and opened his laboratory on 21 March 2005. It stayed open until some time in June 2005.
[68] At the first ADHB meeting attended by Dr Bierre in December 2004 the chairman, Mr Wayne Brown, asked each Board member to make a brief statement. Dr Bierre referred to his conflict of interest in what he describes as “similar terms” to his written statement. He did not mention the pilot project, his developing interest in opening a boutique laboratory or the possibility that he might seek funds from the ADHB.
[69] Dr Bierre stated in his affidavit that Mr Brown expressed his general opinion on conflicts of interest at that meeting. Mr Brown said that practically all persons on New Zealand DHBs, particularly doctors, faced conflicts of interest, given the fact that all medical services were funded through DHBs. Valuable experience should not be lost for that reason. He had noted that conflicts of interest related to particular transactions, and that if ADHB members were interested in particular transactions then they had to exclude themselves.
[70] These observations have been reiterated by Mr Brown in his affidavit. Mr Brown’s policy was to manage conflicts. The elected members of DHBs tend generally to rely directly or indirectly for at least part of their income on expenditure of public funds under the control of a DHB. Mr Brown has given evidence that of the ADHB elected in 2004, two were employees of the ADHB and another was a director of two companies who bid against the ADHB for Government contracts. All members either directly or indirectly earned at least part of their income from the expenditure of public funds under the control of the ADHB. The ADHB openly contemplated that members would have conflicts of interest, and provided an interest register in which ADHB members could register any such conflict.
[71] At the time Dr Bierre was standing for the Board, Dr Pilstrom was preparing his report for the ARDHBs on laboratory services in the Auckland region. The Pilstrom Report was presented in January 2005 approximately one month after Dr Bierre had attended his first ADHB meeting on 6 December 2004.
[72] On 7 March 2005, on behalf of his company LabTests, Dr Bierre applied to Dr Jury, the chief funding and planning officer for the ADHB, for a contract to provide histopathology and cytopathology services in the Auckland region. In a theme that Dr Bierre was to pursue in the year to follow, he stated that he and his partner believed in an open-book accounting approach within an agreed cost of capital return. The same theme had been put forward on 29 July 2004 when Dr Bierre had sought funding for the establishment of a private project in the area. Dr Bierre also emphasised the necessity to decrease the “information asymmetry”, in other words, a perceived lack of financial information provided by DML and other community laboratory service providers. It was a term he would continue to use. On 30 March 2005 Dr Jury advised Dr Bierre that the ADHB had no policy on the provision of histopathology and sited pathology services consistent with his application, but that his letter would be considered by those undertaking the review of services.
[73] As the only pathologist on the ADHB, which was leading the way in considering reconstructing the provision of laboratory services in the Auckland region, Dr Bierre became increasingly involved in the suggestions for reform and the work of Dr Gollop through 2005. On 3 February 2005 he was appointed to the ADHB audit committee, an influential committee that met in private and was concerned with financial issues. There was some urgency in finalising a position on laboratory services as the contracts with both DML and SCL were due to expire in September 2005.
[74] At an audit committee meeting on 4 May 2005 Dr Bierre successfully moved a motion that the ADHB purchasing policy be amended to require the use of a competitive tender process when services or supplies were being purchased, or if this were not possible due to market conditions, to require that “open-book accounting” be established with a supplier. Dr Bierre, although he had referred to a conflict of interest, did not advise the committee that he was seeking a contract for laboratory services for himself. The audit committee recommendation was adopted in this form by the ADHB meeting that followed on 5 May 2005.
[75] Through May 2005 there were discussions and emails between Dr Bierre in his capacity as an ADHB member and Dr Jury and Dr Gollop, who both in due course became members of the evaluation panel. In the course of these exchanges Dr Bierre set out his assessment of laboratory services in Auckland, using language critical of the incumbent providers of laboratory services.
[76] He met with Dr Gollop on 17 May 2005. Following that meeting, in his email of 18 May 2005 to Dr Gollop, he said:
[DML’s] culture, past behaviour and critical requirement to continue to return super profits to their shareholders leaves me very cynical that by you agreeing to kill off the very people who can help you make changes and cementing in place once again the monopoly status that when the time comes to make the changes you talk about – they will be holding all the cards.
[emphasis added]
Dr Gollop responded to Dr Bierre’s email stating that he did not share the view that DML would be holding all the cards when the issue of renewal arose. He appears to have accepted that any prospective bidder should provide an open-book proposal.
[77] Dr Bierre sent a handwritten fax to Dr Gollop on 20 May 2005 forwarding a letter from International Accreditation New Zealand praising Dr Bierre’s laboratory. Dr Bierre’s action was consistent with his earlier proposal to establish a small specialist laboratory, although he made no specific reference to it. Among the matters he raised in the fax was whether it was right to “kill off” organisations that were innovative, “willing to contract on an open book basis” and able to increase capacity where it was clearly deficient.
[78] On 23 May 2005 Dr Bierre prepared a detailed confidential memorandum for members of the ADHB about his vision for community laboratory services. He referred to his “declared conflict of interest” but again was not specific as to its nature. He supported Dr Gollop’s recommendation that all ARDHB hospital testing services be amalgamated into one alliance, which in time would enter into a long- term alliance or partnership arrangement with a third party.
[79] In 2004 DML did not have a monopoly on all the Auckland community collections. SCL, through a historical anomaly that it is not necessary to traverse was funded by the Otago Health Board and had 6.7 % of community testing in the Auckland region. DML had the balance. In addition, certain ADHB hospitals had their own particular laboratories, which carried out testing to meet the testing requirements within the hospitals.
[80] Dr Bierre was critical of a proposal of Dr Gollop’s that SCL exit the market, stating “this would further reinforce DML’s virtual monopoly situation in Auckland.” He argued that such a proposal did not address structural issues and would cement DML’s monopoly and secure its increased profitability. Dr Bierre criticised the $3.8 million in savings resulting from the proposal as “short term”. He again used the phrase “information asymmetry” in commenting on the existing situation.
[81] At the same time, Dr Bierre advised an ADHB member, Mr Burkhardt, that Sonic, DML’s Australian parent, owned approximately 70% of New Zealand laboratories. He questioned whether corporate investors actually added any value to the New Zealand health care scene.
[82] On 31 May 2005, Dr Bierre emailed all ADHB members advising that there was “obvious waste” in the laboratory sector. He said that certain organisations were making “super profits” and would not agree to an “open-book” approach, but those making a reasonable commercial return on invested capital would “readily do so”.
[83] In these exchanges Dr Bierre put forward the idea that DML was making excessive profits, was obstructive and unwilling to work with the DHBs, and was seeking a monopoly, and repeated that open-book disclosure was desirable. At the ADHB meeting of 2 June 2005, Dr Bierre reiterated the same concerns after having declared a general conflict of interest. He opposed the extension of the DML contract for a further two years and opposed the exit of SCL, and spoke of South Island laboratories making savings of 15%-17% by having competitive tenders.
[84] On 2 June 2004 the chief executive officer of CMDHB, Mr Stephen McKernan, clearly concerned about a conflict of interest, wrote to persons to be involved in a pending regional meeting of the ARDHBs suggesting that they “tread very carefully” in respect of Dr Bierre. He did not know that Dr Bierre had an operating laboratory or that he was planning to have a specific interest in supplying laboratory services. His caution derived rather from Dr Bierre’s position as a pathologist and previous interest in laboratory services. He said:
I would have thought he has an interest in this and is as such conflicted. There is a consultation process about to commence with this project so should he not feed his views into that process?
He questioned whether he was being overly sensitive, but observed that there was a need to ensure that the process was “squeaky clean” as it would inevitably be subject to review.
[85] The deputy chair of the ARDHBs in 2005 was Mr Ross Keenan. As part of his role as deputy chair he chaired a monthly meeting with chairs and chief executive officers of the ARDHBs. His role was to foster a regional approach to health issues.
[86] Mr Keenan’s response to Mr McKernan’s concern was that Dr Bierre had fully declared his interests in both the ADHB situation and “the wider business interests”, and that:
His presence as Board member of A+ (and agreed by many) is to support a management view that might consider dealing more aggressively with the DML situation than is currently proposed.
“A+” referred to the ADHB hospital laboratory. Mr Keenan stated that he could muzzle Dr Bierre if that was the wish, but that as a closed forum the chief executives and chairs of the ARDHBs should at least hear his views. Mr Keenan was unaware when he made these observations that Dr Bierre was actively seeking funding for his own boutique laboratory and had been seeking ADHB funding. On the basis of Mr Keenan’s explanation, Mr McKernan took no further action.
[87] On 9 June 2005, at Mr Keenan’s invitation, Dr Bierre attended the Northern
Regional DHB collaboration meeting to outline his views on Dr Gollop’s current
proposal to extend the DML contract and allow the SCL contract to terminate pending an RFP.
[88] At this time, Mr Brown’s view was that there was not a conflict problem as long as it was declared, and that he did not want to make a decision in the absence of all the information. However, it is clear from both Mr McKernan’s and Mr Brown’s affidavits that they considered the conflict, being Dr Bierre’s role as a practising pathologist and thus his being likely to have a degree of personal interest in changes to pathology services, and as an ADHB member. They did not realise that Dr Bierre was himself an interested bidder for a portion of the service. Dr Bierre’s conflict of interest was accepted by Mr Brown and Mr McKernan on that basis, and he attended the meeting.
[89] In a memo of 28 June 2005 to the chief executive officers and chairs of the ARDHBs, Dr Gollop discussed various recommendations, including an agreement to reduce the current DML collection centres by 20 to approximately 70, while still maintaining acceptable geographical coverage. This would be in addition to the loss of approximately 20 to 25 collection rooms that were being provided by SCL.
[90] At the audit committee meeting of 6 July 2005 Dr Bierre unsuccessfully opposed Dr Gollop’s revised proposal to enter into a further two-year contract with DML and to allow the contract with SCL to lapse.
[91] Dr Bierre was still actively pursuing his idea for what he described as a boutique histology and cytology laboratory. On Friday 24 June 2005 he wrote to a member of Parliament, Dr Paul Hutchison, asserting that there was a monopoly on histology and cytology services in Auckland, and claiming that his company LabTests could provide a “valuable alternative”. He asked for a letter of support. Dr Hutchison in response wrote a short and careful letter on 27 June 2005 to Mr Brown, attaching Dr Bierre’s letter and suggesting that it be considered. He stated: “Clearly he has a conflict of interest being a member of the ADHB.”
[92] Dr Hutchison’s letter alerted Mr Brown for the first time to the fact that
Dr Bierre’s company was involved in negotiations with ADHB. On 8 July 2005
Mr Brown wrote a stern letter to Dr Bierre, stating that while he had known of his directorship of LabTests, he wished to record his disappointment that he had not been made aware that Dr Bierre’s company was involved in negotiations with the ADHB. He noted that the ADHB may therefore have been compromised in the interim, and that the ADHB had put “considerable stock on your advice in regard to current regional laboratory testing process, and your advice has been central to decisions the Board has taken”. He noted that there appeared to be a clear conflict of interest, and stated that Dr Bierre’s personal position should have been made clear to have allowed the ADHB to consider the conflict and his ongoing involvement. He observed that Dr Bierre’s failure to do so “may have compromised the Board’s process”. He stated that Dr Bierre should “now be excluded from considerations on lab testing and the current regional process”.
[93] Dr Bierre responded shortly afterwards on 11 July 2005. Over a number of pages he set out his involvement in laboratory issues since early 2004. He stated that he believed that ADHB members were aware of his company. He stated that he had attempted to keep his personal practice of medicine “as divorced as possible” from ADHB business, and that he had endeavoured to introduce concepts and ideas of “significant benefit” to the ADHB with particular emphasis in obtaining “value for money spent on health in our region”. While justifying his position, he also said he was now “mothballing” his practice.
[94] Mr Brown did not reply to Dr Bierre’s letter, and he does not state in his affidavit what he thought about it. Dr Bierre remained fully involved in the ARDHBs’ considerations and continued to advocate his views. Mr Brown in his affidavit said that Dr Bierre did not participate further in discussions about laboratory matters at the meetings of 3 and 4 August 2005, having stood down from the laboratory services “item” in view of his conflict. However, the minutes show Dr Bierre was present at both the audit committee meeting on 3 August 2005 and the ADHB meeting on 4 August 2005. Dr Bierre states that at the 4 August 2005 meeting he made little comment and abstained from voting on the community laboratory proposal item. However, in other respects he remained fully involved.
[95] On 12 July 2005, a day after sending his letter to Mr Brown, Dr Bierre emailed Mr Brown suggesting a break-up of the laboratory service into components to give the ARDHBs “levers of control”. The next day Dr Bierre received a note from Mr Keenan that had also been sent to the chief executive officers and chairs of the ARDHBs. This memorandum amounted to a frank disclosure to the chairs and chief executive officers of Mr Keenan’s thinking. Mr Keenan in his affidavit described the letter as a “check list” of some of his concerns and suggestions about the future provision of laboratory services.
[96] In his affidavit Mr Keenan noted that he was aware from Dr Bierre’s emails, ARDHBs’ discussions and presentations that Dr Bierre’s views on laboratory services accorded with many of his own. Mr Keenan made it clear in his affidavit that he was aware of Mr McKernan’s earlier concern about Dr Bierre’s having a conflict of interest but, like Mr McKernan, he knew only of a general conflict arising from Dr Bierre’s being a pathologist. He stated that he was unaware that Dr Bierre was interested in putting in a bid to provide laboratory services. He also stated that he was not aware that Mr Brown had specifically raised a conflict of interest issue with Dr Bierre a few days earlier. He stated that if he had been aware of this he would not have sent his 13 July memorandum setting out his detailed personal views to Dr Bierre.
[97] Mr Keenan’s memorandum of 13 July uses the term “super profits”, also used by Dr Bierre, and states that DML’s “non-response” when asked to be transparent about current costs and margins was an attempt to retain these super profits. He commented in the memorandum that he understood that DML had been recently sold to an Australian owner. The memorandum stated that no doubt DML’s purchase price was constructed on “forward estimates of super profits”. He stated the sorts of things he would be looking for, emphasising transparency, and continued:
I would advise the players that we seek a minimum saving on current spend of $20M in the first year (whatever that year may be given we may need to seek a temporary extension to the current timing). The $20M would be against the total spend with both lab services currently and therefore a pro- rata discussion would need to be held.
[emphasis added]
He then goes on to discuss the possibility of a joint venture involving the PHOs and a provider.
[98] Dr Bierre responded by an email of 20 July 2005, in which he stated:
Dear Ross,
Thank goodness for your common and business sense! I am glad you are on the right track. Any help behind the scenes I can give to ensure a good outcome for the region – given the conflict of interest issue – please don’t hesitate to ask.
[emphasis added]
[99] At the 14 July 2005 meeting Mr Brown told the Northern Regional District Health Board representatives about Dr Bierre’s conflict of interest, referring specifically to the boutique laboratory and Dr Bierre’s attempt to gain a contract from the ADHB. There was no formal consideration of his position. It was resolved to proceed in accordance with Dr Gollop’s recommendation and Dr Bierre’s view that a monopoly extension to DML be refused was rejected. In the weeks that followed, the DML extension of contract to 30 June 2007 was formally confirmed.
[100] Dr Bierre attended the ADHB meeting on 4 August 2005 when the extension of the DML contract was confirmed. He attended the audit committee meeting of
31 August 2005 when procurement policies were discussed. A resolution was passed that the audit committee recommend that the ADHB adopt a more “aggressive commercial orientated procurement and payment policy with details to be finalised by the Audit Committee”. It is likely Dr Bierre would have received Dr Gollop’s pathology project report of August 2005 that considered the options for laboratory testing in draft. Dr Bierre was not heavily involved in the ARDHBs’ laboratory matters during September and October 2005.
[101] Meanwhile, on 2 August 2005 he applied for a position as a histopathologist and cytopathologist for Gribbles. The position sought related to a Gribbles response to an RFP for the Northland district. On 23 September 2005 he was employed by Gribbles as a consultant in relation to the Northern RFP.
[102] On 11 October 2005 Dr Bierre sent an email to Mr Keenan commenting on a press release from the New Zealand Association of Pathology Practices concerning a Commerce Commission decision to decline an application for clearance for the funding and delivery of pathology services in Otago and Southland. He stated that he would not wish to make any comment “which would be copied to others”, but the tone of his email is hostile to the comments of Dr Paul Ockelford of DML in the press release. He commented that there was very little substance to Dr Ockelford’s comments, and that his “rhetoric” was nothing but “scare tactics” and should probably be challenged. Dr Bierre’s email portrayed DML as an entity that was playing games with the ARDHBs.
[103] On 1 November 2005 the ARDHBs held a strategy workshop concerning the upcoming RFP. The workshop was intended to allow the ARDHBs to discuss privately what they wanted from the RFP process and to begin work on a discussion document. Dr Bierre attended this important meeting. Dr Gollop had explained Dr Bierre’s presence at the meeting as being due to his “expertise and independence from the current providers”. The notes of the meeting show that Dr Bierre pursued a line of argument hostile to DML. For instance, he advised the ARDHBs that “now we have an inefficient delivery model with high unit costs”. The notes taken at the meeting show that it was a detailed and open discussion about the ARDHBs’ objectives. Following the meeting a revised draft discussion document was circulated to various ADHB members including Dr Bierre.
[104] A Northern Regional District Health Board collaboration meeting took place on 17 November 2005, but there is nothing to indicate that Dr Bierre attended that meeting.
[105] On 26 November 2005 Dr Bierre signed a “casual contract of employment” with Gribbles Analytical Laboratories NZ as a pathology consultant based at Penrose and other locations. On 28 November 2005 Dr Liz Walker, the general manager of Gribbles Veterinary, sent an email to Dr Bierre stating “as we discussed earlier in November” Gribbles would like to discuss “further opportunities” in various districts in New Zealand “as well as Auckland DHBs”. Clearly Gribbles had discussed with Dr Bierre prior to 26 November 2005 a possible Gribbles presence in Auckland.
[106] Dr Bierre continued to act as an ADHB member after 26 November 2005. He exchanged a series of emails with Mr Brown in early December in which Dr Bierre summarised the Commerce Commission decision. Dr Bierre’s analysis of the Commerce Commission decision was circulated to Board members. Mr Brown’s email of 2 December 2005 concluded by thanking Dr Bierre for his “insights into the arcane world of pathology”.
[107] On 7 December 2005 Dr Bierre emailed personnel at the Auckland Hospital Laboratory stating that he was interested in putting together a consortium of players to respond to the RFP and seeking their possible involvement. One of the persons contacted, Ms Fiona Ritsma, immediately responded expressing her concern about a perception of conflict of interest on Dr Bierre’s part. She noted that Dr Bierre was an elected ADHB member who would ultimately be making a decision and signing off on the proposals. Dr Bierre did not appear to consider that there was a problem. He responded by an email of 9 December 2005 stating:
I have declared my conflict of interest in this area to the Board as I am required to do and if I am involved in responses to the RFP as I intend to be as a practising pathologist, I will be excused from any decision-making at Board level. This has already occurred in some of the preliminary discussions.
He expressed the view that New Zealand was a small country and that persons with ability and expertise should not be excluded on the basis of conflicts and in any event, that there was a process for dealing with conflicts of interest.
[108] Ms Ritsma was not convinced. She responded immediately stating that she had passed on his email to others despite its being sent to her “in confidence”. She stated that she felt the need to ensure that there was no perception of conflict of interest which could be used to argue against the overall process.
[109] On 20 December 2005 Dr Bierre met with Ms Ritsma and others from the hospital laboratories to discuss the prospect of merger with community laboratories. Mr Hewitt from Healthscope of Australia was present. It was clear that the Consortium proposal was developing. Dr Bierre appears to have continued to regard himself still as a fully functioning ADHB member at this meeting.
[110] Mr Gary Smith, the chief executive officer of the ADHB, met with Dr Bierre on 21 December 2005. Mr Smith had been given a copy of the email exchange of 7 to 9 December with Ms Ritsma which he noted he considered “inappropriate”. He stated in his affidavit that he was concerned about Dr Bierre’s conflict of interest and spoke to Mr Brown on the topic. Mr Smith and Mr Brown agreed that Mr Smith would speak to Dr Bierre about his conflict of interest, which he did. His file note, which indicates that he raised the topic of conflict of interest with Dr Bierre, supports this. He says that Dr Bierre agreed to stand down after Mr Smith had raised the topic with him. Dr Bierre, on the other hand, stated that it was he who raised the matter of conflict of interest on 21 December 2005, and that he reached the decision to take a leave of absence independently from Mr Smith. He refers to his own file note which is dated 14 January 2005, which he says is not the date when the note was made.
[111] Neither Dr Bierre nor Mr Smith has responded in any direct way to the other’s version of what happened. It is not a critical issue, but I prefer Mr Smith’s account, which is more consistent with Mr Smith’s undoubtedly contemporaneous file note. It is also consistent with Dr Bierre’s limited concern about conflict of interest that he demonstrated throughout, evinced in his 11 July 2005 letter to Mr Brown and in his December exchange with Ms Ritsma.
[112] On 22 December 2005 Dr Bierre wrote to Mr Brown applying for a leave of absence from the ADHB from 14 January 2006 to 30 June 2006. He gave as a reason the fact that he wished to respond as a provider to the RFP. He stated in his letter:
Such leave of absence will in my opinion manage any conflict of interest issues that could arise concerning the RFP process and my position as a Board member.
Mr Brown agreed to this stand-down, and in the meeting of 22 December 2005 it was noted by the ADHB. There is no evidence that there were any evaluation panel or ADHB discussions in which Dr Bierre was involved between 22 December 2005 and 14 January 2006.
[113] I am satisfied that all parties involved in the process honoured the substance of Dr Bierre’s stand-down, and that Dr Bierre did not seek to obtain information or influence his ADHB and evaluation panel contacts during that stand-down period. His state of knowledge of confidential information or, as it may be called, any state of advantage, must therefore be judged as at 23 December 2005. This does not mean that the events that followed are less important. It is the plaintiff’s claim that the information that Dr Bierre had acquired up to that point gave him a material advantage, and that this is clearly seen in the events of 2006. It is the defendants’ assertion that that is not so, and that any knowledge that he had was also ultimately enjoyed by DML.
[114] On 6 January 2006, Dr Bierre in response to the discussion document registered his interest as a proposer to provide community laboratory services on behalf of the Consortium. At this point in time Dr Bierre’s stand-down had not at least technically commenced, the stated commencement date being 14 January 2006.
[115] On 30 November 2005 a draft discussion document had been circulated to all stakeholders. This document will be discussed later in the judgment in relation to consultation. The RFP itself was issued on approximately 8 February 2006.
[116] As could be expected, through February and March 2006 both DML and Lab Tests were very busy preparing their respective proposals. Dr Bierre reserved the company name “Auckland Pathology Consortium Limited”, and he secured the involvement of Gribbles and Ms Mathias. The parties met with PHOs and with the hospital laboratories. It became clear that the suggestion to amalgamate with the hospital laboratories would not work because there was little spare useable capacity in those laboratories. This position was confirmed at a meeting of the DHB laboratories strategic leadership group on 14 March 2006, and by letters on
17 March 2006 to those who had expressed an interest in responding to the RFP.
[117] On 10 April 2006 the Consortium submitted a response to the RFP, a document of some 136 pages. On the same date DML lodged its proposal. Both proposals were in two parts. The first part of the proposal related to the mandatory and non-financial criteria. The second part of the proposal related to financial
matters and was presented in a separate sealed envelope. The idea behind the separation of the proposal into two parts was so the evaluation panel’s consideration of the non-financial criteria would not be coloured by the proposal’s economic aspects.
[118] As leader of the Consortium proposal, Dr Bierre then had to field questions and liaise with the evaluation panel, which he did through April and May. Dr Bierre’s dealings with the evaluation panel were premised on his being the leader of the Consortium bid, and there is no suggestion that this was not clearly understood by all involved.
[119] In December 2005 the ARDHBs had engaged Audit New Zealand to provide independent “probity assurance” in respect of the tendering process for the community laboratory services contract. Its objectives were to ensure that the proposal process conformed to good practice, that the subsequent evaluation process was robust and in keeping with recognised good practice, that the risks of litigation through a failure to adopt good processes were minimised, and that adverse risks arising from complaints by disaffected parties, process failure, or improper practices were minimised. An experienced auditor, Mr William Inglis, became involved in late December 2005. He reviewed documents and attended evaluation panel meetings and some meetings with DML and the Consortium. He prepared a report which was presented by Audit New Zealand on 24 May 2006. The report stated that the processes were conducted in keeping with recognised good practice. It further stated: “We are not aware of any departures from good practice or outstanding probity issues up to this point of time”.
[120] On 12 July 2006, after the evaluation panel’s recommendation of early June had been accepted by the ARDHBs, and two days before the Lab Tests contract was signed, Mr Keenan circulated an email directed to Dr Jury on the evaluation panel, setting out a number of questions that he had been specifically asked by the chairs at the various meetings of the ARDHBs. The first question was “Qualify Tony Bierre position – no influence/no insider info and probity clearance”. This question and the others were responded to in a memorandum of 13 July 2006 from the general
counsel to the ADHB. In respect of the query raised about Dr Bierre’s position, he responded:
ADHB and Tony Bierre have addressed any conflicts by an approach that exceeds all statutory or ethical obligations.
All participants in the community laboratory sector – DML and SCL in particular – were involved on the extended strategic assessment that occurred prior to the release of the RFP. Significant information was shared in this process, including the final report. Via this process and the direct involvement in the sector the other respondents would have had access to more specific information and understanding as to ARDHBs’ strategies and Tony Bierre.
[121] It is now necessary to consider these facts against the allegations of procedural impropriety. It is convenient to do so under the separate headings of conflict of interest and use of confidential information as these concepts best capture what was allegedly improper about Dr Bierre’s involvement.
Conflict of interest
Conflicts of interest in administrative law
[122] A conflict of interest arises when a person carries out a particular function with two or more interests in conflict. In administrative law, a conflict of interest exists when a person has a private interest in a decision where that person also has a public role. In such a case the person’s public role and private interest are in conflict. The result can be a poor decision because private concerns that have nothing to do with the public duty have influenced the decision.
[123] The concept of a conflict of interest is well known in the common law. It has developed particularly in the context of professional and fiduciary duties, the classic example being a solicitor’s duty not to be in a conflict of interest with a client. It is also well understood in public law where its usual expression is under the heading of bias or apparent bias.
[124] The public law rule against conflicts of interest is not, as it is in private law, based on a relationship of trust and the need to protect a particular client or person to whom the trust is owed. Rather, the rule exists to protect members of the public
affected by the decision from poor decision-making. Conflicts of interest can be seen as an aspect of the administrative law requirement of procedural propriety in decision-making. The corollary is that insisting on procedural propriety helps to uphold public confidence in public decision-making.
[125] It must be recognised immediately that persons elected to public office will often be elected on the basis of express philosophies and policies. They will inevitably make decisions influenced by those stated policies and principles. It is well accepted that, providing the task of decision-making is approached with an open mind, such conflicts are acceptable: Turner v Allison [1971] NZLR 833 (CA), R v Amber Valley District Council ex parte Jackson [1985] 1 WLR 298. There is a distinction, however, between a conflict arising from the personal views held by a decision-maker, and a conflict arising from a personal financial interest in the outcome of a decision.
[126] A conflict of interest can be benign where the person who is conflicted does not participate in making the actual decision and the decision-makers know about and understand the conflict. If the conflict is declared, the decision-makers can stand the conflicted person down in respect of certain matters, or consider input from the conflicted person while making appropriate allowances for the conflict. The ability to compensate for the conflict cannot extend to voting, however, where the conflicted person could directly influence the outcome or decision. The undesirability of a conflicted person taking part in decision-making is reflected in cl 36 of Schedule 3 to the PHD Act. Clause 36(4) states that a conflicted member who discloses a conflict may, if the Board permits the member to do so, take part in deliberations but may not take part in any decision.
[127] The difference between a conflict of interest and misuse of information is clearly reflected in the provisions of the Crown Entities Act, where different sections set out duties under each heading. Sections 62 to 72 relate to conflicts of interest and s 57 relates to the misuse of information. A conflict of interest will not necessarily give rise to misuse of the DHB information, but a misuse of the DHB information will generally arise from a conflict of interest. Conflicts of interest can be managed, and this is contemplated by the relevant section. In contrast, managing or permitting
the use of confidential information is much more slippery territory. The fact that any such misuse of information is disclosed may not prevent damage to the ARDHBs’ fair process.
[128] It is clear that Dr Bierre participated to one degree or another in the ARDHBs’ deliberations leading up to the selection of the first preferred provider. It is equally clear that, although participating in the DHBs’ deliberations, Dr Bierre did not take part in final decision-making. There is no allegation that the decision- makers were biased. Thus, while counsel accepted that Dr Bierre had a conflict of interest as an ADHB member interesting in securing a contract with the ARDHBs, it was submitted for both the ARDHBs and Lab Tests that his disclosure of the conflict was adequate to excuse his involvement in deliberations. Thus, it was submitted that the ARDHBs had not made any procedural error in allowing Dr Bierre’s continued involvement.
Conflicts of interest in the relevant statutes
[129] The two statutes that relate specifically to DHBs are the PHD Act 2000 and the Crown Entitles Act 2004. Clause 36 of the Schedule 3 of the PHD Act provides as follows:
36 Disclosure of interests
(1) A member of a board of a DHB who is interested in a transaction of the DHB must, as soon as practicable after the relevant facts have come to the member’s knowledge, disclose the nature of the interest to the board.
(2) A member of a board who makes a disclosure under this clause must not (unless subclause (4) applies, or the Minister, by a waiver or modification of the application of this sub-clause under clause 37, permits) –
(a) take part, after the disclosure in any deliberation or decision of the board relating to the transaction; or
(b) be included in the quorum required by clause 25 for any such deliberation or decision; or
(c) sign any document relating to the entry into a transaction or the initiation of the transaction.
(3) A disclosure under this clause must be recorded in the minutes of the next meeting of the board concerned and entered in a separate interests register maintained for the purpose.
(4) However, a member of the board who makes a disclosure under this clause may take part in any deliberation (but not any decision) of the board relating to the transaction concerned if a majority of the other board members of the board permits the member to do so.
…
[130] “Conflict of interest” is defined in s 6 of the PHD Act as “having an interest in a transaction” (the word used throughout cl 36 of Schedule 3). Section 6 defines “transaction” as follows:
or
(b) an act that is done otherwise than for the purpose of performing its functions.
(2) Subsection (1) does not limit any discretion of a court to grant relief in respect of a minor or technical breach.
20 Some natural person acts protected
(1) Section 19, or any rule of law to similar effect, does not prevent a person dealing with a statutory entity from enforcing a transaction that is a natural person act unless the person dealing with the entity had, or ought reasonably to have had, knowledge—
(a) of an express restriction in an Act that makes the act contrary to, or outside the authority of, the Act; or
(b) that the act is done otherwise than for the purpose of performing the entity's functions.
(2) A person who relies on subsection (1) has the onus of proving that that person did not have, and ought not reasonably to have had, the knowledge referred to in that subsection.
(3) A statutory entity must report, in its annual report, each transaction that the entity has performed in the year to which the report relates that was invalid under section 19 but enforced in reliance on this section.
(4) For the avoidance of doubt, this section does not affect any person's other remedies (for example, remedies in contract) under the general law.
[348] The Crown Entities Act originated in the Public Finance (State Sector Management) Bill. Clauses 60 and 61 of that Bill later became ss 19 and 20 of the Crown Entities Act. The explanatory notes to the Public Finance (State Sector Management) Bill are of assistance in interpreting sections 19 and 20.
[349] The explanatory notes state that clause 60 (s 19) continues the “existing law”. It is stated that s 20, however
[M]odifies the ‘ultra vires’ doctrine (as regards third parties) for acts of a statutory entity that are acts that a natural person could have done. An example is --- a statutory entity, A employs an employee, Mr B. An Act of Parliament says that A must not employ an employee until A has consulted with the State Services Commissioner about that employee’s terms and conditions of employment. A does not so consult. Mr B does not know this omission.
Under the existing law, the contract of employment with Mr B is of no effect. Under clause 61, the contract of employment with Mr B can be enforced by Mr B, because the powers of appointing an employee is a power that an actual person has. It does not matter that A has acted in breach of its Act of Parliament.
[Emphasis added]
[350] The explanatory notes go on to state that the reasons for modifying the doctrine of ultra vires in such a way are the uncertainty for parties when entering into transactions not provided for in the statute, the high transaction costs involved in seeking legal advice about proposed actions and the possibility that “the doctrine can be used as an excuse for walking away from legal obligations”. It is also noted that other mechanisms are better designed to ensure the accountability of statutory entities.
[351] It is then stated further:
The modification of the doctrine applies only if there is an innocent third party involved. If the person dealing with the entity knew, or ought reasonably to have known, that the act was outside an Act, then the protection does not apply, and the act is still illegal.
[Emphasis added]
[352] Section 20 clearly prevents a statutory entity from raising its own error against third parties. For instance, it would prevent a DHB from refusing to perform a contractual obligation on the basis that the DHB had made an error as to its power to enter into the contract. Thus s 20 is not of relevance in this case. The ARDHBs are not trying to take advantage of their own wrongs by raising their own errors as a defence to a contract. On the contrary, the ARDHBs seek to uphold the contract. Rather, the error is being raised by third parties themselves, namely DML and the intervener.
[353] Moreover, I do not think that Dr Bierre or Lab Tests can avail themselves of any protection under s 20. In this case the act that was contrary to or outside the authority of the Crown Entities Act was the use of the ARDHBs’ information by Dr Bierre. Dr Bierre and the Consortium were aware of the background and state of knowledge. Indeed, I have already referred to the Healthscope Minutes, which expressly acknowledged his use of information. In the words of s 20(1)(b), they “had or ought reasonably to have had knowledge” that the decision was ultra vires.
[354] I also note that s 21 expressly states that s 20 does not limit an application in accordance with law for judicial review. Clearly s 20 is not intended to operate in any general way as a privative clause. Consistently with s 27 of the New Zealand Bill of Rights Act 1990 it leaves unaffected the right of a party to challenge the decision of a public authority for a failure to observe the principles of natural justice by judicial review. Its limited purpose is that referred to in the explanatory notes.
[355] I conclude that neither s 87 of the PHD Act nor ss 19-26 of the Crown Entities Act affect the decision that must be made as to what remedies, if any, should be ordered as a consequence of the above findings. The validity of the decision and of the contract itself fall to be determined on traditional common law principles.
Can the contract be declared invalid?
[356] I have concluded that the decision to enter into the Lab Tests contract was ultra vires and that s 87 of the PHD Act and s 20 of the Crown Entities Act do not apply. It could be expected that it would follow that the contract itself, having been entered into by a party that was acting ultra vires, would also be invalid. Mr Illingworth for the first defendant submits, however, that this should not be so. He refers to Crédit Suisse v Allerdale Borough Council [1997] QB 306 (CA). In that decision Hobhouse LJ held that the issue of the validity of a contract was to be decided in private law terms unless there was a lack of capacity to enter into the contract at all. He stated at 356 that “the existence of private law rights must be determined as a private law issue.”
[357] The first defendant submitted that the ARDHBs clearly had capacity to enter into the contract and so a flawed process adopted by the decision-maker gave rise only to private law issues. Therefore, it was submitted, there was no power at common law to interfere with the Lab Tests contract.
[358] This submission, however, overlooks the rationale of public protection that lies behind administrative law. As Lord Templeman said of local bodies in Hazell v Hammersmith & Fulham London Borough Council [1992] 2 AC 1 (HL) at cl 36 “the object of the doctrine of ultra vires is the protection of the public.” There is a public
interest in good decision-making. Decisions that are made in breach of the rules of natural justice or contrary to statutory powers do not constitute good decision- making.
[359] I respectfully agree with the observation of Neill LJ in the Crédit Suisse v Allerdale Borough Council case, who disagreed with Hobhouse LJ. Neill LJ stated that he knew of no authority proposition that the ultra vires decisions of local authorities can be classified into categories of invalidity, and stated at 343:
Where a public authority acts outside of its jurisdiction in any of the ways indicated by Lord Reid in Anisminic v Foreign Compensation Commission [1969] 2 AC 147, 171 the decision is void. In the case of a decision to enter into a contract of guarantee the consequences in private law are those which flow where one of the parties to a contract lacks capacity. I see no escape from this conclusion.
[360] DHBs’ objects and powers are solely those that Parliament set out in the PHD Act, and beyond those powers they are legally incapable of doing anything: Re Westminster City Council [1986] AC 668. The wider powers open to private persons are not available to them, and the statutory protection available to third parties when dealing with private companies is also not available, subject to s 87 of the PHD Act and s 20 of the Crown Entities Act as discussed. A contract made by a DHB outside its powers is therefore wholly void, subject to the presumption that it is operative until specifically declared invalid.
[361] The question that must now be addressed is whether the Court in its discretion should set aside the ARDHBs’ decision and so retrospectively invalidate the decision and the contract.
Application of discretion
[362] The position on the Court’s discretion as to remedies was recently restated by the Court of Appeal in Unison Networks Limited v Commerce Commission CA 284/05 19 December 2006 at [82], quoting Professor Feldman English Public Law (2004) at paragraph 18.52:
Although it is unusual to do so, the Court may decide to refuse remedies … possibly allowing invalid public action to stand, because countervailing public considerations justify withholding the relief.
The Court in Unison Networks Limited v Commerce Commission referred to some of the reasons for refusing relief, including the implications on third parties and on public administration. It also referred to situations where relief would serve no purpose, such as where the applicant has achieved the substantial result sought, or where an error has been substantially cured: at [83].
[363] It was submitted for the ARDHBs that to grant relief would cause great administrative inconvenience to the ARDHBs, who would be forced to undertake a costly and time-consuming second proposal process for no apparent purpose. It was possible that the ARDHBs could enter into a second contract, thereby exposing themselves to a damages claim. It was also suggested that DML does not have
‘clean hands’ and had brought the situation on itself by its failure to open its books to the DHBs and its combative approach to the proposal process. It was said that to grant relief to DML would embolden disappointed incumbents to challenge adverse commercial decisions and make DHBs unduly apprehensive with regard to reform and change.
[364] Lab Tests, for its part, submits that it will suffer great prejudice if the contract is set aside. It will be forced to participate in another RFP process. It has invested in excess of $17 million already on the assumption that it had a valid contract. It points out that if the Court intervenes, the ARDHBs will no longer have a contract for pathology services on 1 July 2007, as the contract with DML expires on
30 June 2007. Finally, it submitted that there is a clear risk to the general Auckland public health in the short term if the proposal process starts again.
[365] I now proceed to consider these various arguments.
DML’s “clean hands”
[366] “Clean hands” are relevant in a consideration of equitable relief but are not an established reason for a refusal to grant administrative law remedies. Given the fact that the remedies in question arise from public law, and that the concept behind
administrative law is the protection of the public from bad administrative decisions, there must be a limit to the relevance of an applicant’s conduct when considering relief.
[367] In this case the two procedural faults identified, Dr Bierre’s conflict of interest and the permitted misuse of information, and the ARDHBs’ failure to consult the PHOs, resulted in the community, in whose interests the decision was made, being deprived of a properly made decision. DML’s moral position is irrelevant. Even if DML were unscrupulous and had behaved badly, the decision- making process would still be flawed and the public would still be entitled to have it done properly. I do not consider that such circumstances would be a reason to refuse relief.
[368] Mr Davison for Lab Tests emphasised a memorandum dated June 2006 written by Chris Wilkes, the finance director of Sonic, in which it was stated that the decision to award the contract to the Consortium was described as “understandable”, and it was noted that DML would probably have “done the same” and often does when it comes to dealing with suppliers. It was stated “they have effectively called our bluff.” The memorandum discusses the ways DML might get some leverage, having found itself in the position of second preferred bidder.
[369] There was mention of approaching politicians and issuing proceedings. There was the suggestion of an offer to take representatives of the ARDHBs on a tour of laboratories around the world to show them the efficiency of the DML operation in Auckland. This would be an opportunity for Dr Morris to get to know the ARDHBs’ personnel better.
[370] I do not consider any of these comments in the memo to be either surprising or reprehensible, although they certainly prevent DML taking any high moral ground. They demonstrate a search for the right tactical position to be taken in its negotiations now that it was likely to lose the contract. I have considered elsewhere DML’s tactical decision not to openly provide its financial information. It is the sort of decision that a large commercial party could be expected to take. Therefore, even
if it were a valid consideration, I do not consider that any action on DML’s part should persuade the Court to exercise its discretion not to grant relief.
Prejudice to third parties
[371] Lab Tests submits that it should be regarded as a third party. It has spent in excess of $17 million in setting up new laboratories and implementing its plans. If the contract is held to be void, this will clearly prejudice Lab Tests and its shareholders.
[372] I do not accept that hardship to Lab Tests should be regarded as a reason not to grant the relief sought. Lab Tests is not truly a third party. It is the successor to the Consortium, the two major shareholders of which were involved in the ultra vires acts. Lab Tests is not the position of an innocent third party. The Healthscope Board Minute of 27 June 2006 shows that Dr Bierre was given a substantial shareholding in Lab Tests knowing that he had provided the Consortium with relevant information derived from his position on the ADHB, and I have already noted that Lab Tests could not avail itself of the protection in s 20 of the Crown Entities Act even if that section applied.
Position of the defendants
[373] The ARDHBs acted in good faith. Their task is a difficult one. I accept that it will be costly for them to have to go through the proposal process again, and the effect of this will be to reduce the funds available for health in the Auckland region. But these sort of costs often arise when there is relief granted in judicial review to remedy a faulty process. The public have an interest in DHBs adopting fair processes. The ARDHBs’ good intentions and the cost of a further process are not reasons that preclude relief.
[374] The prospect of Lab Tests suing the DHBs has been raised. I make no comment on this, except to note the remarks I have already made as to the awareness of Lab Tests’ shareholders of the advantage gained through the involvement of Dr
Bierre. At issue here is good decision-making in the interests of the public. I do not consider that the possibility of a claim is a reason to deny relief.
Proportionality and the wider implications of a finding of invalidity
[375] I consider that a relevant factor in considering whether to grant relief is whether the seriousness of the error identified in the successful judicial review application is proportionate to the consequences of relief being granted. Weight should be given to the gravity of the error and all the circumstances of the case: AJ Burr Ltd v Blenheim Borough Council [1980] 2 NZLR 1 (CA) at 4, Hill v Wellington Transport District Licensing Authority [1984] 2 NZLR 314 (CA) at 324.
[376] There is no doubt that the effect of a decision to invalidate the contract will be wide-ranging. Although I have had no particular submissions made in this regard, such an order will no doubt affect the employment of the persons that Lab Tests have already employed. This is of course a matter of concern, but the employment of the DML staff has also been at stake in these proceedings.
[377] I doubt whether there will be a hiatus of laboratory services from 1 July 2007 if relief is granted. DML has undertaken to continue to provide a service on the
2005 prices. Realistically, there are likely to be options for the provision of interim services in the short term.
[378] I do not consider that the Court is imposing an intolerable “flood-gates” type of burden on DHBs by retrospectively invalidating the decision and contract. A stern response is required to a grave error which has affected the balance of a public process. I also do not accept Lab Tests’ submission that it is inevitable that the same result will be reached if relief is granted. That submission was based on the proposition that the Lab Tests contract would remain in force. Once, however, that contract is declared of no effect and the proposal process has to be conducted again, it cannot be said that any conclusion is inevitable.
[379] These errors were not minor. They were major faults in a procedure that was of importance to the people whom the ARDHBs served. Although they did not
involve dishonesty, they were serious, and the effects were far-reaching. The Consortium bid ended up greatly advantaged by Dr Bierre’s improper use of knowledge. This skewed the decision-making process significantly. Further, the PHOs were not consulted. That was a serious failure incompatible with the statement of intent issued under the PHD Act and the plans and contracts that followed.
[380] I conclude that the decision to enter into the Lab Tests contract, and the contract itself, should be declared invalid.
The various claims
[381] While I have divided the plaintiff’s claims into four heads of claim, DML’s amended statement of claim raises a considerable number of overlapping complaints. I will now briefly refer to each specific complaint, with a reference to the decisions in this judgment.
a) Bias or other fault by the ARDHBs, based on the involvement in the
Lab Tests’ bid of pathologist and ADHB member, Dr Bierre.
I have found that there was no bias in the orthodox sense, but that Dr Bierre should not have been involved in laboratory matters as a potential proposer, and once he had, should not have participated in a proposal.
b) Actions by the ARDHBs contrary to DML’s legitimate expectations as to what was being sought by the ARDHBs as to a service model, the quality and level of service, and the RFP process.
I have found there here was no breach of any legitimate expectation. c) The ARDHBs’ actions were irrational and/or arbitrary, and involved:
i) a failure to make proper inquiries;
ii) an error in assessing the mandatory criteria;
iii) reliance on material mistakes of fact; and
iv) a failure to take into account relevant considerations or taking into account irrelevant considerations.
These claims have not succeeded.
d)Failure of the ARDHBs to consult with parties who should have been consulted.
There was no failure of the ARDHBs to consult with DML, but there was a failure to consult with the PHOs.
e) Failure of the ARDHBs to satisfy themselves as to the usability, adequacy and quality of a changed service model, and its ability to meet the health care needs of the wider communities.
This claim had the effect of attacking the merits of the decision and does not succeed.
f) Failure of the ARDHBs to give DML the opportunity to bid on the same basis as other bidders.
I have found that DML was given an adequate opportunity to make a proposal but that it was disadvantaged because of Dr Bierre’s ability to use confidential information for the Consortium proposal.
g) Failure of the ARDHBs to act reasonably and in the public interest.
This claim, which is an attack on the reasonableness of the decision, does not succeed.
h) The contract was not permitted by or consistent with the ARDHBs’
annual plans and was ultra vires.
I have upheld the intervener’s submission that there was both a breach of a requirement to consult imposed by the statute and related documents, including plans, and also that there was a breach of a legitimate expectation on the part of the PHOs that they would be consulted.
Particular orders
[382] The orders sought were as follows:
a) a declaration that the decision and the Lab Tests contract are ultra vires and of no effect;
b) an order that the decision be set aside;
c) a declaration that the contract entered into between the ARDHBs and
Lab Tests is invalid and/or of no effect;
d)an order that the ARDHBs reconsider whether, and if so on what basis, they will contract for primary-preferred pathology testing, having regard to all potentially affected parties including all those persons listed in paragraphs 65.1 and 65.4; and
e) costs
[383] I note that originally the plaintiff sought a further order that no person who had contact or discussions with Dr Bierre concerning the ARDHB strategy for purchasing primary/referred pathology services prior to August 2005 should participate in the design and/or evaluation of any further RFP processes or other processes. At the close of submissions I was advised that that relief is no longer sought. I consider that that is an appropriate position of the plaintiff to take. There is no suggestion that the members of the evaluation panel or ARDHBs were biased.
The evidence shows that all those involved in the ARDHBs and evaluation panel acted in good faith. The advantage that Dr Bierre’s knowledge gave to the Consortium has now been effectively neutralised by the very public nature of these proceedings and the very full disclosure that has taken place.
[384] The effect of declaring the decision to enter into the contract invalid will be that the request for proposals process will have to begin again. It was submitted to me by Mr Illingworth that if the only successful cause of action was the claim of failure to consult with the PHOs, a direction could be given that the RFP process could be continued by the evaluation panel after the stage at which it had decided on a first preferred bidder. The premise upon which Mr Illingworth’s submission was made has not eventuated. I have, in addition to upholding the claim on the basis of failure to consult with the PHOs, upheld the claim of conflict of procedural unfairness. In order to purge the unfair advantage gained by Lab Tests it will be necessary to start the RFP process again.
[385] I am not clear as to how the relief sought in (d) will advance matters. I did not receive detailed submissions on that prayer for relief. It refers to para 65.1 of the amended statement of claim, and there are persons listed in that paragraph whose interests have not been the subject of submissions. Given the fact that the parties could not have anticipated which causes of action would succeed or fail, and what relief might arise, I will not grant that relief. However, I will reserve leave to enable the parties to seek further directions, if necessary.
Summary
[386] The plaintiff succeeds in its claim based on conflict of interest and misuse of information.
[387] The plaintiff fails in its claim that it was not properly consulted and that the
ARDHBs breached DML’s legitimate expectations.
[388] The plaintiff succeeds in the claim, presented by the intervener, that the PHOs should have been properly consulted, and that the consultation that took place was inadequate.
[389] The plaintiff fails in its claim based on unreasonableness, irrationality and mistake of fact.
[390] The primary relief sought by the plaintiff will be granted.
Relief granted
[391] An order is made that the decision of the ARDHBs to award a contract for laboratory services for the Auckland region to Lab Tests was ultra vires and is invalid and of no effect.
[392] An order is made that the contract entered into between the ARDHBs and Lab Tests for the provision of primary preferred pathology services on 14 July 2006 is invalid and of no effect.
[393] Leave is reserved to the parties to seek further directions.
Costs
[394] I observe, without in any way pre-determining the issue, that costs could be expected to follow the event, but also that a considerable amount of hearing time was spent on the plaintiff’s unsuccessful arguments. I would hope that the parties would agree on costs. If they cannot, the plaintiff and intervener should file submissions within 21 days, with the first and second defendants to file submissions within a further 14 days.
[395] If counsel wish to seek to vary these costs directions, they should file memoranda, and if necessary seek a telephone directions conference.
……………………..
Asher J
Solicitors:
Chapman Tripp, PO Box 2206, Auckland
Lowndes Jordan, PO Box 5966 Wellesley Street Auckland Wilson Harle, PO Box 4539, Shortland Street Auckland Russell McVeagh, PO Box 8 Auckland
Copy to:
G Illingworth QC, PO Box 7205 Wellesley Street, Auckland
PJ Davison QC, PO Box 105513, Auckland
H Janes, PO Box 4338 Shortland Street, Auckland
“A”
[Some personnel referred to]
ADHB
ADHB Board referred to: ADHB Management referred to:
Chair Wayne Brown CEO Garry Smith
Deputy Chair Ross Keenan GM Funding Dennis Jury
Board members referred to:
Tony Bierre Inhouse counsel Bruce Northey
Harry Burkhardt
Di Nash
ADHB Audit Committee members referred to:
LABPLUS employees referred to:
Chair Harry Burkhardt General Manager, Clinical
Support Services
Fiona Ritsma
Member Tony Bierre
CMDHB
CMDHB Board referred to: CMDHB Management referred to:
Deputy Chair Ross Keenan CEO Stephen McKernan
WDHB
WDHB Board referred to:
Deputy Chair Ross Keenan
RFP 577
RFP Working group members referred to:
RFP 577 Evaluation Panel referred to:
Projector
Coordinator
Bruce Gollop Project Director, NDSA Bruce Gollop
Laboratory
Services Manager
Andrew Coe GM Funding & Planning
ADHB
Dennis Jury
RFP 577
GM Funding & Planning, ADHB
Dennis Jury Materials Manager, ADHB
Chris Morgan
Independent Pathologist Bert White Audit NZ Bill Inglis Assistants to Evaluation panel referred to
ADHB Inhouse counsel Bruce Northey
DML
DML personnel referred to: Sonic personnel referred to:
Chief Executive Arthur Morris Finance Director Chris Wilks
HARBOUR PHO
Harbour PHO personnel referred to:
CEO Susan Turner
LAB TESTS
APC/Labtests personnel referred to: Gribbles/Healthscope personnel referred to:
CEO Tony Bierre General Manager, Pathology NZ
Liz Walker
Director Lee Mathias
“B”
[Acronyms and abbreviations commonly used]
ADHB Auckland District Health Board ARDHBs
Auckland Regional District Health Boards
CMDHB
Counties-Manukau District Health Board
DHBs
District Health Boards
DML
Diagnostic Medlab Ltd
FTEs
Full-time Equivalents
Gribbles
Gribbles Pathology NZ Ltd
Healthscope
Healthscope Ltd
Lab Tests
Lab Tests Auckland Ltd
NDSA
Northern DHB Support Agency Ltd
PHOs
Primary Health Organisations
RFP
Request for Proposal process SCL
Southern Community Laboratories
Sonic
Sonic Healthcare Pty Ltd
the Consortium
Auckland Pathology Consortium Ltd
the PHD Act
New Zealand Health and Disability Act 2000
WDHB
Waitemata District Health Board
0
0
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