Integrated Education Software Limited v Attorney-General on behalf of the Ministry of Education

[2012] NZHC 837

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2009-485-1875 [2012] NZHC 837

IN THE MATTER OF     THE NEW ZEALAND BILL OF RIGHTS ACT 1990

BETWEEN  INTEGRATED EDUCATION SOFTWARE LIMITED Plaintiff

ANDTHE ATTORNEY-GENERAL ON BEHALF OF THE MINISTRY OF EDUCATION

Defendant

Hearing:         18-21 July 2011

Counsel:         S Perese for Plaintiff

J C Holden and T M Bromwich for Defendant

Judgment:      30 April 2012

In accordance with r 11.5, I direct the Registrar to endorse this judgment with the delivery time of 3:00pm on the 30th April 2012.

JUDGMENT OF WILLIAMS J

Solicitors:

Crown Law, Wellington

INTEGRATED EDUCATION SOFTWARE LIMITED V THE ATTORNEY-GENERAL ON BEHALF OF THE MINISTRY OF EDUCATION HC WN CIV-2009-485-1875 [30 April 2012]

[1]      This case is about a system the Ministry of Education (MoE) introduced to encourage schools to use MoE accredited providers of school management systems (SMS) software.   The plaintiff, Integrated Education Software Limited (IES), was already a long standing provider in the sector by the time MoE introduced SMS accreditation.  IES made two attempts to gain accreditation but failed both times.

[2]      IES no longer provides SMS software to schools, all of its clients having migrated to other, mostly accredited, providers.

[3]      IES sues MoE claiming both retrospective and prospective damages for the loss of these contracts.  IES says that it lost these contracts as a result of the unlawful design and unfair implementation of MoE’s accreditation policy.

The facts

[4]      IES was initially established in 1987 by Robert Tinker.   It had a different name then but its objective was the same.

[5]     Robert Tinker had an extensive background in computing and software development in Europe and North America during the early days in which computer technology  was  being  mainstreamed.    He  returned  to  New  Zealand  for  family reasons in the 1980s.   When the community-focused reforms of “Tomorrow’s Schools”  were  introduced  in  the  late  1980s,  he  identified  an  unmet  need  for computer based school administration systems.   The company spent two years developing an integrated school software product.

[6]      IES was joined as an early mover in the market by Massey University-backed MUSAC.  Over time, MUSAC came to dominate the primary school market and IES (at that time at least) took a leadership role in the secondary school market with fewer but much larger schools.   IES’ market advantage was, Mr Tinker said, its comprehensive integrated software.   It was designed to provide roll management, student management, asset and stock management, financial management, and multi- agency interoperability all in a single integrated package.  This, he said, tended to

suit the larger more complex secondary schools.   IES distinguishes this package, which it calls a school administration system, from the SMS products tested by MoE. SMS products were more narrowly circumscribed covering only roll and student management aspects of a school’s operation.

[7]      By the turn of the 21st century, over a decade later, MUSAC held 77 per cent of the market overall, much of it still in the primary school market.   IES had not faired quite so well.  It supplied two per cent of the market overall although most of its business was still in the more complex secondary school market, so this market share was respectable.  The overall market was, however, very fragmented.  There were 37 software vendors providing software to the compulsory education market. Most were small.  Some were one-man back shed operations.  The school software market had grown organically over the decade since 1989 and, although it was almost entirely state-funded, there were no uniform standards or other controls in place to ensure product quality.

Reform

[8]      It was during this time that MoE decided the sector needed to be rationalised and standards set.   With e-government in vogue for the first time, interoperability between schools on the one hand and MoE and other State agencies on the other, was an important driver.  As to the long term interests of schools themselves, there was also concern within MoE about the variable quality of software packages and after- purchase support.   Lack of technical expertise at school management level meant school leaders were often unable to make good choices.  Ultimately it was felt that this represented a risk to government in terms of wasted expenditure where software was not up to spec or the vendor company failed.   In either case the government would be left to fund a replacement.

[9]      Policy was developed, options scoped, and stakeholders consulted.    Four options received serious consideration.  Option A was the most radical intervention. It involved MoE entering the school software market (either alone or in partnership with a private sector provider of its choice) as a compulsory monopoly provider. Option B   was   somewhat   less   radical.      It   involved   MoE   awarding   formal

accreditation to private vendors and/or certifying their products.  Option C involved the limited intervention of imposing industry-wide software standards but only in relation to interoperability between schools and MoE.  Internal school management would remain unregulated.  Option D was to do nothing.

[10]     In early 2002 MoE plumped for a variation of Option B: rationalisation by way of an accreditation model in which the open market would be respected but MoE would:

(a)       set standards for software vendors;

(b)      test vendors against those standards; and

(c)       accredit those who passed the test.

[11]     It was proposed that accreditation rounds would be held every two years. Incentives would be put in place to encourage those using non-accredited software to shift to accredited software, but there would be no outright compulsion to change.

2003 accreditation round

[12]     For  the  12 months  beginning  June  2002,  accreditation  categories  and standards were set.  In May 2003, final standards were provided to vendors and the first accreditation round commenced in August of that year.

[13]     The round tested vendors only in the business and software categories.  Other areas such as financial management and capital asset management were not tested. The business categories were:

(1)      Organisation;

(2)      Support Services;

(3)      Quality Assurance; and

(4)      Software Development Management.

[14]     Seven software categories were made up of four general categories (which were common to all areas of the software) and three functional categories.   The general categories were:

(1)      G1 – Access Control; (2)          G2 – Installation;

(3)      G3 – Technical Architecture; and

(4)      G4 – Usability. The functional categories were:

(1)      F1 – Student Database; (2)       F2 – Attendance; and (3)      F3 – Assessment.

[15]     For IES, Mr Tinker said his company’s competitive edge lay in the broad and integrated functionality of its software.   By focusing on a very narrow range of software categories,  Mr Tinker argued  that  MoE  had  written the most attractive aspect of its product out of the test.   MoE accepts that the software categories it tested  were  but  a  small  part  of  the  software  functionality in  an  overall  school administration system.   This was because, MoE said, testing functionality was an expensive and time-consuming process.  MoE decided to focus on what it considered were core software functions for school management.

[16]     Between  January  and  July  2003,  MoE  met  with  vendors  to  explain  the proposed testing process.   Weekly Q&A sessions were held with providers who wished to engage.  All exchanges were copied to all applicants in the accreditation pool.  Final software standards were provided to vendors in July 2003 together with a description of testing methodology, test plan and test laboratory infrastructure.  All proposed questions in the business categories were disclosed in August.  Applicable weightings (I explain these below), were also disclosed and explained.

[17]     Accreditation would be given only after the vendor passed all business and software categories.  The software categories contain selected “essential” questions. A failed  answer  to  these  questions  would  forfeit  the  category  –  and  therefore

accreditation.    Both business and software categories contained weighted “evaluation” questions.   Multiplier weightings of 3, 2 or 1 were accorded to each question depending on the importance of its subject matter in the view of the test’s designers.  In addition, answers were categorised as “desired level” – a super pass – worth two marks; “standard level” – a bare pass – worth one mark; or “below standard” – a fail – attracting -1.  The combined effect of a question’s weighting and the quality of its answer was that a good answer to a question in an important category could produce up to 6 marks, while a poor answer in the same category could produce -3 marks.

[18]     Vendor testing was carried out between August and November 2003.

[19]     The entire assessment process was subsequently evaluated by Ernst & Young

Limited  with  sign-off  being  received  from  Susan  Steedman  of  that  firm  on

24 November 2003.   Ms Steedman identified no problems or anomalies with the process.1

[20]     It was hoped that the 2003 accreditation round would produce a small group of accredited vendors with excellent functionality, support and interoperability.

[21]     This is not what happened.

[22]     Ten vendors including IES participated in the accreditation round.  Only one passed.    IES  failed.    So  did  the largest  provider,  MUSAC,  which  at  this  stage supplied 79 per cent of the market.

[23]     No-one was happy.   The long term vendors who had failed accreditation blamed a defective accreditation process.  MoE did not achieve its goal of producing a  small  number  of  accredited  vendors  with  excellent  functionality,  support  and

interoperability.

1 MoE only retains a draft of her letter of 24 November 2003, but Mr Munro of the Ministry gave evidence that a final copy had in fact been received but appeared to have been mislaid from the file. Mr Perese for the plaintiff took no issue with this.

2005 accreditation round

[24]     In light of this outcome, it was decided to move immediately to a second accreditation round rather than wait the planned two years.   Modifications were made to tests and categories.

[25]     Two  categories  were  added  –  one  in  software  and  one  in  business.    In software, the new category was Roll Returns and Roll Audit Approval.  In business it was Future Directions and Code Audit.  All other categories were as in round one. Standards were increased.  In a number of cases what was treated as “desirable” in round one, became the standard in round two.

[26]     Two vendor meetings were held – the first on 13 February 2004 and the second  six  months  later on  3  June 2004.    New vendors  attended  who  had  not participated in the 2003 round.  Officials discussed vendor feedback from round one as well as changes proposed in round two, both to the content and process for testing. In the second meeting, draft test criteria were circulated and explained.   Weekly Q&A sessions were reinstituted in round two.   Vendors posed questions of interpretation  for  both  areas  being  tested  and,  as  in  round  one,  answers  were circulated to all participating vendors.

[27]     The testing process had been changed in response both to vendor feedback and to the aberrant result thrown up by round one.   Testing would now be more flexible and allowed for a degree of interaction between testers and vendors in the examination process itself.  Results would be moderated for the first time, no doubt as a guard against unexpected trends similar to those discovered all too late in round one.   According to Mr Munro, the aim was to ensure that testing addressed the substantive standards and could cope with vendor’s unexpected interpretations where these could, on reflection, be justified by reference to the wording of the relevant standard.

[28]     A change was made in granting all vendors a “right of reply” to marking in all business categories.  Once marking had been completed, interim marks would be provided to vendors who were invited to provide written feedback in areas where

they  had  not  scored  full  marks.    No  new  material  would  be  accepted  but  this provided vendors with an additional opportunity to explain themselves.  It was hoped that the right of reply would encourage vendors to correct any marking errors or omissions made by examiners.

[29]     Finally,  “near  misses”  would  generally  be  rounded  up  to  a  pass.    The assessment process, it was felt, should avoid technical fails.   It was felt that the marking process needed to be robust enough for a failure in any particular category to make sense in light of the overall submission.   A near miss was considered inconsistent with this approach.

[30]     Testing of business categories ran from September to October 2004, with marking in November to December 2004.   Software testing ran from November

2004 to March 2005.  Overall results were finalised in April 2005 and published on

9 May.

[31]     Ernst & Young were once again invited to audit the testing process.   On

23 June 2005 Susan Steedman wrote to MoE: “… nothing has come to our attention that  would  cause  us  to  believe  the  process  was  not  fair  to  all  vendors  or inconsistently followed.”

2005 result

[32]     Seven vendors received accreditation.  Among them was the biggest provider MUSAC – although only in relation to its Student Manager package. IES did not receive accreditation.   IES failed one software and two business categories.  They were Usability in software and Organisation and Quality Assurance in the business categories.  In fact preliminary marking had seen IES fail three business categories but two of these (Software Development Management and Future Direction) were upgraded following IES’ right of reply.  Future directions also benefitted from being a near miss on its revised score leading to the score being rounded up to a bare pass.

[33]     MUSAC also received upgrades in the quality assurance category (where a bonus mark was added on one question) and in the future directions category where a fail answer was upgraded to a pass mark. These were both business categories.

Incentives to use accredited vendors

[34]     With the accreditation round now complete and a small group of accredited vendors now in  place,  MoE  set  about  incentivising schools  to  swap  from  non- accredited to accredited providers.  Primary schools were offered $3,500 +GST, and secondary schools $5,500 +GST to fund the transition.  This was to be a contribution to purchase of the accredited package preferred by the school together with staff training.   If the cost of the package exceeded these figures, it was the school’s responsibility to make up the difference.

[35]     MoE also provided schools with advice on choosing a package and provider that suited them.   Schools were actively encouraged to  make the change to an accredited provider.  Non-accredited providers did not figure in the MoE’s advisories either in formal presentations to school clusters, or in one on one discussions with school administrators.

[36]     Three hundred of 326 schools eligible for funding support took the money and made the change.

[37]     Although MoE argues that IES was in fact losing clients before the second accreditation round, there can be no doubt that IES’ failure to achieve accreditation did have a significant impact on that company’s fortunes.   This occurred at two levels.   First, it made it harder for IES to retain existing clients in the face of monetary incentives to change and MoE’s aggressive change campaign.  Second, and for the same reasons, it made it more difficult for IES to attract new clients from the pool of 300 schools hunting for a new provider.

[38]     Although the original plan was to run a new accreditation round every second year in out-years, the 2005 round was in fact the last accreditation round run by MoE.    According  to  MoE,  the  accreditation  process  had  led  to  a  significant

improvement across the board in SMS software used by schools.  MoE then moved to a Data Sharing Approval model (Option C in the original suite of reform options) in which vendors were tested annually against MoE’s interoperability standards.  In light of the fact that a small but significant number of schools had stuck with non- accredited  providers,  no  distinction  was  drawn  thereafter  in  testing  between accredited and non-accredited providers.

[39]     IES received data sharing approval in 2008.

[40]     Between 2002 and March 2005, IES lost SMS contracts for six secondary schools.  Between 2005 and the present, all of its remaining SMS schools left IES.

[41]     The  company  currently  provides  only financial  management  packages  to schools in New Zealand.

IES’ complaint

[42]     IES says that the effective demise of its  SMS business is attributable to MoE’s accreditation processes.  IES says accreditation, misconceived from the start and poorly executed, was why it lost both its then existing client base and access to a fair share of the 300 schools that changed providers after the second accreditation round.  IES estimates that it had lost $226,328 to 31 March 2008 and $489,913 per annum thereafter.  Net present value of that loss exceeded $3.6m over 10 years and

$4.8m over 20 years according to Kenneth Iles, IES’ forensic accountant.  IES brings the following claims:

(a)      a claim in negligence alleging that MoE, in conceiving and carrying out the two accreditation rounds, breached a duty of care to IES and caused it harm;

(b)a claim for breach of natural justice under s 27(1) of the New Zealand Bill  of Rights Act  (NZBORA)  arguing  that  MoE was  actually or apparently biased against IES when it implemented the accreditation rounds;

(c)      a claim under s 36 of the Commerce Act that MoE used its market position  to  remove  IES  from  the  SMS  market  in  breach  of  that section.

[43]     In respect of the negligence claim, MoE says it owed IES no duty of care, did not behave negligently and caused IES no harm.  In respect of the claim of actual or apparent bias, MoE denies bias in either form, and says in any event the facts do not reach the threshold to justify an award of damages under NZBORA, even if bias had been made out.   In respect of the Commerce Act claim, MoE says this claim is barred by the limitation provisions in the Act and, even if that is wrong, s 36 has no application to these facts anyway.

[44]     I turn now to address each claim in the order introduced.

Negligence claim

General principles

[45]     The general principles are well settled and were not controversial in this case. To succeed in negligence IES must establish that it was owed a duty of care, that MoE breached that duty, that the breach caused the harm IES suffered, and that the harm was not too remote.2

[46]     Where the subject matter of the claimed duty of care is not expressly covered by prior authority, a duty may be imposed where it is “fair, just and reasonable” to do so in the circumstances.3

[47]     The two concepts to be engaged with in analysing and deciding what is fair, just and reasonable, are proximity and policy.  Proximity addresses the nature and

features of the relationship between the parties while policy is concerned with wider

2 See Couch v Attorney-General [2008] NZSC 45, [2008] NZLR 725 at [9] per Elias CJ and

Anderson J.

3 Couch v Attorney- General at [52] per Elias CJ and Anderson J, at [78] per Blanchard, Tipping and

McGrath JJ.

legal and other issues.4   The two categories will often overlap and do so in this case. The  task  of  the  court  is  not  so  much  in  correctly  allocating  the  relevant considerations to the right category, but in ensuring that the relevant considerations are placed somewhere in the mix for analysis.  As is to be expected when faced with a wide field of analysis, the courts will draw analogies with other cases in deciding what is fair, just and reasonable.5

Arguments

[48]     IES argues that there was a high level of proximity between itself and MoE. IES  says  there  was  an  openly  competitive  market  in  place  prior  to  MoE’s intervention and internal briefing documents show MoE was very aware that all providers were vulnerable to the effects of the new policy and MoE also knew that harm caused by failure to achieve accreditation was likely to be significant.   IES argued that MoE should have introduced elements into the accreditation process to mitigate the risk and effects of non-accreditation.  It relied here on the decision in

Wilson & Horton v Attorney-General6 in which the court imposed a duty not just to

avoid the damaging event in that case, but also to minimise its effect whatever the cause of the event.

[49]     At a second level IES argued that the accreditation process was negligently implemented.  It was characterised by the unfair manipulation of marks, rigid and inflexible testing, the encouragement of provider versus provider competition, and bias against IES.

[50]     It was argued that it is sound policy to impose a duty of care that protects those affected by government programmes against this kind of arbitrary exercise of power.

[51]     MoE  argued  that  SMS  provider  accreditation  was  high  level  policy  and unsuited to be challenged in the courts by way of an argued duty of care.   MoE

4 Couch v Attorney-General at [48]-[52] per Elias CJ and Anderson J, at [78] per Blanchard, Tipping and McGrath JJ.

5 Rolls Royce New Zealand Limited v Carter Holt Harvey Limited [2005] 1 NZLR 324 (CA) at [340].

6 Wilson & Horton v Attorney-General [1997] 2 NZLR 513 (CA).

argued that if a duty was found to exist in this context, that would have far reaching consequences for the administration of government policy generally wherever the Crown regulates or distributes benefit.   It would potentially have, MoE argued, a chilling effect on the creation and implementation of regulatory policy.  In addition, it was argued, if liability is found here, damages would be potentially limitless relating as they would do to ongoing economic loss.

[52]     In the context of application of the policy, MoE rejected any claims of bias, overly rigid or inconsistent testing or score manipulation.  MoE pointed to the two Ernst & Young audits, to the extensive consultation with providers, the independent testing regime and the assistance provided to IES in its results.   MoE argued that these showed that there was no evidential foundation for the allegations.

Analysis

[53]     I agree with MoE that there is no basis for imposing a duty of care in this case, at least not in the context of the construction of MoE’s accreditation policy.  At the implementation level, the facts alleged in support of the duty are simply not made out and, although it is not necessary for me to decide this, the proper footing for mounting a claim of this nature would have been by pleading the tort of misfeasance in public office.7

[54]     Three factors count decisively against the imposition of a duty of care that would have made the policy as it was rolled out, actionable.

[55]     The first is that the courts are generally unenthusiastic about imposing a duty of care in cases of pure economic loss.8   As the Court of Appeal has said, the danger

is that:9

7 To establish the tort of misfeasance in public office, the plaintiff must prove that the official acted with malice, or knowing that the official’s invalid act would cause damage and damage actually occurred. See Gared v Attorney-General [1997] 2 NZLR 332 (CA).

8 Rolls Royce New Zealand Limited v Carter Holt Harvey Limited [2005] 1 NZLR 324 (CA) at [340]. See also Wool Board Disestablishment Co Limited v Saxmear Co Limited [2010] NZCA 513.

9 Rolls Royce at [63].

…claims for economic loss may result in mere transfers of wealth, so that one person’s loss is another’s gain, whereas harm to a personal property involves a net loss to social wealth.

[56]     A related problem is that the economic loss is ongoing, making liability, if it is found, potentially limitless.

[57]     The  second  consideration  is  that  there  is  an  alternative  form  of  redress. Unlawful implementation of a policy or, for that matter, unlawful policy itself, can be more effectively challenged by way of judicial review.   Judicial review is a prompt corrective procedure aimed at the wrongful exercise of public power.  If there was anything in the allegations of bias, inconsistency or irrationality in the implementation of the policy,  an  action in judicial review could have corrected matters before they had gone too far to be reversed.   The crucial requirement is prompt action.   It is not appropriate for IES to have recourse after the loss to a private action in tort simply because it did not move quickly enough to challenge the policy or its result.

[58]     The third and most important consideration is that the shift to accredited providers was a “policy laden” decision.   In Couch v Attorney-General, the Chief Justice recognised that:10

It may be more readily accepted that existence of an action in negligence for acts and omissions in the course of exercising such high level responsibility may be precluded as a matter of implied legislative intent.  But … no such legislative intent can be assumed “where the relevant powers and functions are of a routine administrative or “operational” nature.”

[59]     Lord Keith of Kinkel in Takaro Properties Limited v Rowling put it this way:11

…this distinction does not provide a touchstone of liability, but rather is expressive  of  the  need  to  exclude  altogether  those  cases  in  which  the decision under attack is of such a kind that the question whether it has been made negligently is unsuitable for judicial resolution, of which notable examples are discretionary decisions on the allocation of scarce resources, or the distribution of risks …   If this is right, classification of the relevant decision as a policy or planning decision in this sense may exclude liability,

10 At [59] per Elias CJ and Anderson J.

11 [1987] 2 NZLR 700 (PC) at 709.

but a conclusion that it does not fall within that category, does not, in their

Lordships’ opinion, mean that a duty of care will necessarily exist.

[60]     The foregoing description describes accurately the nature of the accreditation policy in this case.  The means by which the government is to fund the provision of SMS services to schools so as to ensure proper interoperability and  appropriate standards in an era of widespread computer usage is a policy matter.  It is difficult to conceive of appropriate measures against which courts could determine the metes and bounds of a duty in this area. These are questions for officials and politicians not Judges.   The potential effect of imposing a duty of care in this case would be widespread.   If it applied here, it would apply in very many areas of Government activity and with a co-related and dangerous chill effect on policy making.

[61]     At the implementation level, even if a duty of care were found (and in that respect I prefer the consistency of applying the tort of misfeasance in public office to a more generalised duty of care), the facts alleged by IES are just not made out.  I will address the question of bias in the next section, but it is sufficient at this point to reflect that there is no evidence of special help being given to MUSAC, IES’ competitor.   There is no evidence of an intention on the part of MoE officials to ensure that IES failed accreditation, indeed the reverse appears to be the position. There is no evidence of irrational or inconsistent testing, or that the tests themselves were irrational or inappropriate in any way.   Indeed the evidence is of a carefully constructed, analysed, consulted on, and deployed testing procedure.

[62]     This cause of action must fail accordingly.  There is therefore no requirement to address the downstream questions of causation or damage quantification.

Bias

General principles

[63]     Section 27(1) of NZBORA provides:

Every person has the right to the observance of the principles of natural justice by any tribunal or other public authority which has the power to make

a determination in respect of that person’s rights, obligations, or interests

protected or recognised by law.

[64]     As the Court of Appeal in Combined Beneficiaries Union Inc v Auckland City COGS Committee12 made clear, s 27(1) applies to both administrative and judicial or quasi-judicial decision-making.  The right protected by s 27(1) is co-extensive with the common law right to natural justice.13

[65]     Natural justice is essentially about the right to be treated fairly.   It has two aspects: first, the right to notice and an opportunity to be heard before a decision is made; and second, the right to a decider who is both disinterested and unbiased.  It is the impartiality aspect that is engaged in this case.

[66]     The  requirements  of  impartiality  are  necessarily  flexible  and  will  vary according to circumstances.14   But in this case, MoE accepts that the standard to be applied is the full judicial one – a duty to assess IES’ application for accreditation with an open and impartial mind, and in particular with no pre-disposition as to whether IES should pass or fail.

[67]     It is sufficient to refer to the most recent New Zealand statement on the test –

that contained in Saxmere Co Limited v Wool Board Disestablishment Co Ltd.15

Whether  there  is  actual  bias  is  a  question  of  fact  to  be  assessed  against  the appropriate evidential standard.   The test for apparent bias is now whether a fair minded lay observer might reasonably apprehend that there was a real (rather than remote) possibility that the decider might not bring an impartial mind to the question

before him or her.  Blanchard J proposed a two-step inquiry:16

First, the identification of what it is said might lead a Judge [or here MoE officials] to decide a case other than on its legal and factual merits; and secondly, there must “an articulation of the logical connection between the matter and the feared deviation from the course of deciding the case on its merits.

12 Combined Beneficiaries Union Inc v Auckland City COGS Committee [2008] NZCA 423, [2009]

2 NZLR 56.

13 At [50].
14 Daganayasi v Minister of Immigration [1980] 2 NZLR 130 (CA).

15 [2009] NZSC 72, [2010] 1NZLR 35; and see also Muir v Commissioner of Inland Revenue [2007] NZCA 334, [2007] 3 NZLR 495 to like effect.

[68]     In   Muir   v  Commissioner   of   Inland   Revenue,17    Hammond   J   focused particularly on the importance of isolating the factual basis for the bias allegation. That inquiry, he said, “should be rigorous, in the sense the complainants cannot lightly throw the “bias” ball into the air.”18     In this case, that is useful guidance indeed.

Arguments

[69]     IES  points  to  three  factors  in  support  of  allegations  of  both  actual  and apparent bias.  The first is MoE’s pre-occupation with ensuring MUSAC and another provider named Itas achieved accreditation because of (particularly) MUSAC’s utter domination of the SMS market.   Mr Tinker pointed in particular to two pieces of evidence to support an allegation of actual bias against IES and in favour of MUSAC and  Itas.    The  first  is  an  MoE  draft  operational  policy  paper  modelling  some scenarios that might obtain after the 2005 accreditation round.  The paper is undated but obviously precedes the 2005 round itself. The paper provided:

The remainder of this document assumes the following outcomes from the

2005 accreditation.  These assumptions are highly likely (more than 80%) and necessary to provide specific policy direction.   If any of these assumptions proves incorrect the policies will need revisiting.

MUSAC (with Student Manager and associated modules) and Itas (with

Integris) will be accredited.

There will be at least four vendor/software combinations accredited through the 2005 process.

There will be an accredited SMS capable of running via a browser/ASP mode, be it through a specific selection process for schools currently without an SMS or through the standard accreditation process.

[70]     Mr Tinker’s point was that the 80 per cent scenario showed that MoE had already decided that those two providers would get through.

[71]     The second piece of evidence is the minutes of a MoE SMS project steering group meeting that was widely attended by officials.   The meeting occurred on

17 Ibid.

21 July 2004.   One official, Doug Miller, is recorded as asking whether “funding

MUSAC to ensure it does pass had been considered”.

[72]     Mr Tinker agreed that, taken together, these suggested at least an unhealthy and suspicious focus on MUSAC’s success during the period that the accreditation policy was being formulated.

[73]     The second factor identified by IES in support of the bias allegations was the failure of MoE officials to reassess through moderation IES’ performance in the business section given that it was only 2.7 marks short of a pass.  It was argued that MUSAC and Integras had both been moderated up to passes in business categories but no such consideration had been given to IES.

[74]     The third factor – the factor that corroborated the suspicions arising from the first two – was Mr Paul Seiler’s (an MoE official) treatment of IES’ results in an email to two schools that had been clients.  The office manager of Pigeon Mountain School wrote to Mr Seiler expressing her surprise at IES’ failure given the fact that IES had provided good service to the school.  Mr Seiler replied:

While you have expressed satisfaction with the vendor and software, this is the experience of all schools using this combination.  We find schools can have a very different experience and consequent views on most SMS products.  This is often related to the extent to which the software is used throughout the school.

[75]     IES  said  this  clearly  showed,  when  combined  with  the  other  evidence discussed, that MoE wanted them out.

[76]     MoE rejected any allegations of bias of any kind.  The argument was that the allegation was simply not made out on the facts.   In a second argument, MoE submitted that, in any event, the threshold for an award of damages for breach of s 27(1) had not been met.  The Crown relied on the Court of Appeal’s decision in Combined Beneficiaries Union to the effect that only the most serious breach of natural justice rights could justify an award of damages, if an award were possible at

all.19

19 Supra at [70].

Analysis

[77]     The Crown is correct on both counts.  There is simply no evidential basis to support an allegation of bias of either kind.  Seen on their own or taken together, the three points advanced by IES just do not provide a basis upon which a fair minded lay observer might reasonably apprehend that MoE officials did not bring open and impartial minds to the marking of IES’ test scripts.  They most certainly do not make out a claim to actual bias.  The Pigeon Mountain School email simply records that not all of IES customers were unvarnished in their support of that company.  What is the fair minded lay observer to make of this?  What is it about that observation that suggests a reasonable possibility of bias?  I fail to see anything.  Perhaps it would be different if Mr Seiler had said to the office manager at Pigeon Mountain School, “no you are wrong, IES was a very bad SMS provider and we wanted that company out”, but that is not what was said.  I read this email as a relatively measured response to the inquiry by the school’s office manager.

[78]   Nor is there any evidence of bias towards MUSAC and Itas.   The correspondence between officials during round one and round two do indicate a concern about MUSAC’s dominance and questions around what the best strategy might be to deal with that.  But as Mr Munro pointed out, MoE’s aim overall was to achieve a reduction in MUSAC’s dominance because of the risk that represented to MoE.   Officials did discuss the possibility of helping MUSAC through the accreditation process but this idea was quickly squashed by senior management and other mid-level officials.   In response to the suggestion of special financial aid to MUSAC through round 2, Paul Seiler is recorded in the minutes as saying “… once this was a consideration but it was realised quickly that this would undermine the whole accreditation process.”

[79]     And in the next SMS project team meeting in September, Kim Shannon wanted to know why recommendations from the July meeting had not explicitly rejected special treatment for MUSAC.  A formal recommendation was recorded to that effect in that meeting.

[80]     As  Mr  Munro  pointed  out,  modelling  future  scenarios  is  necessary  for officials to plan for the past 2005 situation.  They had been caught off guard by the result of the first round, and it was important that they modelled likely scenarios in the second round.  That did not mean MoE was working back from a pre-determined result in the second round.

[81]     Mr Hofkens, MoE’s independent software tester who tested IES software, described  the  safeguards  in  place  to  ensure  that  testing  was  independent  from officials within MoE.  His evidence was careful and convincing.

[82]     Finally, the argument that IES’ performance had been close enough in the business category to justify a moderated pass has no merit.   The rules had been carefully set out and consulted on.  Providers knew when and how they would be upgraded.  Feedback was invited.  Mr Tinker confirmed he gave none on the issue – at least not in writing.  To have passed IES in the business category when it was 2.7 marks short would have breached the rules all understood and would undoubtedly have been the subject of criticism from IES’ competitors.

[83]     The evidence, such as it is, points to officials striving to maintain objectivity with some particularity.  There is no evidential support for the bias allegation in this case.

[84]     Even if there was support, there is simply no way that the conduct alleged by IES could make it over the threshold necessary to found a successful action in damages for breach of s 27(1).  The majority of the court in Combined Beneficiaries Union (with whom, on this point, Baragwanath J agreed) took a firm line:20

There is strong support in Taunoa and this court’s decisions in Udompuni for the proposition that Bill of Rights damages for a breach of s 27(1) are likely to be rare.  They would be confined to circumstances where there is no other effective remedy, where human dignity or personal integrity or (possibly) the integrity of  property are also  engaged  and  where the  breach  is  of  such constitutional significance and seriousness that it would shock the public conscious and justify damages being paid out of the public purse.

20 Supra at [70].

[85]     As Baragwanath J pointed out, damages for breach of public law duty and private law claims for redress come from very different conceptual and policy premises.  It is not appropriate that they should be assimilated.21

[86]     This claim fails accordingly at both levels.

Commerce Act

General principles

[87]     I will address three particular areas under this heading.  First, the requirement that the Crown must engage in trade; second, the wrongful purpose requirement under s 36 of the Act; and third, the s 82 limitations provision.   There are other considerations, but it is unnecessary to address them here.

[88]     The Commerce Act only applies to the Crown if it “engages in trade” in

terms of s 5(1) of the Commerce Act.  Section 2 provides that “trade” means:

…any   trade,   business,   industry,   profession,   occupation,   activity   of commerce, or undertaking relating to the supply or acquisition of goods or services or to the disposition or acquisition of any interest in land.

[89]     Glaxo New Zealand Limited v Attorney-General22 related to subsidies paid by the government for medicines pursuant to s 99 of the Social Security Act.  Glaxo was a pharmaceutical company whose product had been excluded from such subsidy. Glaxo brought proceedings arguing (in part) that the Minister breached s 36 of the Commerce Act.  Both Barker J in the High Court and Casey J in the Court of Appeal agreed with the Attorney General that the Commerce Act cause of action should be struck out.   The Minister of Health was not engaging in trade but performing a

“regulatory action  for welfare purposes”.23      Both Judges  pointed  to  s 43  of the

Commerce Act excluding from the Act’s purview any action “specifically authorised by any enactment”.  In that case it was clear that the Minister’s refusal was pursuant

to s 99 of the Social Security Act 1964, but both Barker J and Casey J set the

21 At [89].

22 [1991] 3 NZLR 129 (HC), [1991] 3 NZLR 138 (CA).

23 Per Casey J at [140].

relevant  principle  on  much  broader  terms.    Where  the  Crown  intervenes  for regulatory or welfare purposes the Commerce Act is not engaged, irrespective of s 43.

[90]     A number of cases have followed the lead in Glaxo on this point, whether under the Commerce Act or under identical provisions in the Fair Trading Act.  See for  example  Chisholm  v  Auckland  City  Council24,  Mariner  Holdings  Limited  v

Thames Coromandel District Council25, and Clee v Attorney-General26.   To like

effect is the decision of Cooper J in Arms and Stratagem Trustee Services Limited v New Plymouth District Council27, a Fair Trading Act case relating to the District Council’s refusal to allow lessees of council land to freehold their properties.  His Honour took the view that this decision was not one “in trade” but rather a matter of policy involving “a broad level of abstraction well removed from day to day operational considerations”.28

[91]     Assuming the s 5(1)  gateway is  not  a bar,  Part  2  of the Act  deals  with restrictive trade practices.   Section 36 prohibits those with a substantial degree of market  power  from  taking  advantage  of  that  power  in  some  circumstances. Section 36(2) provides:

A person that has a substantial degree of power and of market must not take advantage of that power for the purpose of –

(a)       restricting the entry of a person into that or any other market; or

(b)      preventing  or  deterring  a  person  from  engaging  in  competitive conduct in that or any other market; or

(c)       eliminating a person from that or any other market.

[92]     Among other things, the cases suggest that it  is important to isolate the defendant’s purpose.  New Zealand Private Hospital Association – Auckland Branch (Inc) v Northland Regional Health Authority29 arose in the context of the significant

health reforms in the mid-1990s.  NZPHA claimed that the NRHA breached s 36 by

24 [2002] NZRMA 362 (HC).

25 HC Hamilton CIV-2009-419-000699, 6 September 2010.
26 HC Auckland CIV-2010-404-7101, 12 November 2010.
27 HC New Plymouth CIV-2006-043-00099, 14 May 2008.
28 At [160].

29 HC Auckland CP 440/94, 7 December 1994.

using its position as a monopsony (that is a monopoly purchaser) to create a competitive environment among providers that was likely to force some of those providers out of the market.  The Northland RHA decided that it would introduce a system of tendering for the supply of hospital beds.   Blanchard J considered that NZPHA had mistaken the effect of NRHA’s new purchase regime for its underlying purpose when it based its case on s 36.

[93]     In that case His Honour held that the authority’s purpose was to enhance cost effectiveness in a fiscally straitened environment through legitimate market rationalisation.  In a shrinking private hospital market, the authority’s new approach was designed to result in it purchasing beds from fewer but better quality providers. The purpose was not to drive competitors out of the market but to produce better quality service at lower cost.  Reduction in competition may have been an effect but it was not the purpose and thus did not infringe s 36.

[94]     Finally, it is necessary to mention s 82, the teeth of the Act, in this context.  It provides an action in damages for any loss or damage caused by conduct in contravention of s 36.  Subsection (2) of that section provides that:

An action under subsection (1) may be commenced within three years after the  matter  giving  rise  to  the  contravention  was  discovered  or  ought reasonably   to   have   been   discovered.      However,   no   action   under subsection (1) may be commenced 10 years or more after the matter giving rise to the contravention.

[95]     Thus the effect of subsection (2) is that there is an absolute prohibition on bringing proceedings 10 years after the causative event no matter when it was or could have been discovered.   Subject to that absolute limit, plaintiffs have three years from discovery or reasonable discoverability to bring their proceedings.

Arguments

[96]     On the question of whether the Crown is “engaging in trade” under s 5 of the Act, IES argued that the principle in Glaxo does not apply.   There was, counsel argued, no statutory basis for the accreditation policy and s 43 of the Commerce Act

did not save it.  Rather, IES argued that MoE had purchased SMS services on behalf of schools and was therefore intervening directly in the market ‘in trade’.

[97]     For the Crown, it was argued that the accreditation procedure was not “in trade”.  Rather it was a matter of high policy and a sensible technique for regulating quality in the provision of software services in the compulsory education sector to its overall benefit.

[98]     On the question of wrongful purpose under s 36(2), IES argued that MoE’s purpose was to eliminate IES or at least to inappropriately reduce competition in breach of s 36.   The Crown on the other hand argued that MoE’s purpose was to protect schools from poor quality providers and products and, in line with NZPHA, the possible effect of this policy on the viability of some providers was not its purpose.

[99]     On the limitations question under s 82(2), IES argued that the real reason for MoE implementing its accreditation process only became clear on the completion of discovery, after proceedings were brought and within the three year limit.   The Crown argued that the limitation period should have run from the date of non- accreditation at the latest, and, to the extent that IES attacked the structure of the accreditation programme, even earlier still.  That, the Crown argued, put the latest date for filing of proceedings at some point in 2008 – but they were not filed until June 2011.   The effect  of this  was,  the Crown  argued,  that  IES  is  outside the limitation period and not entitled to bring these proceedings.

Analysis

[100]   In my view, the Commerce Act has no application to the circumstances of this case.

[101]   In  the  first  place,  the  principle in  Glaxo  clearly applies  here.    Both  the accreditation regime itself and the limited subsidies provided by MoE to schools are the exercise of policy based regulatory functions.  The purpose of accreditation was to ensure that schools were armed with knowledge about which providers met MoE’s

performance standards, and the funding assistance package was an incentive to encourage transition to providers who met those standards.  Enhancing standards and encouraging schools to use providers that met the new standards, were sensible policy objectives consistent with MoE’s statutory functions and able to be implemented by regulatory style programmes.

[102]   Second, and for the same reason, it cannot be said that MoE’s purpose in terms of s 36(2) was to remove competitors.   The purpose, as I have said, was to enhance SMS quality for schools and school/MoE interoperability.   In accordance with the NZPHA decision, if the accreditation process did have a negative effect on IES, that was an effect of the programme but not its purpose.

[103]   Thirdly, IES’ attack in this case is mounted at both the design and purpose of the accreditation policy.  IES argued, among other things, that the policy should have included mitigating measures to ameliorate its impact on those who risked failing accreditation. To the extent that this was the way IES’ case was mounted, that design and purpose was obvious as early as 2003 and remained consistent until 2005 and the result of the second accreditation round.   IES therefore had until 2008 at the latest to bring the design and purpose aspect of its proceedings.

[104]   While  it  might  possibly  have  been  said  that  the  way  in  which  MoE implemented its accreditation programme on IES might not have been discovered or discoverable until disclosure of internal MoE documents, this aspect falls away, as I have said elsewhere, for complete lack of evidence.  There is just nothing to suggest that IES was itself a target or that MoE could have been fairer or more even-handed in the way it processed IES’ application for accreditation.

[105]   I would conclude therefore that to the extent IES attacks the design of the accreditation process, s 82(2) bars those causes of action.  And to the extent that IES attacks the implementation of that programme in respect of IES, there is, as I have already found, no merit in that claim on the facts.

Result

[106]   The plaintiff’s claims are all dismissed.   The defendant will be entitled to

costs.  Brief memoranda may be filed if agreement cannot be reached.

Williams J