Residential Care (New Zealand) Incorporated v New Zealand Hospitals Association Incorporated

IN THE COURT OF APPEAL OF NEW ZEALAND

CA170/99
CA268/99

BETWEEN	RESIDENTIAL CARE (NEW ZEALAND) INCORPORATED
First Appellant

AND	NEW ZEALAND HOSPITALS ASSOCIATION INCORPORATED
Second Appellant

AND	WAIAPU ANGLICAN SOCIAL SERVICES TRUST BOARD
Third Appellant

AND	ASSISI HOME AND HOSPITAL (HAMILTON) LIMITED
Fourth Appellant

AND	P & J BLINKHORNE AND ASSOCIATES LIMITED
Fifth Appellant

AND	IAN JAMES ROBINSON & CATHERINE RUTH ROBINSON
Sixth Appellant

AND	HEALTH FUNDING AUTHORITY
Respondent

Hearing:	20, 21 and 22 June 2000
Coram:	Richardson P Henry J Keith J
Appearances:	R J Asher QC, K W Berman and R G Paul for Appellants G P Barton QC, C M Grice and M D Branch for Respondent
Judgment:	17 July 2000

JUDGMENT OF THE COURT DELIVERED BY HENRY J

This appeal raises issues relating to a series of agreements for the purchase of rest home care services covering the period 25 December 1996 to 30 June 1999. The purchaser was the Midland Regional Health Authority (Midland), which was succeeded by the present respondent. The providers, including the appellants, are engaged in the industry of providing rest home care service for publicly funded residents. The agreements were the result of extensive negotiations which ran from about June 1996 through to late 1997. The appellants contend that Midland breached its contractual and statutory obligations in the negotiation process, and seek redress for those breaches. Following a hearing which occupied some 20 days, and involved consideration of a large number of documents, in a written judgment delivered on 15 June 1999 Hammond J dismissed the claims of the appellants in their entirety.

Background summary

Midland had statutory responsibility to purchase health services for its region, which covered an extensive area in which rest homes and hospitals provided approximately 5000 residential care beds for the elderly, about one half of whom are publicly funded. In 1994 Midland entered into agreements with a number of residential care providers. The agreements, which expired in December 1994, contained a good faith negotiation term known as clause 2.4:
2.4Prior to the Termination Date Midland Health and the Provider undertake to negotiate in good faith on the terms of a new agreement for the provision of the Services if Midland Health wishes to continue contracting for the Services from the Provider.
A similar clause was included in the 1995 agreements, which were for a two year term expiring in December 1996. A dispute arose during the course of the 1995 agreement negotiations, which was resolved through the mediation of Mr P M Salmon QC. The resolution reached in June 1995 was between Midland and the New Zealand Licensed Rest Homes Association (Inc), which was representing 30 providers. The agreement recorded:
1.The prices for the 30 individual homes the subject of this mediation are agreed as set out in the attached schedule.
2.The settlement of these prices resolves the issues identified in the document entitled “Summary of Individual Homes Disputes”.
3.The parties agree to co-operate in the continuing development of a transparent method for the negotiation of subsequent contracts.
4.Each party accepts that this settlement represents compliance with the contractual obligation of negotiation in good faith.
For its purchase of publicly funded health and disability services, Midland entered into a funding agreement with the Crown. For the 1995/1996 year the amount available to it was $891.1million. For the 1996/1997 year, Midland allowed a contingency in its budget for increased prices in rest home care. Budget allocation was based on historical volumes and prices, and included anticipated increases in both. To assist its objectives, Midland investigated an efficient pricing process which was designed to determine an appropriate price to be paid for the different levels of service to be purchased. The providers were concerned at the pricing levels which were effective in 1995 and 1996, and were looking to the 1997 contract round as an opportunity for improvement.
In June 1996 Midland held a series of meetings with providers for the purpose of introducing a particular concept of an efficient pricing process. The purpose was to produce a model, to be known as the efficient pricing model (EPM) which would be used as a starting point for final negotiations with individual providers. In brief, the methodology involved analysing historical costing information obtained from six selected providers which would then provide a basis for assessment and allocation of costs to identified particular services. These would then translate into a range of total bed day costs payable to the provider. A working group was established, comprising representatives from the providers and from Midland. The Midland personnel prepared a report setting out details of the process to be undertaken, and the roles of those participating. This was known as the business case, and its contents were approved by the board of Midland on 22 July 1996. Matters progressed through to 24 September 1996, when a meeting of the working group took place. The agenda for the meeting noted that there would be a further meeting on 15 October, when technical material provided at the September meeting would be discussed. The proposed meeting of 15 October did not transpire.
Midland prepared what has been described as the final report, which was the end result of the efficient pricing process and effectively constituted the EPM. It was published on 30 October. The providers objected to the release of the report, and raised as one particular point of concern the return on investment rate used in it, which represented a reduction from the range which had been under discussion at the earlier meeting of 24 September. In January 1997 Midland indicated that the report and its published prices would be the basis of offers it proposed to make to the providers. Further negotiations were undertaken, and in March there was what became known as the “fresh faces” meeting, involving representatives who had not been earlier participants in the discussions. Matters were not progressed to the satisfaction of the providers, and on 18 April 1997 Midland advised them of the basis upon which individual negotiations would take place. Ultimately an offer pack was sent on 28 May 1997, which led to the present proceedings being instituted on 8 July 1997. In September 1997 individual offers were forwarded to providers, and between then and December 1997 agreements were concluded.

The claims

Three of the four pleaded causes of action are relied upon in this Court. They are: breach of the contractual obligation to negotiate the agreements in good faith (cl 2.4 of the 1995 agreements); breach of the contractual obligation to cooperate in developing a transparent method for negotiation of contracts (cl 3 of the mediation agreement); breach of a statutory obligation to consult. The statutory provision relied upon is s34 of the Health and Disability Services Act 1993, which states:
34. Regional Health Authorities to consult - Every regional health authority shall, in accordance with its statement of intent, on a regular basis consult in regard to its intentions relating to the purchase of services with such of the following as the authority considers appropriate:
(a)Individuals and organisations from the communities served by it who receive or provide [public health services or personal health services] or disability services:
(b)Other persons including voluntary agencies, private agencies, departments of State, and territorial authorities.
Midland’s statement of intent issued in accordance with its statutory obligations included under the heading “residential services” the following:
Objective (22)
-          Develop a residential care efficient pricing methodology
           (stage 1)
Measure
-          Model for efficient pricing of residential services for the
           elderly is completed by 30 December 1996.
The relief sought in the first two causes of action referred to above included declarations and the inquiry into losses suffered by the providers. The third cause of action sought an order requiring Midland to consult in good faith. The same matters are relied on as constituting breaches of all three obligations. In summary, the providers claimed that Midland had effectively abandoned the process of developing the EPM as a joint enterprise and instead itself produced a final report incorporating prices acceptable to it, but which are substantially less than those which would have resulted from a proper application of the agreed process. Although alternative price scenarios were later calculated, Midland was not prepared to accept them or negotiate from those bases, but insisted on negotiating individually only on the basis of the final report. In essence it was Midland’s conduct from late September 1996 through to finalisation of the individual contracts in late 1997 which it is said was in breach of its obligations. The cause of action which is not now pursued was that based on the Fair Trading Act 1986, alleging misleading and deceptive conduct on the part of Midland.

The nature of Midland’s obligations

Although three separate causes of action are relied upon, as earlier noted the alleged breaches are common to all three. Furthermore, on a careful analysis it would seem that in reality the separate obligations are but different ways of stating the same basic proposition. In the context of the present litigation, it can be formulated as imposing on Midland an obligation to develop the EPM following good faith consultation with the providers. This conclusion results from a consideration of a number of points.
First, what was not in issue was the final negotiation of an individual contract with each provider. Hammond J expressly refrained from attempting any such exercise, and it seems that the case was not presented at trial on any such basis. This was made clear by the Judge’s ruling No.6, which falls for consideration later. The whole thrust of the complaint against Midland concerned the publication of the 30 October final report (the EPM), and its implementation unamended as the basis for the later individual negotiations. The latter exercise was described as stage 2, in contrast with the development of the EPM which was stage 1 of the whole exercise. The integrity of the EPM was of course very relevant to stage 2, and to whether the providers are entitled to relief. If the stage 1 process was flawed, then there would be consequences affecting the end contracts.
Secondly, the obligation to negotiate in good faith required by cl 2.4 of the 1995/1996 contracts was not confined to the obligation to cooperate in developing the transparent method for negotiation expressed in para 3 of the mediation agreement. We have no doubt that the acknowledgement in para 4 of the mediation agreement that the settlement then negotiated represented compliance with the good faith obligation related to the dispute over the prices for the 30 individual homes. The providers had claimed lack of good faith in respect of those negotiations, and the settlement resolved that particular dispute. Paragraph 3, misplaced from a purist drafting viewpoint, must be seen as a separate ongoing undertaking by the parties referable to future contracts. Negotiations for the future contracts would still come under the general cl 2.4 good faith requirement.
Thirdly, although there is a distinction to be drawn between consultation and negotiation, that distinction does not impact on the concept of a duty of good faith. Consultation in the statutory context carries with it the implication of a good faith duty. It was not suggested that Midland could act other than in good faith in undertaking the EPM process. It would also be artificial not to regard the EPM development as part of the good faith negotiation of the terms of the agreements
Fourthly, the obligation did not extend to requiring the parties to compromise or reach agreement on the form and content of the EPM. To contend otherwise lacks practical and commercial reality. The submission that the EPM had to be the agreed result of the working group meetings is an example of an approach which permeated the appellants’ written submissions. In many respects these were framed on the basis that there were a series of separate contractual obligations undertaken by Midland, which had binding force. To the extent this was the intended approach of the appellants, it was in error. There were no such contractual obligations in the legal sense. To support this submission on this particular question, Mr Asher relied substantially on the minutes of the first meeting of the working group of 2 July 1996 and a reference under the heading “statement of purpose” that production of the report should be one of the terms of reference. There was subsequent approval by the Midland board of the business case of 15 July, which in turn had confirmed the production of a report as being a purpose of the working group. To elevate this material to an agreement or acknowledgement that the final report must be a joint report of Midland and the providers’ representatives is an unwarranted step. The report had its origin in para 3 of the mediation agreement and in the statement of intent earlier noted. The study which resulted in the report was effectively conducted by and funded by Midland, consistently with the statutory obligation to “consult in regard to its intentions”. There was no mechanism for resolving matters on which the respective representatives were unable to agree. We are satisfied that there had been in this regard no delegation to the working group by Midland, which necessarily had to operate under financial constraints which affected the whole of its operations. As a matter of practical reality, the final report was to be that of Midland, with its compilation being subject to the good faith consultative process.
Fifthly, and consistently with the preceding point, Hammond J correctly held that the EPM was not intended to be binding in the sense contended for by the providers, namely that it would stipulate for minimum prices which individually could be negotiated up, but not down. Mr Asher relied on evidence which referred to Midland “accepting the outcome” of the EPM process. The Judge gave detailed reasons, including his acceptance of oral evidence from Midland officers, to support his conclusion. We are not persuaded that the critical analysis of this reasoning undermines this finding, the relevance of which seems to be marginal in any event, having regard to what transpired. It is clear that individual contract negotiations proceeded using the EPM as a base for then producing in each case a site specific figure.
For the above reasons, we take the view that the appeal falls to be considered under the broad question whether Midland breached its obligations to develop the EPM following good faith consultation with the providers.

The alleged breaches down to 30 October 1996

The essence of the case for the providers is that after 24 September 1996 Midland abandoned the good faith consultative process, and instead proceeded unilaterally to produce a report which was economically acceptable to it.
Before considering the particular breaches relied upon by the providers, it is necessary to refer to the sequence of events between 24 September and the release of the final report on 30 October. The members of the working group were provided with an information pack for the meeting of 24 September. The pack included an updated project plan. The agenda indicated that presentation slides would be presented at the meeting, but that “feedback” and comments would be welcome, but only after consideration subsequent to the meeting. The feedback was foreshadowed as being provided at the following meeting, scheduled for 15 October.
From 1 October to 14 October, Midland essentially completed drafting the report internally without further reference to the provider representatives. On 14 October a draft (designated as the “Final Report of the Resthome and Hospital Efficient Pricing Study”) was sent to Midlands staff. It has been described as the Lovatt report, having been the primary responsibility of Mr Lovatt, who was Midland’s commercial manager, and leader of Midland’s representatives on the working group. Some concern was expressed by the Midland officers with the prices which resulted in the draft report, and consequently a review of the methodology adopted in it was undertaken by Coopers & Lybrand. The intended meeting of the working group for 15 October was therefore cancelled. In addition to the Coopers & Lybrand review, Deloittes who had been employed throughout by Midland in a consultant capacity, also conducted tests and reviewed parts of their own work. Further checking and testing was carried out, and the 30 October report resulted which was then presented to a working group meeting that day. As with Mr Lovatt’s draft report, this was designated a final report. However there was evidence that it was not final in the sense that it was thereafter immutable, and that was accepted by the Judge who held that it was open thereafter for the providers to make further representations following receipt of the report. Indeed that was referred to by the Judge in his discussion under the head “Curation”, and the subsequent events which occurred preparatory to individual contracts being finalised. Those events will require consideration, as they do impact significantly on the submission that somehow 30 October was a cut off date by which time irremediable breaches had occurred. Before turning to the particular breaches as they were identified in this Court, it is important to keep in mind the Judge’s express finding that the duty to consult in formulating the final report had not been breached. Although he did not deal with the present points separately, he reached the clear view that over the entire period there had been adequate consultation. Absence of good faith consequently was also negated in his general finding. Importantly, the Judge accepted that in October Midland was working under considerable pressure of time to complete the report (stage 1), in order to enable the stage 2 individual negotiations then to proceed, recognising that the contracts would expire in December. Hammond J concluded that the allegations of lack of cooperation and lack of consultation were not tenable, although there were problems in the relationship between the parties over this particular period.

(a) Cancellation of the meeting of 15 October

We do not see postponement, or cancellation if that is what it was, of the 15 October meeting as of any major significance. We would not be prepared to hold on the evidence which was referred to us in submissions that this action was a demonstration of bad faith, or of a refusal to consult further when that was the obligatory course. Time was a problem, and the need to finalise the report was real. The draft prepared by Mr Lovatt, who was then about to depart overseas and was not due to return until some time in November, contained matters of concern which Midland justifiably thought needed to be addressed. To treat cancellation as itself an act of bad faith is unjustified.
It was also alleged that Midland “disguised” its decision to abandon consultation. This is essentially a facet of the argument concerning cancellation of the 15 October meeting. The Judge’s finding as to problems in management of the relationship is a sufficient answer to this complaint as being a breach of the good faith duty.

(b) Non disclosure of the Lovatt draft report

We are unable to see how the failure to disclose Mr Lovatt’s draft to the provider representatives before presenting the “final” report of 30 October has any present significance. The real complaint is that it contained figures which were more advantageous to the position of the providers. Mr Lovatt had produced the report as a draft, and we can see nothing untoward in the fact that it was then reviewed and amended by Midland before being submitted to the providers. There would be little point in putting before the working group a draft report in a form which Midland was not able to accept. The draft has no greater significance than would earlier drafts of Mr Lovatt’s own draft. There was no obligation on Midland to disclose all stages of its thinking, any more than there was such an obligation on the providers.

(c) Changing the return on investment rate

The rate of return on investment capital was obviously an important aspect of the pricing model. The rate of return advocated by Mr Lovatt at the working group meetings was in the range of 13.2% to 14.5%. In the report it was set at 10.95%, although Mr Lovatt had in fact used 10.60% for the purposes of his draft report, but in that also envisaging the possibility of adjusting that figure in the course of individual negotiations. At trial a considerable volume of evidence was called to address the issue of the appropriate rate of return, which Hammond J discussed when reviewing the suitability of the EPM, concluding that while there was room for argument, it could not be said that Midland got the figure wrong. There are three points to be made in respect of the complaint that there was an actionable failure to consult over the rate of return. First, there was evidence from Mr Lovatt that matters had earlier reached a stage where agreement on a rate would not be reached, and Midland needed to come to a decision. Second, Midland ultimately did have to take its own position on this aspect, and having regard to the time factor earlier mentioned, there would seem to be nothing untoward in making that known in the 30 October report. Third, and importantly, the issue was not closed from further representations by the providers. Again, it is important to keep in mind, contrary to the contentions of the providers, the report was to be that of Midland and there had been extensive consultation over the preceding months.
Associated with this issue, is the further complaint that under the 30 October report the rate of return would not necessarily be based on the value of each individual provider’s assets. This is another example of the confusion between particular contractual obligations and the general obligation to consult in good faith. The written argument was directed to a claimed undertaking by Mr Lovatt in this respect, reliance also being placed on his draft report. But there is no proper base for contending that anything in the nature of a binding commitment in this respect was made by Midland. The whole process was in the course of development, and in the end Midlands did not envisage an automatic adjustment in respect of each provider. This decision cannot be classed as a breach of the legal obligations now identified.

(d) No allowance for motor vehicles in the EPM

The EPM as formulated did not include in its asset calculations the value of vehicles used in the course of business. It was accepted by the Judge that criticism of this absence was justified, but he observed that it had no significant effect within the model. That observation is challenged by Mr Asher, but even accepting the validity of the challenge, it is difficult to place this matter within the framework of an actionable breach of duty. Midland argued against inclusion, and the most that could be said is that the providers lacked an opportunity before 30 October to persuade Midland that vehicles should be included. That is not sufficient to establish a breach of duty. In substance, the attack under this head is really on the integrity of the EPM as a whole, something which was obviously very much at issue at trial where the primary stance being adopted by the providers was that the EPM, correctly formulated, would have resulted in different prices being adopted. That is not now an issue, and Mr Asher accepted that on the appeal the proper focus has to be on the breach of the duty to consult in good faith.

Legal significance of the alleged breaches

These specific allegations essentially go to a complaint that the providers did not have an opportunity to persuade Midland from altering some of the features of the EPM before it took final form. There is no doubt the providers, with good cause, expected a further meeting. Although they mistakenly held the view that the EPM was to be a joint authorship document, the failure to have further discussions, brought about primarily by reasons of urgency, displayed a lack of good judgment on the part of Midland. This was recognised by the Judge, and accepted by Mr Barton. But that does not translate into actionable breach of a good faith duty. What eventuated on 30 October must be looked at in its full context, including all that had previously transpired and Midland’s ultimate responsibility for producing the EPM.

Events after 30 October 1996

Mr Asher submitted that Midland adopted a “closed mind” attitude after production and publication of the EPM. Although the written submissions were not framed in that way, Mr Asher accepted that this complaint was part of the claim that Midland had breached its good faith consultative obligation. In our view that is the appropriate way in which to approach the events in question. What is important, however, is that what did transpire between the parties after 30 October is also significant when considering in their full context the allegations of Midland’s breaches of obligation in the period preceding that date, which we have just discussed. If in fact a consideration of the post 30 October events discloses that there was ongoing dialogue and consultation on matters of concern to the providers, then assuming these were conducted in good faith it must mean that the process was not “cut off” on 24 September, but continued through to well into 1997. Hammond J dealt briefly with this aspect under the head of what was called curation. The term no doubt was used as meaning that if there had been deficiencies in the consultation process between 24 September and 30 October, they were cured by what happened thereafter. On that basis, it could mean that in the end there could not be any actionable loss suffered by the providers. It is therefore important to summarise what was done after 30 October by Midland to consider the concerns expressed by the providers over the content of the EPM, before the individual contracts were finally negotiated.
The letter of 30 October from Midland to Mr Hudig, a leading member of the providers’ negotiating team, enclosing a copy of the report, included the following:
The report is an information document, outlining the process which has been followed to find a fair price for residential services for older people.   It provides a basis for discussion on a number of issues including efficient pricing, return on investment and appropriate staffing levels.
Midland Health welcomes your feedback and input on the report
*         through your industry representative (listed below) or
*         at its provider meetings in November/December this year.
It became immediately apparent when the report was presented to the working group meeting of 30 October that the providers’ representatives had concerns about the EPM. Midland agreed to postpone individual contract negotiations until there had been an opportunity to work through those concerns. The providers were given information for their analysis purposes. On 19 November Deloittes was made available to the Midland providers in order to discuss and clarify areas of concern. Deloittes prepared a technical appendix containing detailed information relating to the steps taken in compiling prices arrived at in the EPM, which was sent to the providers on 4 December.
At the meeting of 12 December the parties discussed issues arising, including the method of asset valuation and the relevance of drawing a distinction between new and old buildings. There was also discussion on the appropriate risk factor to be applied in assessing the rate of return on investment. Midland then conducted a series of roadshows between 21 and 24 January 1997. Although designated consultation meetings with the providers, they were largely explanatory in nature. Providers were given the opportunity to ask questions and to give feedback on the EPM. A further document was then prepared and distributed, containing questions arising from the roadshow meetings and Midland’s response to the questions. One such response was that if a provider could show the EPM was radically wrong in some area, it would undertake to review that particular process.
The providers had employed the services of Ernst & Young as consultants, and at Midland’s suggestion on 12 February Ernst & Young met with Deloittes to discuss the EPM, and endeavour to resolve differences between the parties as to its validity and fairness. It was agreed that the parties would be bound by any joint decision reached by the two consultants. Agreement between them however was not reached.
A further meeting was held on 14 February at which a refinement proposal was put forward by Midland. Essentially this was to do further research and modelling in the contentious areas of asset valuation and return on capital, but for the purposes of the forthcoming June 1998 negotiations rather than the current contracts. A meeting of 27 February failed to find any way to resolve the deadlock between Ernst & Young and Deloittes. A “fresh faces” meeting involving new personnel was proposed and agreed to. This took place on 6 March, when it was agreed that Ernst & Young would run various scenarios through the EPM but using their own variables in the exercise. On 14 March it was agreed that these results would be included as a revised appendix to the EPM (which was now known as the User’s Guide). General discussions continued, and on 16 April Midland and the providers met to discuss the various scenarios - scenario 1 being that prepared by Deloittes, and scenarios 2-7 those prepared by Ernst & Young. On 29 April the User’s Guide with the amended appendix which included all scenarios was sent to all providers, but with a statement by Midland that it did not accept scenarios 2-7. Finally on 28 May offer packs were sent to all providers by Midland.
The end result was that there was no movement by Midland away from the content of the 30 October EPM. Midland had however gone to lengths to explain the report and the basis of the methodology, and had made further information available to the providers. The primary areas of dispute remained - asset valuation, and calculation of the rate of return. The providers had opportunities to present their arguments, and of significance was Midland’s preparedness to accept any agreed outcome of the February meeting between Deloittes and Ernst & Young. It is also of relevance that Hammond J, having heard extensive evidence on the issue, reached the view that the EPM was not flawed in any significant way.
Mr Asher supported his submission that Midland had a closed mind as from 30 October (a submission expressly rejected by Hammond J) by reference to five particular examples. The first was a failure by Midland to act on an internal memorandum from Mr Lovatt dated 13 November and prepared following his return from overseas, in which he referred to what he described as two flaws in the EPM. A reading of Mr Lovatt’s own evidence does not demonstrate anything in the nature of a closed mind approach by Midland in its conduct following that memorandum. In essence, what is being said now is that Midland should have adopted what Mr Lovatt said, notwithstanding the other views expressed and the effect of advice it was receiving from Deloittes. There is no basis for this Court now to conclude either that Midland was required to do that, or that it was not prepared to take into account what Mr Lovatt was saying.
The second supporting submission was that Midland had decided that the EPM prices were a maximum, and then set its budget in November 1996 accordingly. This submission is based on two reports of 20 November 1996 by Ms Ings, a senior executive of Midland, to the effect that the objective was for the overall price structure to come in at or below the 30 October prices. We are unable to give this evidence the connotation now placed on it. The issue does not appear to have been put in that stark form at trial, and indeed in final submissions Mr Berman for the providers drew attention to what he contended was the conflicting evidence given by Midland representatives as to whether Midland was negotiating to a budget. He also noted that the proposition that the outcome of the EPM would only be accepted by Midland if it fitted within the budget was expressly discounted by Midland. The third point relied upon was the answer given to providers in the summary following the roadshow meetings in January 1997 that “the model will be the basis for all price offers made”. It is difficult to translate that into a refusal to listen further. At that stage Midland was entitled to take the stance that, subject to negotiating individual contracts, the EPM would be the basis unless it was shown there was an error. Having regard to what had transpired since June 1996, it is unrealistic to say that Midland was required to approach any area of concern voiced by the providers as though that issue was completely open for discussion virtually on a de novo basis.
The further point relied upon was what was claimed to be a failure to honour the “fresh faces” agreement. It is difficult to extract from the material referred to any agreement other than one to introduce the new scenarios 2-7 into the appendix to the User’s Guide, and so to inform the process and promote negotiations, but yet recognising “the political and commercial factors driving both parties.” The additional scenarios were included in the appendix. The fact that Midland adhered to scenario 1 when it came to individual negotiations does not demonstrate any breach of an earlier agreement. The final point concerns Midlands insistence on using the 30 October prices. We do not think this takes the issue any further. The offers made by Midland on 18 April 1997 are just that, offers, and identify areas of likely negotiation.
We are not persuaded that the Judge was in error in concluding that there was no “cut off” on 24 September or 30 October, and that there was later consultation, discussion and consideration. The fact that the EPM remained substantially intact and was then the basis of offers made by Midland does not mean that the consultation process ceased earlier.

Conclusion on breaches of obligations

For the above reasons we are not persuaded that the Judge erred in identifying the legal obligations under which Midland operated in producing the EPM and conducting the negotiation process, including the use of the EPM down to the point of negotiating the individual contracts. The one area of difference we have is in the Judge’s application of para 3 of the mediation agreement, which as we have said does not in our view define or limit the general requirement of good faith expressed in cl 4 of the earlier agreement as applying to these negotiations. That difference however has no bearing on the outcome, and in particular does not impact on any of the relevant factual findings.
Neither are we persuaded that there is any sufficient ground for this Court departing from the Judge’s findings of fact, or for now holding that there were breaches of obligation in any of the respects propounded in the course of the appeal hearing. Although much of the evidence was contained in a vast array of documentation, the issues of good faith consultation essentially came down to an overall assessment and evaluation, with the trial Judge being in the advantageous position of having heard and read all relevant material, as well as having the opportunity of assessing individual witnesses. Also in the overall picture, rejection of three important contentions of the providers is of significance. They are the claims that the EPM had to be the agreed result of the working group meetings, that the EPM set minimum prices which could be negotiated up but not down, and that the EPM correctly formulated and binding on Midland had to be in conformity with the so-called scenarios 2-7, and not scenario 1. These assertions were at the forefront of the providers’ case at trial. The concern obviously felt by the providers over the way in which the EPM was finally developed without the anticipated further meeting following that of 24 September is understandable, particularly in the light of the failure of later discussions to yield a result regarded by them as satisfactory. But to translate those concerns into breaches of the legal obligation to consult in good faith had to be a difficult task, having regard to Midland’s own total fiscal responsibilities. It required what was essentially a fact finding exercise, and the undertaking of an evidential burden at trial and a consequential burden on appeal, for reasons which we have endeavoured to express have not been discharged.

Ruling No. 6

The Judge ruled in the course of the trial that the circumstances of the negotiation of each individual contract was not fairly in issue, and that counsel could not therefore cross-examine Midland witnesses on such an issue. We have some difficulty in appreciating the full import of the appeal against this ruling. It came in response to an objection by Mr Barton to a line of cross‑examination of a Midland officer Mr Dahl, which Mr Barton contended extended into an examination of individual contract negotiations. The Judge ruled that this area was outside the ambit of the case as it had been developed in the course of the trial. If he was in error in that regard, presumably it would be necessary for Mr Dahl, and perhaps subsequent witnesses for Midland, to be recalled for further cross‑examination. What is not clear is where that would lead, even were it an appropriate course now to adopt. As we understand it, it is not submitted that as a consequence of the ruling the providers have been deprived of advancing any ground which could base a substantive claim for relief. Furthermore, the cross‑examination of Mr Dahl appears to have been a response to what was said in written submissions to this Court to be some unexpected cross‑examination by Mr Barton of one of the providers on this same topic. If the nature and extent of the individual contract negotiations was central to the case for the providers, it would surely have featured and been detailed in evidence from the providers.
There would also seem to be considerable force in the Judge’s reasons for his ruling. Clearly he was concerned that there was a change signalled in the focus of the case, which did not accord with his own appreciation of how it had been developed down to that comparative late stage of the trial. It is also difficult to see how the providers have been unduly prejudiced by the ruling. It is accepted that complaints made as to the final formulation of the EPM as at 30 October, and the retention of that formulation for the purposes of the individual negotiations could impact on the legitimate expectations of the providers. If the process was flawed and in breach of legal obligations, then entitlement to relief could follow.

Having read the ruling in full and in the context of the trial, we are not satisfied the Judge was wrong to restrict cross‑examination in the way he did. There has been no consequential prejudice to the providers which would warrant interference and a reference back to the High Court.

Conclusion on the substantive appeal

For the above reasons we are satisfied that the appeal must fail.

Costs

In a separate supplementary judgment Hammond J awarded Midland costs as follows:
Solicitor and client  $500,000.00
           Expert witnesses fees  $164,333.33
           Disbursements  $ 55,565.00
           Costs application  $   3,000.00
  $722,898.33
  =========
The first two items only are now under challenge, the former representing 60% of the actual costs incurred under that head. Mr Asher submitted that the appropriate figures should be $300,000 for solicitor and client costs, and $64,333.33 for expert witnesses fees. The hearing occupied 20 days, and as already mentioned involved preparation and consideration of a large volume of written material. Hammond J observed that the agreed bundle of documents was contained in 10 folders. It comprised some 3000 pages (not 10,000 as estimated by the Judge). There were extensive briefs of evidence prepared, and the recorded oral final submissions, in addition to what was reduced to writing, occupied some 300 pages of transcript. The amount at stake was not addressed in any detail because the trial focussed on issues of liability, although remedies were discussed in general terms in the judgment. At one stage of the trial, a witness estimated that if a particular formulation of prices was determined as being that required to be applied, then as much as an extra $30million may have been involved. On any basis, the possible implications were substantial if the claim succeeded to its full extent.

Solicitor and client (excluding leading counsel)

The actual costs incurred totalled $542,557. The Midland team comprised a senior litigation partner Ms Grice, a junior counsel Mr Branch, and an assisting law clerk. The charge out rate for the three personnel is basically accepted as reasonable. It was submitted however that the total hours charged for the team of 2,910 was unreasonable. The comparable figure for the providers’ team was 1,792 hours. Mr Asher stressed that it was the latter team which had the primary responsibility for compilation of the agreed bundle of documents, and was also involved in researching and developing a legal argument on the ability to enforce an agreement to negotiate, an issue which in the end was not contested by Midland. Hammond J held that there was no proper basis of challenge to the actual hours engaged, inferentially thereby accepting their reasonableness. Assessing the reasonableness of time spent on preparation and interlocutory matters can be a difficult task for a trial Judge, as there is no real yardstick other than comparison with another party, and even that has possible problems. To challenge on appeal the trial Judge's assessment that the hours spent were not unreasonable therefore has obvious difficulties. Here, the Court was really left in the position of having to consider the comparative figures. On that approach, the time spent by the Midland team does appear to be on the high side, having regard to what were the many common features, and also to the position of the providers as plaintiffs who carried the burden of proof. It should also be noted that in submissions to the High Court, credible reasons for Midland’s more extensive preparation time were advanced. On balance, we would not be prepared to hold that for the purposes of a costs exercise such as this the time spent was unreasonable. Where the apparent discrepancy may come into play however is in looking at the final overall objective assessment of what is a fair contribution.

Leading counsel

There was no criticism of the time factor represented by Mr Barton’s fees, which totalled $284,906, or of the appropriateness of applying a daily rate approach. His daily rate for a total involvement of 33 days was $7,500. It was submitted that a reasonable daily rate for senior counsel in litigation such as this, again for costs consideration purposes, should be $4,000 to $5,000. The Court was not provided with any statistics to assist this question, and is left with the Judge’s reference to having been presented for similar purposes over the years with figures ranging from $2,000 to $10,000 per day . He concluded that $7,500 was appropriate for this litigation, which required senior counsel with Mr Barton’s experience in public sector litigation. Again, we do not think this Court is in a position to disagree with that conclusion. But again too, that level of expense incurred and Midland’s choice to employ the services of eminent counsel may be taken into account in the final assessment of what is a reasonable contribution overall.

The award

In arriving at his proportion of 60% as being the appropriate contribution, Hammond J observed that the claim for the providers was always going to be a difficult one, describing it as “a long bow”. Its very nature meant heavy expenses would be incurred by Midland, an aspect expressly raised by Mr Barton at the close of the case for the providers when foreshadowing a possible claim for indemnity costs. The Judge also noted particular matters which were relevant to his final conclusion.
First, he said there had been a serious allegation against Midland that it had “tweaked” its financial calculations. The expression had apparently been used by counsel in opening in contending that Midland had altered the outcome of the EPM by changing, for example, the rate of return from that discussed by the working group. The thrust of the contention was that the changes were not justified. Although a serious allegation, and one which was rejected at trial, and although a relevant factor, we do not see it as of major significance - it could not be seen as equivalent, for example, to an unfounded and time consuming allegation of fraud. Secondly, the novelty and complexity of the issues. It is accepted that these were relevant considerations. Thirdly, the volume of documents and the amount of work involved. The Judge overstated the volume, but it was nevertheless very substantial. Fourthly, the claim was “multi-dimensional”, in the sense that although very substantial it did not turn on narrow issues. We think that observation was appropriate, while accepting Mr Asher’s point that although there were several causes of action, the same factual matrix applied to all. There were however discrete issues under each head to be considered as the case was presented.
Mr Asher submitted that there were contributing factors, such as this being important but uncharted territory which the providers were justified in exploring and testing Midland’s conduct. He relied also on the finding of fault by Midland in its management of the situation between 24 September and 30 October, which led to a real sense of grievance and unfair treatment. Mr Asher also stressed the importance of the need to look at the issue of costs in the round, and he drew a comparison with the likely costs award under the new High Court regime, not applicable to this proceeding, which would have approximated $220,000. Under that regime, time actually spent, and costs actually paid, are irrelevant. The overriding discretion which still exists is controlled.
Taking all factors into account, we are persuaded that the allowance of $500,000 is too high, and has resulted probably from placing rather too much weight on the actual costs incurred, which were high in the context of the trial. A figure of $400,000 would properly represent the required balance.

Expert witness fees

The Judge allowed a total sum of $164,333.33 under the head of expert witness fees. That sum covered the expenses of four witnesses, including Mr Naylor of Deloittes in respect of whom the allowance was $100,000. It is only Mr Naylor’s allowance which is the subject of appeal. Deloittes’ total costs to Midland in respect of the proceeding came to $311,894. Hammond J noted that the fees fell into two categories, accounting fees (incurred in its case management role for Midland) which were not recoverable, and expert’s fees with respect to the hearing itself. He observed that there was no scientific way to separate out an amount properly recoverable as expert’s fees, and accordingly made an estimate based on the information before him and his detailed knowledge of the trial.
It was first submitted that Mr Naylor was not an expert and the whole allowance should be set aside for that reason. Mr Naylor had been involved in the establishment of the EPM, and his evidence in part was directed to its development. The Judge recognised that, but also held that a substantial part of his evidence was as an expert on the process and its integrity. Mr Naylor’s brief of evidence was addressed quite substantially to the development of the EPM, and to the reason for adopting particular aspects of the methodology. This was necessary because of the challenge made to the validity or integrity of the EPM, and the contention that scenarios 2-7 represented the kinds of proper result which should have been achieved. We are unable to accept this submission, which appears to confuse the distinction the Judge was making between the involvement of Deloittes in its accounting (case management) role and the provision of evidence at trial, with the characterisation of a witness as an independent expert. Mr Naylor gave extensive evidence at trial. He was an expert in his field, and spoke not only of the development of the EPM but also of its validity and integrity. We can see no proper basis for confining the allowance to that part of his evidence which could be said to be an independent expert opinion.
As to quantum, we are not persuaded the Judge has erred in principle. Mr Naylor was in attendance to hear the relevant evidence of the providers’ financial evidence. He would also be entitled to qualifying time. There is nothing before us which demonstrates that the Judge’s assessment, made on the material available to him, was not justified. Neither do we think he was wrong to make the allowance on an indemnity basis - that was within his discretion. Accordingly the allowance in respect of Mr Naylor will stand.

Result

For the above reasons the substantive appeal is dismissed. The appeal against the costs orders is allowed, but only to the extent of reducing the allowances for solicitor and client to the sum of $400,000. The respondent is entitled to costs in this Court, which are fixed in the sum of $14,000 plus disbursements, including travelling and accommodation expenses for two counsel, those to be settled by the Registrar if necessary.

Solicitors

Kensington Swan, Auckland, for Appellants
Harkness Henry, Hamilton, for Respondent

[2000] NZCA 128

17 July 2000