Problem Gambling Foundation wins big but loses it all again after Court of Appeal decision

Friday 19 May 2017

Authors: Simon Watt and Claire Harmsworth

​​​​​The Ministry of Health procurement saga of the past three years caused significant uncertainty for public sector agencies who engage in procurement activities. The Court of Appeal decision released in December last year​ The Attorney-General v Problem Gambling Foundation of New Zealand has returned public sector entities to familiar ground as to when their commercial contracting decisions will be subject to judicial review.

Now that the dust from the decision has settled, Bell Gully has considered the findings in the case and what they mean for public sector entities as well as how these findings are influencing practices.

Key takeaways from the Court of Appeal decision

  • Judicial review in a commercial context will normally only be available where there is fraud, corruption or bad faith, or any analogous situation.

  • The Court of Appeal has noted, however, that a wider scope of a review is possible where the decision entails broad public interest obligations - and the applicant is not just a disappointed commercial party seeking to take advantage of public remedies in a commercial context.

  • It has been highlighted that conflicts of interest are still a risk area and may lead a court to grant review even in narrow-scope cases, if the conflict of interest creates an analogous situation to fraud, corruption or bad faith.  In addition, having prior knowledge of a tenderer or the relevant sector is not automatically sufficient to create a conflict situation that disqualifies a person from involvement in evaluating tenders.

  • A breach of the Government Rules of Sourcing does not automatically give rise to illegality - nor the right for the Court to judicially review the decision because of such a breach. The consequence of a material breach will depend on the nature of the rules and circumstances of the breach.    

  • Neither the Government Rules of Sourcing nor the RFP (unless the latter expressly provides otherwise) binds an agency to a process contract. Being clear that the procurement documentation does not create a process contract actually weighs on the side of finding limited scope for judicial review.​​


In a move that will have been welcomed by public sector agencies, the Court of Appeal essentially reversed everything the High Court had to say about the scope of judicial review in public sector commercial contracting decisions. It restored the position to the legal principles previously outlined in Mercury Energy Ltd v Electricity Corp of New Zealand Ltd (PC) and Lab Tests Auckland Ltd v Auckland District Health Board.  In doing so the Court of Appeal recognised that the imposition of overly onerous procedural obligations may unduly fetter a public body’s ability to negotiate effectively.

Comments made by the Court of Appeal also indicate its dissatisfaction with a situation which allowed an incumbent provider to hold on to a large existing contract while it pursued its commercial interests through the avenue of judicial review. The Court’s comments on the scope of review indicate that judicial review should not be available as an avenue to pursue one’s commercial interests.

Scope of review

Prior to the High Court judgment of 23 July 2015

The position established in Lab Tests and Mercury Energy was that decisions made by public sector entities in the course of a procurement process constitute a commercial context. The default position was that courts will apply a narrow scope of review.

This narrow scope meant judicial review in a commercial context would normally only be available where there was fraud, corruption or bad faith, or any analogous situation. A broad-based probity-in-public-decision-making review was not to be applied. The exception to this starting point, a broader scope of judicial review, was only available in constitutionally significant or high public interest contexts.

For example, Ririnuiv Landcorp Farming Ltd which was decided between the Problem Gambling High Court and Court of Appeal decisions, involved a state-owned enterprise’s decision to enter into a commercial contract (for the sale of land to private individuals). The Supreme Court noted that a prima facie/default narrow scope of review was applicable to those facts. Nevertheless, the Court held that a broader scope of review was appropriate due to the commercial sale process having a substantial public interest component, namely the Treaty of Waitangi settlement context.

That is not to say that Lab Tests and Problem Gambling did not also involve important public interests; to the contrary. However, their distinguishing feature from Ririnui is that the claimants’ grievances were not directly aligned with the broader public interests. Rather, their claims related only to their personal commercial interests.

Court of Appeal decision

The Court of Appeal could also not find any basis to distinguish the public interest position in Lab Tests from that in Problem Gambling (both involving broad public health implications). The Court noted that “although the development of the problem gambling strategy was a public act with public consequences, entering into individual contracts through a procurement process to implement that strategy does not have public consequences which call for the full panoply of judicial review”.

Accordingly, the Court of Appeal restated the previous position that “where the decision the subject of a review is a procurement (contracting) decision made in a commercial context, that is the starting point for the appropriate scope of review”. Further, the Court has also been clear that for a party to “avail itself of that broader scope of review, the applicant for review must raise issues relevant to that public interest and not just be a disappointed commercial party, seeking to take advantage of public remedies in a commercial context”.

The Court of Appeal helpfully contradicted the view put forward by the High Court in Telco Technology Services Ltd v Ministry of Education (applied by the High Court in Problem Gambling) that the existence of a “vacuum created by an absence of specific legislative provisions” in some way invites public law procedural provisions to fill it. The Court of Appeal noted that the absence of contractual obligations placed on a public sector entity also weighed on the opposite side of the scale, in favour of a narrow review.

Finally, contrary to the views expressed by the High Court, the Court of Appeal felt that the ability to make a complaint to the Ombudsman or to the Auditor-General about the conduct of a procurement process provides an appropriate avenue for an aggrieved party to address its concerns.

Conflicts of interest

Despite finding that a narrow scope of review was appropriate in this instance, the Court of Appeal did go on to consider the conflict of interest position, noting that evidence of a conflict of interest may lead a court to grant review even in narrow-scope cases if the conflict of interest creates a situation analogous to fraud corruption or bad faith. However, that threshold was found not to have been met here. The conflict would need to have involved financial interests, genuine insider knowledge (that might lead to corruption) or clear personal interest in the tender outcome. The Court of Appeal also made further comments about the High Court’s approach to conflicts of interest to helpfully set a more realistic and appropriate standard.

The Court of Appeal disagreed with the High Court’s analysis of both bias and conflicts of interest and its application of the Saxmere judicial standard. Requiring a panel to have no knowledge of, or previous involvement in, the relevant sector (in this case problem gambling) is unrealistic, and not always in the public interest. The Court of Appeal indicated that requiring ‘no previous knowledge’ is nothing more than a best practice, which helps to ensure that incumbency is not given weight beyond what the criteria provide for.

Government Rules of Sourcing

The Court of Appeal’s decision on the scope of review meant that an assessment of the grounds of review (in this instance, breach of legitimate (procedural) expectations and illegality) was not going to alter the outcome. The Court of Appeal nevertheless commented that the ‘Mandatory Rules of Procurement by Departments’ (which have now been replaced by the Procurement Rules) were imposed by Cabinet, not voluntarily adopted, and accordingly do not have the force of law. The Court of Appeal has noted that a breach of the ‘Mandatory Rules of Procurement by Departments’ does not automatically give rise to illegality. The consequence of a material breach of the rules depends on the nature of the rules and the circumstances of the breach. As no material breach of the Mandatory Rules was identified, the Court of Appeal did not give this issue any further consideration.

Procurement documentation

The Court of Appeal held that neither the Procurement Rules nor the request for proposals (RFP) procedure bind the Ministry to a process contract. The RFP documentation expressly stated that it did not, of itself, create contractual rights or obligations, and reserved discretion for the Ministry as to how it would evaluate the proposals.

The High Court had raised concerns over the use of a moderation process, which in this case resulted in a significant re-ordering of scores. However, the Court of Appeal held that, as the RFP did not preclude a moderation process and gave the Ministry discretion as to how to evaluate proposals, prospective providers ought to have contemplated moderation given the complexity of the undertaking in this case. The Foundation could not therefore have held a legitimate expectation that a moderation process would not occur. Retaining documentation of the methods used by decision-makers to moderate the results and arrive at the final recommendations is an important safeguard for agencies to take.

Our view on where things stand for public sector entities

Even if the higher threshold restored by the higher court means public sector procurement processes are less likely to be successfully judicially reviewed, it is still crucial to apply a high standard of methodology or procedure. Failure to comply with the Procurement Rules and broader public sector obligations may result in at least one of a range of alternative avenues for challenge. In addition to contractual claims (where a process contract has been created through an agency’s procurement documentation), complaints to the Auditor-General or an Ombudsman inquiry enable scrutiny of the processes of Crown agencies and hold them to the best practice prescribed in the Procurement Rules.

These challenges can lead to undesirable consequences, such as reputational damage and a lack of confidence in an agency’s processes (by relevant parties as well as the public), which may dissuade people from participating in future processes or wanting to deal with the agency. Additional accountability mechanisms to be aware of are Parliamentary oversight and ministerial control.

It is still important for public sector agencies to take the following measures:

  • Determine all stages of the evaluation process in advance and set out in its request for proposal/tender document the evaluation criteria that will be used. However, in doing so the agency should still look to maintain for itself a reasonable level of discretion and flexibility as to how it will evaluate proposals against the stated evaluation criteria.

  • Follow the process that is set out in the request for proposal/tender document and act consistently with the proposal/tender documentation. If any changes are necessary, the supply market should be notified.

  • Thoroughly document the procurement process.

  • Have a clear evaluation methodology for panel members to understand the scope of their role. Undertake a holistic assessment of suppliers (including due diligence) following the evaluation and prior to the contract being awarded.

  • Apply conflicts of interest policies for those involved in procurements to identify, notify and manage these.

  • Regularly review the agency’s internal documentation to ensure policies and processes are up-to-date and appropriate.

  • Any scoring processes should be used carefully. While the High Court placed significant weight on the statistical flaws of the Ministry’s numerical scoring, the Court of Appeal provided reassurance to public agencies wanting to use such methods, by recognising that use of a number-based system does not necessitate a statistically defensible analysis throughout the process. Care is required, however a scoring system is just an aid in an essentially “human process” (the RFP stated that the decision was for the ‘Ministry’s sole discretion’).


If you would like to discuss the implications of this case and what it means for your business, please contact one of our specialists, or​ your usual Bell Gully adviser.​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Simon Watt

    Partner Wellington
  • Rachael Brown

    Partner Wellington
  • Tom Bennett

    Partner Auckland
  • Claire Harmsworth

    Senior Associate Wellington
Related areas of expertise
  • Public law
  • Health