Update on recent High Court case relevant to public sector procurement

Wednesday 9 September 2015

Authors: Simon Watt and Claire Harmsworth

This update summarises a recent High Court judgment that has lowered the bar for judicial review of public sector procurement decisions and signalled how the court would perceive the Government Rules of Sourcing.

We outline:


On 23 July 2015 a High Court judicial review judgment was released, Problem Gambling Foundation of New Zealand v Attorney General , which held that for a number of reasons the Ministry of Health’s contract award decision (which was made following the completion of a procurement process) should be set aside.

Since this decision was released it has been attracting considerable interest in public sector procurement circles. The decision has lowered the bar in terms of the circumstances where a public sector procurement process may be subject to judicial review. The judgment has also brought clarity around how the court may view perceived flaws in procurement processes and how it views the role of the Mandatory Rules for Procurement by Government Departments (Mandatory Rules) (the predecessor to the Government Rules of Sourcing (Sourcing Rules)) in the context of judicial review.

The judgment paves the way for the courts to have a greater role in reviewing how procurement processes have been conducted, and in setting aside procurement decisions that have been reached as a result of a flawed process.

Previously there were two obvious bases on which the court would be prepared to judicially review a commercial contracting decision of a public entity:

  1. where there was fraud, corruption or bad faith; or

  2. a situation analogous to fraud, corruption or bad faith (such as where an insider with significant inside information and a conflict of interest has used that information to further his or her interests and to disadvantage his or her rivals in a tender).

Following the Problem Gambling case there is now more clearly a third and potentially very easily applicable basis:

  1. where the context in which the entity operates imports a broader public law procedural standard; with the relevant contextual factors in Problem Gambling being:

    • the type of service being procured (in this case broader public health services),

    • the fact that the statutory setting did not indicate that the Ministry was required to operate commercially,

    • the fact that the Mandatory Rules had not been complied with,

    • that the Ministry was performing a public function in procuring public health services and that services to implement an entire strategy were being procured,

    • the fact that the procuring agency was a government department (added to the other contextual factors rather than being a contextual factor that would have been enough in itself),

    • absence of contractual rights for bidders (i.e. no process contract existed),

    • lack of onerous process obligations imposed on the Ministry by its RFP and associated documentation,

    • nature of parties bidding (i.e. they were not commercial parties),

    • the complexity of the subject matter relating to the complaint (in this case, being non-complex), and

    • availability of non-judicial accountability measures – in Problem Gambling the court did not consider that complaining to the Ombudsmen or the prospect of an Auditor-General review were sufficient alternative accountability mechanisms.

This High Court judgment is now the subject of an appeal by the Crown, although it may be 6 – 12 months before this brings further clarity and more certainty to the legal position. The decision by Woodhouse J as to the court’s scope of review in cases involving public sector procurement processes goes much further than the Court of Appeal’s position in Lab Tests Auckland Ltd v Auckland District Health Board , 385. Further, the judgment takes a very conservative (and in our view commercially impractical) approach to conflicts of interest. Accordingly, it is not surprising that the Crown has chosen to pursue an appeal.

Notwithstanding the Lab Tests approach to review ability of procurement processes (i.e. a high threshold), we have always recommended a risk-averse approach to running procurement processes. That is, to ensure compliance with the Sourcing Rules, RFP (and other procurement) documents, and internal procurement manuals and procedures, as the best method of protecting against the risk of challenge both from a judicial review perspective (as has occurred in Problem Gambling)and in case of a process contract challenge. 

Unhelpfully the Problem Gambling judgment is likely to provide aggrieved tenderers additional confidence when thinking about whether to challenge a public sector procurement process. Accordingly, the case is likely to result in additional rigour being necessary for government departments and other public sector agencies in terms of the way in which they conduct their procurement processes. This is likely to mean more additional up-front expense for procuring agencies.

It is our view that this judgment goes too far. Taken to its extremes it could result in public procurement processes that are overly formulaic, overly process-driven and often impractical commercially. This would serve to further increase the divide between publicly run and privately run procurement processes, potentially stifling the ability of a public sector agency to reach an efficient result. We consider the position with respect to the scope of review of public sector procurement processes needs to better reflect the reality that (some) public sector agencies must on occasion be free to exercise commercial judgement and run a procurement process commercially.

Brief overview of the facts of the case

Very briefly, the facts of that case were as follows:

  • The Ministry of Health released its RFP in July 2013 for the provision of problem gambling services on a regional and national basis (the contract to be awarded was for a 30 month period from 1 January 2014 to 30 June 2016). The services involved both public health elements and clinical elements. The RFP was not a process contract.

  • The Problem Gambling Foundation (the Foundation) was the long-term incumbent provider of these services. The Foundation submitted two proposals. One proposal was for the Foundation to be the sole provider in 9 of the 13 regions tendered, and the other proposal was to provide all services nationally in conjunction with another provider.

  • The evaluation process involved three main stages resulting in a recommendation to the Ministry officer who was responsible for making the final decision. The first stage, “pre-scoring”, involved the evaluation panel members individually scoring all proposals against the evaluation criteria. The second stage, “consensus scoring”, involved the evaluation panel collectively deciding on ‘average’ scores for each proposal under each evaluation criterion. The final stage, “moderation”, allowed the evaluation panel to look beyond the terms of the proposals and develop a collective view of the proposals in order to change the rankings of certain proposals where the panel considered this was appropriate. The moderation phase was not based on the evaluation criteria but on other “principles”.

  • The RFP described the evaluation approach to be taken by the Ministry in Part D and Part E of the RFP document. There was a disconnect between the information required from respondents in Part E (effectively a response template for respondents to complete) and the evaluation criteria in Part D, the effect of which was that the Foundation misinterpreted what the Ministry wanted to see from proposals and what would be important in terms of evaluation. Part D contained the following phrase: “The Ministry will select the preferred Proposal(s) based on its evaluation of the Proposals against the evaluation criteria specified in Part D.” Part D afforded percentage weightings to each of the evaluation criteria and also set out sub-criteria. Part E was entitled “Format information required” and set out further percentage weightings for each of the sub-criteria. The Ministry attempted to argue that Part E was definitive in respect of the evaluation criteria. The judge considered the RFP was ambiguous and that such ambiguity could not be cured simply by giving respondents an opportunity to ask clarification questions.

  • The majority of the evaluation panel members declared conflicts of interest. One of the panel members had previously worked for the Foundation (finishing a month before the release of the RFP), and many of the other members had professional dealings with a number of the bidders in the course of their day-to-day roles including as contract managers. The Ministry’s internal ethical code of conduct provided that “relevant discussion and consideration of all proposals are to be based on the content of the proposals presented. Prior knowledge or comments outside of the proposal content are specifically excluded”. Also of relevance in the case was that the Mandatory Rules were much less flexible in terms of the approach to conflicts than the new Sourcing Rules are. Conflict management appeared to be given only cursory consideration.

The key areas of focus for the Foundation and the court which led to a successful outcome for the Foundation were:

  • the scope of review available to the court,

  • whether the Ministry had breached the Mandatory Rules by failing to follow the evaluation approach as set out in the RFP, and whether the Foundation had a legitimate expectation that, in the absence of notification from the Ministry, the RFP would be followed,

  • whether there were material errors in the Ministry’s evaluation process and evaluation methodology such that the decision was unreliable, and

  • apparent bias on behalf of the evaluation panel.

Risk areas for public sector agencies to be aware of in their procurement

As a result of the Problem Gambling judgment, the following are what we see as being the key “risk areas” for public sector agencies to be aware of going forward in terms of conducting their procurement processes:

  1. Adhering to process rules

    Public sector agencies should be conscious of complying with the process for a procurement as outlined in the RFP, the Evaluation Plan for the procurement, their internal procurement policies and procedures, the Sourcing Rules, any separate internal conflict of interest policy, and (where applicable) the Probity Plan for the procurement. Agencies should also keep the Probity Plan under regular review and update this as required (including to ensure it accurately records their approach to conflict management).

    Agencies should also take particular care to ensure that the Evaluation Plan is consistent with the RFP and other procurement documentation noted above.

    If an agency were to be challenged, a court would be looking to all of these documents to ascertain whether the agency had followed the process it had designed (or, in the case of the Sourcing Rules, is subject to) for the procurement.

  2. Evaluation panel

    An RFP Evaluation Panel should be convened early to give sufficient time to work through the conflict position of each Evaluation Panel member (and Evaluation Panel advisors) before proposals arrive, in order to put in place appropriate conflict management measures or remove personnel from involvement in the evaluation process where a conflict is serious.

    The Problem Gambling judgment demonstrates that any prior knowledge that evaluation personnel have of any respondent members will be a particular risk area that needs to be carefully worked through. Great care will need to be taken to ensure that it is permissible for any prior knowledge to be brought to bear in the evaluation process.

    For a Crown entity, for example, the relevant conflict context to be applied generally, and particularly for evaluation, is:

    • the provisions in sections 62 to 72 of the Crown Entities Act 2004,

    • any organisational policies and procedures for managing conflicts of interests,

    • Rule 2 in the Sourcing Rules (which requires an agency to have policies in place that, amongst other things, require that those involved in procurement decisions stay impartial and act responsibly, lawfully and with integrity and that help staff involved in a procurement process identify, notify and manage conflicts of interest). The Sourcing Rules requires that an agency is able to show how it uses sound judgement to manage conflicts of interest,

    • the Probity Plan for the project (where applicable),

    • any instructions to personnel on, or provided with, conflict of interest declaration templates, and

    • any internal agency code of conduct document.

    It is particularly worth noting that if any of the above documents, or any other document that applies in respect of the procurement process, requires evaluators to assess proposals on their face and for evaluators to exclude any prior knowledge of respondent members, this will be a particular risk area if any of the evaluation personnel do have prior knowledge of the respondent members, either through working for or with them or managing a contract with them.

  3. Evaluation scoring stage

    When using numerical scoring, it is critical to ensure that this is done in a way that is not statistically flawed, particularly when the process involves a “consensus scoring” step. A great deal of significance was placed on the statistical assessment of the evaluation results by the court in Problem Gambling, particularly how the results had been skewed by the way in which the individual scores of evaluation panel members were arrived at (including obvious confusion between the panel members as to how to apply the scoring framework to the material before them) and how individual scores were then collated into one overall evaluation panel score.

  4. Evaluation moderation stage

    The Problem Gambling case was highly critical of the moderation process, which was one stage in the Ministry’s procurement process. The key problems with the moderation process were that the RFP did not disclose that moderation would occur and that the process overlaid an entirely different set of “principles” that were applied to adjust rankings of bidders (i.e. principles entirely separate to the disclosed evaluation criteria).

    Public sector agencies should be clear in their Evaluation Plans about how any moderation stage will work and the process that will be followed. Good records should be kept of the process actually undertaken at the moderation stage (which we expect would align with the process described in the Evaluation Plan). If the process is to be anything other than checking and testing consistency of scoring across proposals using the evaluation criteria set out in the RFP as the reference point, consideration should be given to making additional information available to respondents before they submit their proposals that explains how this moderation stage will work and the principles that will be applied to the moderation exercise.

Practical suggestions going forward to deal with risk areas

Beyond what we have suggested under each of the risk areas in section 3 above, further practical steps that agencies could take in order to avoid their procurement processes being successfully judicially reviewed include:

  • ensuring legal review of the Evaluation Plan (once in a near final form) to ensure that it is consistent with the RFP and other relevant procurement documentation relating to the evaluation process,

  • reviewing the conflict declarations of all evaluation personnel to assess whether persons who have declared an interest can remain involved in the evaluation process and, if so, to record a robust management plan for such individuals (and ensuring conflict declarations are obtained and management plans in place, where required, for other personnel and advisers involved in the procurement),

  • periodic checks or audits are conducted during the evaluation process to check that there are no departures from the required process and that there are no indications of procedural flaws,

  • the Probity Auditor or Probity Advisor could sit in on key evaluation panel meetings to oversee the process with a view to spotting any procedural issues that ought to be raised and dealt with, and

  • agencies could also consider engaging a person with statistical analysis skills to oversee or review the design of the scoring process and to review the scores once they have been collated to ensure that the process has been designed to lead to a fair result. In Problem Gambling, a statistician engaged as a witness to support the Foundation’s case was considered by the judge to be highly credible and his evidence as to the partiality and flaws in the Ministry’s process was given significant weight.


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
Related areas of expertise
  • Public law
  • Health