This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
While the trial court decided to strike down the government contract award due to irregularities in the evaluation process, the New Zealand Court of Appeal overturned that decision in its December 2016 decision in Attorney-General v. Problem Gambling Foundation of New Zealand. Where the trial court took issue with how the government used an undisclosed “moderation stage” to change proponent scores, the Court of Appeal found that the trial court was overly interventionist in its review of the evaluation process. The Court of Appeal also found that the moderation stage did not breach the procurement rules.
The case dealt with a Request for Proposals (RFP) to assist the government in the development and delivery of a problem gambling strategy. The complainant lost that competition and brought a legal challenge, which resulted in the trial court striking down the contract award due to irregularities in the evaluation process. The government appealed. As its first consideration, the Court of Appeal examined the scope of judicial review of government procurement decisions and summarized the legal authorities under New Zealand law as follows:
First ground of appeal: did the Judge apply wrong scope of review?
It is common ground between the parties that the first issue to address on this appeal is the appropriate scope of review to be applied in this proceeding and, in particular, whether the standard of review formulated by the Privy Council in Mercury Energy Ltd v Electricity Corp of New Zealand Ltd (Mercury Energy) and applied by the Court of Appeal in Lab Tests Auckland Ltd v Auckland District Health Board (Lab Tests) was appropriate in these circumstances. If the Crown is correct as to the scope of review, that is determinative of this appeal — none of the pleaded allegations would fall within that narrow scope.
The Solicitor-General accepts that judicial review of the Crown’s contracting decisions is available but says that, in a commercial context, review will usually only succeed where there is evidence of fraud, corruption, bad faith, or any analogous situation such as where the integrity of the process has been undermined by a conflict of interest where insider information is used to disadvantage rivals in a tender. On the Ministry’s case, that is the general rule as to the available scope of review of commercial contracting decisions. But the Ministry accepts there is an exception to this general rule — broader judicial review will be available in respect of decisions where public law obligations, which require the Court’s supervision, arise from the particular context. It says the starting point is that the scope of review of the Crown’s commercial contracting decisions is narrow, absent such contextual indications. The Ministry says the Judge erred by abandoning this starting point, instead undertaking an expansive assessment of all of the circumstances and giving no particular weight to the contractual nature of the decision before settling upon a broad scope of review.
For its part, the Foundation supports the Judge’s analysis. Ms Chen for the Foundation points to the recent Supreme Court decision in Ririnui v Landcorp Farming Ltd (Ririnui) as authority for the proposition that not all contracting decisions by the Crown or state-owned enterprises are subject to only narrow review — only ordinary commercial transactions are. It says that outside of ordinary commercial transactions the scope of review is determined by the context within which the decision-maker operates, whether the decision-maker was acting in accordance with its statutory obligations and whether there is a public interest component. Here the Crown was contracting for the provision of public health services. This and other contextual indicators support the Judge’s assessment that this was not an ordinary commercial transaction.
The Court of Appeal then set out the following governing principles for the judicial review of government procurement decisions from the relevant New Zealand and Commonwealth case law:
Relevant principles
We begin with a review of the key authorities relied upon by the parties in this area. First in terms of chronology is Mercury Energy, which involved a judicial review challenge to a contracting decision of a state-owned enterprise. Delivering the Board’s advice, Lord Templeman accepted that the decisions of state-owned enterprises were, in principle, amenable to judicial review but said:
It does not seem likely that a decision by a State-owned enterprise to enter into or determine a commercial contract to supply goods or services will ever be the subject of judicial review in the absence of fraud, corruption or bad faith.
Next in the chronology is Pratt Contractors Ltd v Transit New Zealand (Pratt Contractors). In that case the plaintiff pursued a claim based upon a contract arising out of a tender process conducted by Transit New Zealand, a Crown entity. In the Court of Appeal it was accepted that Transit was bound by a process contract and that the contract included an implied contractual term to treat tenderers even-handedly. However, McGrath J cautioned against the application of “standards akin to those required in judicial review proceedings involving the exercise of statutory powers” when assessing such contractual claims.
On appeal Lord Hoffman, delivering the Board’s advice, agreed with Finn J’s dictum in Hughes Aircraft Systems International v Airservices Australia that an implied duty of good faith and fair dealing:
… does not as such impose on [the employer] under the guise of contract law, the obligation to avoid making its decision or otherwise conducting itself in ways which would render it amenable to judicial review of administrative action.
We then come to Lab Tests Auckland Ltd v Auckland District Health Board. Three district health boards undertook a RFP process for community laboratory services for the Auckland region. Although Diagnostic Medlab was the incumbent provider, through that process Lab Tests emerged as the preferred tenderer and ultimately the three health boards entered into contracts with Lab Tests.
Drawing upon Mercury Energy, Pratt Contractors and other authorities, this Court in Lab Tests stated the following principles:
a. Public bodies must exercise their powers, including contracting powers, in accordance with their empowering statute. If they do not, then their decisions are amenable to review on the grounds of illegality.
b. The procedural obligations of a body performing a public function will vary with context so that a public body exercising a particular statutory power may be bound by natural-justice obligations when making a particular decision but those obligations may have less, or even no, relevance to the same body when making another type of decision under the statute.
c. “Context” for these purposes “includes the nature of the decision being made, the nature of the body making the decision and the statutory setting within which the decision is made”.
d. The courts will intervene by way of judicial review in relation to contracting decisions made by public bodies in a commercial context in limited circumstances, although subject to the contextual point just mentioned. In a commercial context, judicial review will normally only be available where there is fraud, corruption or bad faith, or in analogous situations. A broad-based probity-in-public-decisionmaking review is not to be applied. The imposition of more onerous procedural obligations may unduly fetter a public body’s ability to negotiate effectively. Generally, other accountability mechanisms such as ministerial control and parliamentary oversight are likely to be seen as more appropriate.
The Court of Appeal was also careful to distinguish the Ririnui decision, which involved the special circumstances of land claim settlement issues that triggered a more expanded approach to judicial review in the challenged tendering process, from the stricter default approach in Mercury:
Finally in this line of authorities we mention Ririnui, a decision of the Supreme Court released after the judgment the subject of this appeal. In Ririnui the focus of the application for judicial review was decisions taken in the course of Landcorp’s sale of a particular block of land called Whārere. Landcorp proposed to sell Whārere because it was no longer a fit with Landcorp’s other operations. Landcorp was party to a protocol with the Office of Treaty Settlements, whereby Landcorp would give early warning of proposed land sales to the Office to enable the Crown to consider whether the land was of interest to it for settlement purposes. Where land was of interest, the protocol set out a process by which the Crown could purchase that land in order to bank it for future Treaty settlements.
Landcorp went through the protocol process in respect of Whārere but the Crown disclaimed any interest in buying the land because it believed, wrongly as it transpired, that Treaty claims to the land had been settled. Landcorp then entered into a binding commitment to sell Whārere to private individuals. Mr Ririnui brought judicial review proceedings on behalf of a Treaty claimant who wished for, but had been denied, a proper opportunity to buy the land.
Arnold J, giving the leading judgment of the majority, referred to the general proposition of law that a decision by a state-owned enterprise to enter into a commercial contract was unlikely to be reviewable in the absence of fraud, corruption, bad faith or some analogous circumstance. But he said, “even if that proposition is accepted, it does not necessarily apply to all contracting decisions made by state-owned enterprises”.
In reaching the view that a broader scope of review was appropriate in the case before the Supreme Court, Arnold J identified various factors which he considered revealed a close connection between Landcorp’s own land-owning activities and the Crown’s fulfilment of its Treaty obligations to Māori. He referred to Landcorp’s statement of corporate intent, which included references to the protocol and to the reconciliation of Treaty of Waitangi settlement processes with its commercial objectives. He also took into account various steps taken by the Landcorp board in the course of sale of the land, which reflected that the board did not view the sale process as simply a commercial one but rather recognised it had a substantial public interest component. Accordingly, Arnold J saw the case as falling outside the general proposition because it was not an ordinary commercial transaction “given the special context of former Crown land, the Treaty and Maori interests”. The majority allowed the appeal in part, granting the application for judicial review on grounds that various decisions made in connection with the sale were made under the influence of a mistaken view that Treaty claims to Whārere had been settled.
The Court of Appeal then turned to considering the decision under appeal. In striking down the government’s contract award decision based on the review of the evaluation process, the Court of Appeal concluded that the trial court applied an overly expansive approach to the judicial review of government contracting decisions:
We agree with the Crown that where the decision the subject of review is a procurement (contracting) decision made in a commercial context, that is the starting point for consideration of the appropriate scope of review. We understand the High Court Judge’s analysis to be that the decisions were not taken in a commercial context. However, that analysis gave no weight to the fact that these were procurement decisions. We agree with the Ministry that where decisions are made by the Crown in the course of a procurement process, that will usually provide the commercial context. It follows the prima facie position will be that only narrow review is appropriate, subject to any relevant contextual matters indicating a need for the High Court to have broader powers of review.
This Court identified relevant contextual matters in Lab Tests, noted above. To those we would also add the nature of the interest sought to be protected by the party seeking judicial review. We say this because it may be that a decision taken in a commercial context by a state actor does entail wider public interest considerations, suggesting that a broader scope of review will be appropriate, as the Crown acknowledges. But 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.
In our view, the critical contextual consideration in this case is that the party seeking review, the Foundation, is a disappointed participant complaining about the RFP process through which it hoped to secure a contract to provide paid services to the Ministry. We acknowledge that, as the Judge identified, the RFP process was for the provision of services to enable the Ministry to implement its problem gambling strategy and there is indeed a public interest in the Ministry discharging its statutory duty to formulate a plan and provide those services. But we think the Judge was wrong to conflate the public interest in the Ministry discharging its duty to provide those services with the need for broad review in this case. He was wrong to discount as “too abstract to be of assistance” the Ministry’s argument that the Foundation’s claim did not truly engage the public interest it sought to invoke in support of broad review.
We also do not agree with his view that the services at issue in this proceeding are relevantly distinguishable from the clinical services in Lab Tests. The Judge saw it as relevant that the Ministry was contracting out most of the implementation of its problem gambling strategy and was contracting out public health as well as clinical services. There were very broad public health implications in the provision of laboratory testing for the population covered by the three health boards in Lab Tests. It would be a peculiar outcome if the scope of review is determined by the percentage of contracting out that occurs.
Ms Chen for the Foundation argues that you cannot split up actions taken in the course of pursuing a public interest objective — on her approach, ensuring the problem gambling strategy is adhered to requires the presence of the full scope of review at each stage of its implementation, including down to the level of the RFP process. We do not accept the logic of her argument. 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. And to the extent there is public interest in the procurement process, this challenge does not engage that interest as the complaint is the prejudice to the Foundation’s contracting prospects.
We contrast this challenge with that in Rirunui. Although Ririnui also involved a party disappointed in their hopes of securing a contract, a feature of that case missing in the present was an alignment of the claimant’s grievance with the broader public interests in play — in Ririnui, the resolution of Treaty claims.
The Foundation’s claim, in contrast, is grounded firmly upon unfairness to it in the process and disappointment of its own private interests. It is a complaint which could have been advanced through contract if the process had given rise to a process contract. The only way in which its allegations engage with the public interest in the provision of public health services is the Foundation’s attempted invocation of that contextual feature in favour of broad judicial review.
The Court of Appeal also rejected the argument that the absence of a statutory bid protest regime, along with the absence of a Contract A bidding process contract in the challenged RFP process, increased the need for an expansive approach to judicial review. Rather, the Court of Appeal ruled that these factors actually worked against judicial interventionism:
We also do not see the various absences the Judge identifies as supporting the conclusion he reached as to the scope of review. Although we agree the absence of a statutory direction to act commercially is a factor to be considered, as we have noted, the fact that this was a procurement process is a powerful indicator that the context was commercial. So too was the direction in the Mandatory Rules that procurement decisions were to be made on the basis of value for money of services to be supplied in terms of the essential requirements and evaluation criteria.
The absence of statutory procedural protection does not point, in a commercial context, toward a need for the imposition of public law procedural protection. We do not agree with the approach articulated in Telco that the existence of a “vacuum created by an absence of specific legislative provisions” in some way invites public law procedural principles to fill it. We do not see the logic in that conclusion; it is surely the presence of onerous procedural obligations which might arguably take a contract out of the normal run of commercial contracts. In this case the absence of such provisions is neutral. While it is true the Act does not stipulate process, it does not address at all how the responsible Crown agency is to discharge its obligations to provide the relevant services.
The absence of contractual obligations created by the RFP process also does not assist the Foundation. t weighs on the opposite side of the scale, in favour of narrow review. The Ministry’s stipulation that the RFP documentation did not create contractual obligations, and its reservation of the power to contract with a party not participating in that process or providing a non-complying proposal, makes plain the informal nature of the process.
In adopting a non-interventionist approach to government procurement, the Court of Appeal ultimately concluded that the electoral process, as well as other existing oversight mechanisms, including complaints to the Ombudsman or Auditor-General, created sufficient checks and balances in the area of government procurement so that an expanded approach to the judicial review of government procurement decisions was unnecessary:
Ms Chen argues that broad review is necessary to ensure that, as a public body, the Ministry is held to a high standard of conduct. We accept the Solicitor’s submission that this is to invite a probity assessment of public administration, an assessment rejected in Lab Tests. We agree there is a public interest that agencies show integrity and competence in the discharge of public powers and duties. But we consider that alternative avenues existed for the Foundation to address concerns regarding the process — complaints to the Ombudsman’s office or to the Auditor-General. The Judge discounted these as viable remedies. We consider he was wrong to do so. These two bodies can and do subject the processes of Crown agencies to scrutiny and hold them to best practice as embodied at the time in the Mandatory Rules, which are now replaced by the Government Rules of Sourcing. And the Ministry is responsible to Parliament for how it spends the appropriation it receives for delivery of the problem gambling strategy.
The Court of Appeal also ruled that the government’s “Mandatory Rules” were not justiciable, finding that while they applied to the RFP in question, they were internal government rules and did not give losing bidders the right to disrupt government operations through judicial review applications:
We accept that the Mandatory Rules applied to this RFP process. The Judge saw the presence of these rules as weighing in favour of broad review, even though he treated the absence of statutory and contractual rules as also favouring that level of review. The introduction to the Mandatory Rules records that they “set out mandatory standards and procedural requirements for the conduct of procurement by government departments”, for the purpose of facilitating “competitive participation by domestic and foreign suppliers in New Zealand’s government procurement market”. It would be strange if the application of these rules, designed to be used in an inherently commercial context of procurement, were to be construed as evidence that this was not a commercial context. The Rules were, as the Ministry submits, the executive government’s non-legal directive to its agencies as to standards and conduct required to be observed to ensure fairness, quality and integrity in procurement processes. While they bind the agency, as we come to later, we see no reason to interpret the Rules as imposing, in this case, a procedural obligation enforceable by the disappointed potential contractors; the Ministry did not bind itself to a process contract to that effect. The public interest that undoubtedly exists in the quality and integrity of procurement processes is, in this case, met by the availability of the mechanisms we have already referred to. The Mandatory Rules show unsurprisingly that the executive itself seeks to achieve those ends.
The Judge saw nothing in the Ministry’s submission that, to echo the concerns expressed in Lab Tests, the imposition of broader procedural obligations might handicap the Ministry in meeting its objectives of providing the public health services and that it might simply provide ammunition to “determined private sector service providers”. The facts of this case, however, rather prove the Ministry’s point. These court proceedings have now stretched out beyond the date on which the three-year service plan would have expired. In light of the challenge, the Ministry elected to leave existing arrangements in place, which meant that the Foundation has had the benefit of the status quo, which the decisions were to replace, for the entire time. A three-day hearing in the High Court, a long wait for a judgment from that Court and now the further delay of appeal have all disrupted the implementation of the original six-year strategic plan. Indeed, so great has been the delay occasioned by this proceeding that its outcome is, at least in the one sense, moot. The contracting period covered by the RFP expired on 30 June 2016. The extension of the incumbents’ contracts to 2017 has delayed the introduction of what the Ministry had concluded was the preferred mix of services and has delivered, instead, the status quo.
The Court of Appeal therefore overturned the trial court’s decision since there was no evidence of bad faith, fraud, or corruption in the moderation stage used by the government in the challenged RFP process.
As this case illustrates, the outcome of bid protest challenges can turn on the scope of judicial review applied by the reviewing body. Where the courts adopt a non-interventionist approach to the judicial review of government procurement decisions, those decisions are at a lower risk of successful challenge when compared to jurisdictions that have adopted an interventionist approach to judicial review or have created statutory bid protest regimes.
