16 – Business Law Newsletter
In this edition:
- Procurement update
- Considering selling your business in 2017? Tips for putting your best foot forward
- Business Law Team
On 16 December 2016, in The Attorney-General v The Problem Gambling Foundation of New Zealand the Court of Appeal has confirmed the traditional approach to the judicial review of a Government procurement process. That approach is that judicial review is only available where the procurement involves public interest considerations. In this case, contrary to the High Court view, the Court of Appeal found that the necessary public interest considerations did not exist.
In this newsletter, we discuss this case as it applies to procurement processes.
The Problem Gambling Foundation of New Zealand (Foundation) is a non profit organisation which provides both public health and clinical problem gambling services. It has provided problem gambling services since 1988.
The Ministry of Health has responsibility under the Gambling Act 2003 (Act) for developing, managing and implementing “an integrated problem gambling strategy”. The Act does not set out how any strategy is undertaken, eg by itself or through private providers. In July 2013, a request for proposals (RFP) process was undertaken by the Ministry for the provision of services in accordance with the strategy. The Ministry received 32 proposals in response to the RFP, including proposals from the Foundation.
The Ministry’s processes involved an evaluation process run by a panel, its recommendations being considered by a senior contract manager at the Ministry (Mr Levy), who then made recommendations to the group manger of Mental Health Service Improvement (Mr Bartling) who was the Ministry’s ultimate decision maker. The evaluation process undertaken included scoring by each panel member followed by a moderation exercise. The moderation exercise was not referred to in the RFP.
The recommendations made were largely to change the provider from the Foundation, who was the incumbent, to other providers. Upon receipt of Mr Levy’s recommendations, Mr Bartling sought reassurance from Mr Levy that the recommendations reflected the true consensus view of the panel, and also whether the process employed by the panel met good practice standards for government procurement processes. Mr Bartling sought further advice from the leader for Gambling Harm Minimization (Mr Thompson) as to how to transition to the proposed new service with the least possible disruption and also to ensure that the recommendations ‘made sense’. Ultimately Mr Thompson advised Mr Bartling that the panel’s recommendations with a few minor adjustments ought to be accepted.
The Foundation brought judicial review proceedings against the Ministry. The Attorney-General, as the representative of the Crown, brought the appeal on behalf of the Ministry.
High Court Proceedings
In the High Court, the Foundation alleged and was successful on the following:
- The Ministry had failed to follow the evaluation process and criteria set out in, or indicated by, the RFP and to comply with the process requirements imposed by the Mandatory Rules;
- When evaluating the proposals, the Ministry used criteria, and weightings for those criteria different to those recorded in the RFP;
- The moderation process was not part of the process set out in or indicated by the RFP and was in fact inconsistent with it; and
- The Ministry failed to address conflicts of interests as required by The Mandatory Rules.
The High Court rejected the argument of the Ministry that a narrow scope of judicial review was appropriate in this case because the proceedings involved decisions made by the Crown in a contracting context.
Court of Appeal
Judicial review not available in this case
The Court of Appeal’s primary focus was on the argument about whether judicial review was available in this case. A key case in this area is LabTests Auckland Ltd v Auckland District Health Board  1 NZLR 776. The High Court, in applying the tests outlined in the LabTests case, came to the view that a broader scope of review was available. The Court of Appeal also said that the nature of the interest sought to be protected by the party seeking judicial review must be considered. In particular, they said an applicant must raise issues relevant to “wider public interest considerations” and “not just be a disappointed commercial party, seeking to take advantage of public remedies in a commercial context”.
In applying those statements the Court of Appeal said it thought the High Court was “wrong to conflate the public interest in the Ministry discharging its duty to provide” problem gambling services with the need for broad scope review. They thought that the Foundation was simply a disappointed participant complaining about the RFP process and there was no public interest consideration involved. In this regard, the Court of Appeal said “It is a complaint which could have been advanced through contract if the process had given rise to a process contract”.
In this case, the RFP process had not given rise to a process contract because the RFP stated it did not create a process contract and so the procurement process was of an “informal nature”. The Court of Appeal also voiced its disagreement with the approach articulated in Telco Technology Services Ltd v Ministry of Education  NZHC 213 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”.
The finding that judicial review was not available was, of itself, sufficient to dispose of the appeal. However, the Court of Appeal also went on to consider the substantive matters on which the High Court had found in favour of the Foundation. In that regard, the Court of Appeal was of the opinion that:
- The High Court applied the wrong test to determine whether a conflict of interest existed of such a nature to justify the grant of relief in the circumstances. In the Court of Appeal’s view, the standard to apply is not the judicial standard (which is what the High Court had applied). For judicial review proceedings, bad faith or corruption (or something analogous) needs to be shown. The Court of Appeal also noted that where there is a process contract, fairness and good faith only require honesty and a willingness to consider information which might change a person’s view.
- The Ministry had followed the evaluation process and criteria set out in, or indicated by, the RFP (so the Mandatory Rules requirement to notify changes was not relevant) – the process and criteria had to be determined by looking at the whole RFP, whereas the High Court had said only one part of the RFP could be considered.
- The Ministry had not made changes to the evaluation criteria in the RFP – the criteria it had applied were consistent with those in the RFP, when read in full.
- There was nothing in the RFP to preclude a moderation process being used as part of the evaluation and the Ministry had discretion as to how it evaluated proposals against the RFP requirements. In its view, the moderation process as applied was not inconsistent with the RFP.
For the above reasons the appeal was allowed.
Key take outs
From a procurement perspective, two key take outs from the Court of Appeal’s judgment are:
- judicial review is not generally available in relation to commercial procurement decisions.
- the Government’s Mandatory Rules (and based on this judgment it follows that the current Rules of Sourcing, which replaced the Mandatory Rules) do not have the force of law, ie agencies must comply with them, but other parties cannot go to court if the Rules are not followed.
Thus, if a procurement does not involve a process contract, opportunities for dis-satisfied tenderers are very limited, except in exceptional situations. For judicial review, the procurement will have to involve real public interest considerations and not just an aggrieved tenderer.
Where does that leave future Government tenders?
MBIE does not consider that the Court of Appeal judgment changes the observations MBIE made following the High Court judgement in relation to procurement processes for Government agencies. Those observations can be accessed here.
MBIE’s current template RFPs adopt a mixed approach to the process contract issue. They do this by providing that they do not create a process contract except in relation to certain terms. One of those terms is the evaluation process. So, while judicial review is, as a result of the Court of Appeal’s judgment, now less likely to be available if an evaluation is not in accordance with the RFP, a process contract challenge may be more likely to be available where the MBIE template or similar terms are used in an RFP.
For RFPs structured in this way, the key point to apply is, as it was prior to the Court of Appeal decision, ensure that your evaluation process is clear and you stick to it. However, even if your RFP is not structured in this way (ie no process contract), we recommend sticking to the evaluation process advised. While a successful legal challenge in such a case is less likely, taking our suggested approach reduces the risk that a respondent will feel aggrieved and seek to take action in the first place.
Article written by:
Considering selling your business in 2017? Tips for putting your best foot forward
It is a new year and if you are thinking that this is the year to sell your business there are a number of simple steps you can start taking now to ensure the process runs as smoothly as possible and maximises your chances of a successful outcome. It’s not as simple as putting a “for sale” sign on your door.
If you were selling your home, you might decide to invest in a fresh coat of paint, tidy up the gardens, clean the windows and clear out the clutter inside to achieve the best possible price. It is no different when you’re preparing your business for sale. It is important to ensure everything is in order so that you can put your best foot forward so you attract a suitable buyer and achieve the best possible price.
Below are key areas to consider in preparing for a sale of your business:
- Legal Title: A key concern of any buyer is acquiring legal title to the relevant business assets. You should assess who legally owns the various assets that make up your business, including ownership of the plant and equipment, who is party to the relevant business contracts, who holds any relevant intellectual property rights and who employs the workforce. If there is more than one person or entity holding the relevant assets, then unless it is possible to consolidate them into one entity prior to the sale, each will need to be a “seller” for the purposes of the sale.
- Financials: Think about the financial information you can put in front of a prospective buyer to convince them of the value of your business. Is your financial reporting up to date? Recent and audited financials are the best way to provide evidence of the business’ financial position and performance, but in many instances, recent and properly prepared financials will suffice. You should also consider providing potential buyers with fair and reasonable forecasts to help highlight the value of your business.
- Plant and Equipment: It is a good idea to put together a comprehensive list of plant and equipment that is to be sold, from machinery and vehicles through to mobile phones and office furniture. This will also help you determine the overall value of the plant and equipment, as well as clearly identifying any assets that you may wish to retain.
- Records: Ensure your business records are up to date and in order, as poor record keeping may impact the perceived value of your business. This includes customer records, employee records, supplier records and contracts. If you are selling your company as a whole (i.e. a share sale) then you will also need to ensure that your corporate records, such as share register and board resolutions, are in order.
- Contracts: A buyer will want to review all contracts that are held by the business that are relevant to its ongoing operation. If you don’t have an accessible and complete file of your business contracts, then spend time putting this together prior to commencing the sale process, including an electronic file if possible. This should include all amendments to the contracts and any key correspondence relating to renewals, alleged breaches or termination. In addition:
- you should consider whether there are any confidentiality obligations contained within the contracts which prevent you from disclosing them to potential buyers of your business without the prior consent of the third party to the contract; and
- in due course you will need to consider what rights you have to assign, novate, transfer or terminate those contracts in connection with the business sale.
- Property: Consider the property interests that are held by the business:
- If there is freehold land owned and used by the business, then ensure it is ready to sell, including obtaining any outstanding code compliance certificates and whether there are any mortgages, caveats or other encumbrances that need to be considered in connection with the sale.
- If the business leases its premises, then confirm the process to transfer the lease to the buyer and ensure the lease documentation is up-to-date and accessible. In almost all cases, you will need the landlord’s consent to transfer the lease to the buyer. It can be useful to speak to your landlord early in the process.
- Employment: If you have employees within your business then the buyer may wish for them to continue with the business, in which case their employment will need to transition to the buyer. Where the employees are not required by the new buyer you will need to arrange to terminate their employment. This is a matter best discussed and agreed directly with the buyer and therefore usually can be left until a potential buyer has been identified. Depending on the particular terms of employment, you may become liable to pay redundancy in the event that an employee is not offered an equivalent role with the buyer or the sale otherwise crystallises any such entitlement. In preparing for sale you should ensure employee records are in order and all KiwiSaver obligations are compliant.
- Intellectual Property (IP): If your business holds or uses intellectual property, such as trade marks, patents and domain names, the buyer is likely to seek to acquire ownership of this IP or the right to use it. Consider whether you will sell the IP outright, eg. if it is used exclusively with the business, or whether you might wish to retain ownership and offer the buyer a licence to use the IP for a fee or otherwise.
- Licensing and Regulatory Matters: Often licences and regulatory approvals, such as food and beverage licences and resource consents, are required to operate your business. If this is applicable to you, then consider whether these are transferrable to a prospective buyer of your business or whether that person will need to apply for their own licences and approvals. Being knowledgeable in this area will assist buyers in the process and help them obtain an early understanding of what is required in order to operate the business.
- Guarantees: Have you or any of your associated companies given any guarantees in connection with the business, including under any contracts or leases etc.? It is advisable to collate a list of all your obligations and ensure they are properly released at settlement to ensure you do not continue to be liable for the business following the sale.
- Encumbrances: A buyer is going to want to purchase the business assets free of all security interests and other encumbrances. If you do not already have a good grasp on the security interests that exist in respect of the business assets then do a quick search of the seller entity in the personal property securities register (PPSR). All secured parties will need to be contacted in due course to ensure their securities can be removed at, or prior to, settlement of the sale.
- Confidentiality: Given that a prospective buyer will be looking at your confidential information in assessing the value of your business, it is important to ensure that they enter into a binding confidentiality deed prior to you disclosing any confidential information. This document can be prepared early in the process. You also might consider withholding any information that is particularly business sensitive until you are confident that the recipient is a bona fide buyer and a deal is reasonably likely to be done with that person.
Buyers will look at a wide range of matters when assessing the value of your business and whether they wish to acquire it. Having the matters outlined above in order will help convey the impression of a well managed business which will enhance the likelihood of a successful sale at the best price.
In due course you will also need to give some thought to the potential structure of your sale, and whether you are best to proceed by way of a sale of the business assets themselves, or a sale of the company as a whole (i.e. a share sale). This is something best discussed with your legal and financial advisors.
If you need any assistance with preparing your business for sale, or in connection with the sale process or structure itself, do not hesitate to get in touch with the business law team at Lane Neave.
Article written by:
Business Law Team
If you have any queries in respect of the above, or any other business law issues, please contact a member of Lane Neave’s Business Law Team:
Disclaimer: The content of these articles are general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.