The Judicial Committee of the Privy Council Decisions

Waikato Regional Airport Ltd & Ors v. Attorney General (New Zealand) [2003] UKPC 50 (30 June 2003)

ADVANCE COPY

Privy Council Appeal No. 77 of 2002

(1) Waikato Regional Airport Limited

(2) South Pacific Air Charters Limited and

(3) Palmerston North Airport Limited Appellants


v.


The Attorney General (on behalf of the Director

General of Agriculture and Forestry) Respondent

FROM

THE COURT OF APPEAL OF NEW ZEALAND

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JUDGMENT OF THE LORDS OF THE JUDICIAL


COMMITTEE OF THE PRIVY COUNCIL,


Delivered the 30th June 2003


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Present at the hearing:-


Lord Nicholls of Birkenhead

Lord Hope of Craighead

Lord Hutton

Lord Rodger of Earlsferry

Lord Walker of Gestingthorpe


[Delivered by Lord Nicholls of Birkenhead and

Lord Walker of Gestingthorpe]


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Introduction

1. This is an appeal from a judgment of the Court of Appeal of New Zealand (Richardson P, Gault, Tipping, McGrath and Anderson JJ) given on 27 March 2002. The Court of Appeal allowed appeals by the Attorney-General of New Zealand from the judgment dated 14 February 2001 of Wild J given in four sets of proceedings which had been heard together. The plaintiffs in two sets of proceedings (156/98 and 359/98) were Waikato Regional Airport Ltd ("WRAL") and in the other two (151/99 and 152/99) South Pacific Air Charters Ltd (trading as Freedom Air – "Freedom") and Palmerston North Airport Ltd ("PNAL"). Wild J granted all the plaintiffs declaratory and other relief against the Attorney-General, sued on behalf of the Director-General of Agriculture and Forestry. The proceedings arose out of two decisions (one taken in 1995 and the other in 1998) by successive Directors-General of Agriculture and Forestry in relation to the recovery under the Biosecurity Act 1993 of costs incurred in biosecurity controls at regional airports in New Zealand.
2. The background to this litigation involves three main elements: the special importance of biosecurity to New Zealand's national economy, health and quality of life; the "open skies" policy which the governments of New Zealand and Australia agreed to and adopted during the 1990s; and far-reaching changes (starting in the 1980s) in government policy as regards the funding of public services in New Zealand, accompanied by associated changes in the structure and operations of parts of the public sector. These elements were distinct, but they impacted on each other, sometimes with uncomfortable results. In particular (as it will be necessary to examine in much more detail) the approval of regional airports for international flights increased the problems of the Ministry of Agriculture and Forestry ("MAF") and its Director-General ("the Director-General") in administering new legislation at a time when MAF's internal structure was being reorganised, and its workload increased, but funding from central government funds was not proportionately increased.
3. Biosecurity can be described as protection and remedial action against harmful organisms, including all types of pests and diseases which may infect humans, animals or plant life. One aspect of biosecurity is the maintenance of border controls, in order to provide protection against harmful organisms from outside. It is of particular concern to New Zealand because of the importance to its economy of its pastoral, agricultural and fruit-growing sectors (on the one hand) and of the tourist industry (on the other hand). The aim of the Biosecurity Act 1993 ("the 1993 Act"), which came into force on 1 October 1993, was (as its long title puts it) "to restate and reform the law relating to the exclusion, eradication, and effective management of pests and unwanted organisms".
4. The 1993 Act is a substantial piece of legislation and is concerned with many matters other than border control (used here to mean control at seaports and airports which are points of first arrival in New Zealand). Its scope appears from the headings to the ten parts of the Act: Part 1 preliminary; Part 2 functions, powers and duties; Part 3 importation of risk goods; Part 4 surveillance and prevention; Part 5 pest management; Part 6 administrative provisions; Part 7 exigency actions; Part 8 enforcement, offences and penalties; Part 9 miscellaneous provisions; and Part 10 savings and transitional provisions. Border controls are provided for in Part 3, the purpose of which is (section 16) "to provide for the effective management of risks associated with the importation of risk goods". Risk goods are defined (section 2) as

"any organism, organic material, or other thing, or substance, that (by reason of its nature, origin, or other relevant factors) it is reasonable to suspect constitutes, harbours, or contains an organism that may –

(a) Cause unwanted harm to natural and physical resources or human health in New Zealand; or

(b) Interfere with the diagnosis, management, or treatment, in New Zealand, of pests or unwanted organisms."

The 1993 Act has been amended by Biosecurity Amendment Acts passed in every year from 1993 to 1999, and by some other enactments, and references to provisions of the 1993 Act are to those provisions as from time to time amended; but neither side suggested that the timing of any of the amendments was directly relevant to the issues on this appeal.

5. Section 135 of the 1993 Act (in Part 6) is of central importance to this appeal. It provides as follows:

"Options for cost recovery

(1) The Director-General, every other chief executive, and every management agency, (hereafter in this section and in section 136 of this Act referred to as a recovering authority) shall take all reasonable steps to ensure that so much of the costs of administering this Act, including costs incurred as the management agency of a pest management strategy, as are not provided for by money appropriated by Parliament for the purpose are recovered in accordance with the principles of equity and efficiency in accordance with this section and the regulations.

(2) In determining appropriate mechanisms for the recovery of costs of a particular function or service, a recovering authority shall ensure that there is recovered any amount by which —

(a) The sum of —

(i) The costs of the function in the current year; and

(ii) Any shortfall in the recovery of the costs in the preceding year; exceeds

(b) Any over-recovery of costs in respect of the preceding year.

(3) A recovering authority may recover costs of administering this Act and performing the functions, powers, and duties provided for in this Act by such methods as he or she or it believes on reasonable grounds to be the most suitable and equitable in the circumstances, including any one or more of the following methods:

(a) Fixed charges:

(b) Charges fixed on an hourly or other unit basis:

(c) Estimated charges paid before the provision of the service or performance of the function followed by reconciliation and an appropriate payment or refund after provision of the service or performance of the function:

(d) Actual and reasonable charges:

(e) Refundable or non-refundable deposits paid before provision of the service or performance of the function:

(f) Charges imposed on users of services or third parties:

(g) In the case only of the Director-General or some other chief executive, liens on property in the possession of the Crown."

6. Section 37 provides for the Director-General to approve a seaport or an airport as a place of first arrival in New Zealand, if satisfied that it has appropriate arrangements, facilities and systems. Section 37(4) provides that the requisite arrangements, facilities and systems "are available for use by the Crown at no expense to the Crown". Section 165(1) gives the Governor-General power, by Order in Council, to make regulations for a variety of purposes, including (in para (s)) matters in respect of which costs are recoverable under the Act and the regulations. Section 165(2) (as added by the Biosecurity Amendment Act 1997) requires the responsible Minister to consult before making recommendations for the purposes of section 165(1). The Biosecurity (Costs) Regulations 1993 (SR 1993/368) have been made in relation to costs incurred in connection with the importation of freight of all sorts, but those regulations are largely inapposite to border controls affecting passenger services.
7. The "open skies" policy was agreed between the governments of Australia and New Zealand in 1992. At that time there were (apart from two RNZAF airfields) three airports in New Zealand licensed and used for international flights. These were (in North Island) Auckland, used for flights to and from Asia and the United States as well as Australia, and Wellington, used (until recently) only for flights to and from Australia; and (in South Island) Christchurch, used for flights to and from Asia and Australia. These three airports have been referred to in argument as the metropolitan airports. They have also sometimes been referred to as the Eighth Schedule airports because they (and the two RNZAF bases) were named in that schedule to the 1993 Act as being approved places of first arrival from the coming into force of the 1993 Act. During 1994 and 1995 four further airports were officially designated as approved places of first arrival under section 37 of the 1993 Act. These were Hamilton, which is fairly close to Auckland, in North Island, and Invercargill, Dunedin and Queenstown in South Island. Palmerston North (which is fairly close to Wellington, in North Island) was similarly approved early in 1996. These five airports have been referred to as the regional airports. Hamilton Airport is run by WRAL and Palmerston North is run by PNAL.
8. Before 1994 some of the regional airports had occasionally been used for international flights, but only under one-off charter arrangements (for instance skiing parties coming from Sydney to Queenstown, or rugby supporters coming to matches in Dunedin). Special arrangements were made by the New Zealand authorities (including MAF) to recover the costs of clearing these occasional charter flights. The first international flights undertaken at regional airports on any sort of regular basis were when a small independent airline, Kiwi Travel International Airlines ("Kiwi") began to operate unscheduled flights from Hamilton in August 1994. Kiwi moved on to scheduled flights from Hamilton in August 1995. But it got into financial difficulties and ceased trading in September 1996.
9. In the meantime Freedom (a "budget airline" which is a subsidiary of Air New Zealand) had in December 1995 begun operating flights to Sydney and Brisbane from Hamilton, Dunedin and the three metropolitan airports. In April 1996 Freedom also began operating from Palmerston North (having leased a smaller aircraft which could use the runway there) and it ceased operating from Auckland, Wellington and Christchurch. Their Lordships will return to the financial negotiations and arrangements which took place between MAF and Kiwi, Freedom, WRAL and PNAL. It is however appropriate to deal first with the remaining background matter, that is the reform of public services in New Zealand.
10. This subject was addressed in an affidavit of Dr Russell Ballard, who was Director-General of MAF from 1989 to 1995, after a long career in the public service. Dr Ballard deposed that from the mid 1980's government departments came under increasing pressure to reduce Crown revenue (basically funding from taxation) and to make up any shortfall from what he referred to as "user pays/cost recovery mechanisms". Dr Ballard stated:

"During my tenure as Director-General I was aware of the increasing biosecurity risk to New Zealand through increased volumes of passengers, particularly tourists, and increasing trade including fresh produce importations. These arose through liberalising international trade rules and increased international transport services to New Zealand.

This responsibility weighed heavily on me during my entire period as Director-General of MAF. Despite this I was unable to obtain increased funding for border control from the Government. Nor was I able to prevent reductions in Crown revenue to MAF over three successive years of 1.5% in 1994, 1.5% in 1995 and 1.5% in 1996. However my expressions of concern were recognised to the extent that MAF was instructed in 1995 to take its cuts in Government funded areas other than in border control.

Subsequent to my tenure at MAF, after the detection of fruit fly in Mt Roskill Auckland in May 1996, Cabinet agreed to an increase of expenditure of about $19 million over the 1996/97, 1997/98 and 1998/99 years to meet the cost of X-ray machines and enhanced border protection measures. This increase in appropriation did not include the cost of existing border control services at Hamilton airport or other regional international airports."

11. It will be necessary to return to the rather troublesome issue of appropriations of public funds. At this stage it is sufficient to note that in the last sentence quoted Dr Ballard may seem to have been suggesting (but would not have been correct to suggest) that Parliament had made an appropriation of funds specifically for border control services at the metropolitan airports, to the exclusion of the regional airports. This point has been clearly made by David McGee QC (Clerk of the House of Representatives) in a note ("Interpreting Appropriations" [2001] NZLJ 197) on the first instance decision in this case. Some other public servants within MAF seem to have been under a misapprehension on this point.
12. The general policy of "user pays" was given statutory force, in relation to any shortfall of funds for biosecurity services, by section 135 of the 1993 Act. Moreover, by the time the 1993 Act came into force there was already a move towards full cost recovery for border control services of all sorts (including customs and immigration controls). A written summary exhibited to an affidavit of Mr Larry Fergusson (an Assistant Director-General in MAF) shows that this subject was under more or less continuous discussion by various Cabinet Committees and working parties from as early as 1991.

The facts

13. The facts are set out in some detail in the judgment of Wild J [2001] 2 NZLR 670 (paras [17] to [82] together with a summary and a series of findings at paras [83] to [90]) and in summary form in the judgment of the Court of Appeal [2002] 3 NZLR 433 (paras [19] to [44]). The Court of Appeal regarded Wild J as having made one error of fact, and another apparent error came to light in the course of argument before their Lordships. These are identified in paras 57 and 58 below. In other respects the summary which follows is based on the judgment of Wild J.
14. On 10 October 1994 a meeting was held in Wellington, attended by representatives of various border control agencies, in order to discuss the commencement of international flights to and from Hamilton. WRAL was represented by Mr Barry O'Connor, its Chief Executive Officer. He was given no indication, at that meeting, that MAF would be charging for border control services at Hamilton.
15. At this point it is convenient to repeat the summary in the affidavit of Mr Fergus Small of MAF Quarantine Services ("MQS") as to how MAF was organised, in 1995, in relation to border control services:

"In 1995 there was a Ministry Policy Group which reported to the Minister of Agriculture and to the Director-General and gave advice. Mr Larry Fergusson, Assistant Director-General was in that group. In the next group there was MAF Regulatory authority 'MAFRA' which took the policy given to it by the Policy Group, and formulated it into standards. Messrs Bongiovanni and Alexander were in that group. The service delivery group at that stage was MQS, headed by Neil Hyde and to which I belonged. … MQS were the ground troops, so to speak. MAFRA set the standards and MQS implemented them through its MQS quarantine officers. MAFRA provided the funds and was the link with Treasury. The lines of control are that MAFRA have to justify their requests for funding from Treasury and MQS with its quarantine officers at the airports and related services, had to justify its charges to MAFRA. This is known as a 'funder/service provider split'."

16. The first official decision impugned in the proceedings was taken at an early stage (a fact which must be kept well in mind in determining any challenge to its lawfulness). The first decision cannot be identified with any single memorandum or set of minutes (indeed, on WRAL's case there was simply a failure to take any considered decision, amounting to the imposition of charges without lawful authority). Wild J's findings, reached on the affidavit evidence and exhibits (without cross-examination) was (para [83]) that the decision to recover the full costs of border control services at the regional airports (and not to charge in respect of passenger flights at the metropolitan airports) was taken by Mr Alexander and/or his superior, Mr Bongiovanni, on or about 26 June 1995, the day on which Mr Alexander instructed Mr Hyde (as the latter deposed) "to set up a charging regime to cost recover for the services provided at new international airports".
17. Wild J found that the Director-General (Dr Ballard) was aware of the decision, at least in general terms, but that he had no direct input into the decision and did not approve it in writing. He found that the decision was based on five considerations.

(1) Any services provided before the 1993 Act had continued on an historical basis, but any new services had to be subject to cost-recovery.

(2) Section 37 of the 1993 Act required facilities (including the provision of inspectors) to be at no cost to the Crown.

(3) Section 135 required MAF to recover as much as possible of the costs not provided for by parliamentary appropriations.

(4) The appropriations were for border control services at the metropolitan airports, and no additional money was available for other airports.

(5) At least one officer had a difficulty with providing services "at the taxpayer's expense so Kiwi can make money".

Wild J also concluded (para 111(a)) that the first decision was not made by the Director-General or under proper delegation from him.

18. Mr Hyde initially queried the legality of setting up a charging scheme but he was told that it had been looked into. The outcome was that Mr Hyde's subordinate, Mr Small, wrote to Mr O'Connor a letter dated 20 July 1995 in the following terms:

"As you will be aware, Government agencies at the New Zealand border are concerned at the proliferation of new international airports which includes Hamilton.

These extra facilities are stretching resources and funding while central Government has a policy of decreasing their budget monetary allocations to the department. The border agencies concerned are approaching the cabinet with a joint paper requesting an increased resource allocation to cover operations such as Kiwi International Airlines.

A development, while the above discussions were taking place, was the Ministry Quarantine Service was informed by the Ministry Regulatory Authority that the Government allocations, through the Authority, only covered the three existing international airports plus RNZAF Whenuapai and Ohakea. This being pursuant to the eighth schedule of the Biosecurity Act 1993. In effect this is interpreted as meaning approved international airports since 1993 are required to fund MAF border operations, either from their revenue or from the international airlines [using] the airport services.

To date, Ministry staff have attended 24 international arrivals (excluding medical flights) all in out of normal working hours, at a total outlay of $8,601.60, GST inclusive.

This figure is based on 4 staff at $74.60 per staff member (Gazetted overtime rate under the Biosecurity (Cost) Regulations 1993, 2nd schedule) plus 4 staff x 30km at $0.50/km. Total costs per flight is $358.40, GST inclusive.

As you will appreciate, the above charges were not envisaged at the time of the ministry approval of the international flights. It is requested that urgent consideration be given to payment of these charges. The charges per flight will continue pending the cabinet decision. Your assistance in this matter would be appreciated."

19. Mr O'Connor deposed that he was shocked to received this letter out of the blue. Its origins appear in documents to which Wild J referred in his analysis of the first decision. On 26 June 1995 Mr Alexander of MAFRA faxed to Mr Hyde of MQS, in advance of a meeting to be held on 28 August 1995:

"MAF's position is quite clear:

The facilities required must be provided at no cost to the Crown and the use of staff vehicles, materials etc must be recovered."

(This wording seems to reflect section 37 (4) of the 1993 Act, but may reveal some misunderstanding of its effect.)

20. Mr Hyde of MQS answered by fax on the same day:

"I can understand why airport authorities have to provide facilities at no charge to the Crown but I am much less clear on the background (legal/annex 9/equity issues) of differentiating between the three international airports and two RNZAF air bases and Hamilton and Dunedin Airport. Especially given that Kiwi Travel will be operating six scheduled services per week. Before I attend the meeting I will need to have substantive details to support MAF's position on cost recovery for servicing ..."

21. Mr Alexander replied by fax referring to sections 37 and 135 of the 1993 Act. He stated, among other things,

"The Crown funding provided for the clearance of aircraft is for AKL, WLG and CHC. This is even in the contracts. Any other arrivals should be being cost recovered ... There is no additional money to fund staffing and other resources at other than the three current international airports. If it is not cost recovered then MAF cannot service aircraft at those airports ... Personally, I have difficulty with sending MAF staff up and down the country at the taxpayer's expense so Kiwi Airlines can make money."

22. Mr O'Connor replied to Mr Small on 26 July 1995, stating that WRAL would have to meet MAF's costs in future "if that is how the rules operate", but objecting to the retrospective charge and asking for an early meeting. MAF did modify its position on retrospective charges. But on 6 December 1995 the MAF manager at Auckland Airport sent WRAL a bill for over $18,000 for MAF's costs during November 1995. Mr O'Connor objected strongly to what he saw as an effective quadrupling of the charges, threatening the viability of WRAL's business. Again MAF made some modification in its position.
23. When Kiwi was on 1 August 1995 granted a licence for scheduled international flights (Hamilton-Brisbane three times a week, Hamilton-Sydney twice a week and Dunedin-Brisbane once a week) the licence included a condition that Kiwi would

"meet any additional border agency costs associated with the operation of services and not met by the airport companies, at least on an interim basis pending a government decision on the funding of border functions at airports other than the current international gateways".

This reflected the terms of a letter dated 20 July 1995 from the Minister of Transport to the Minister of Agriculture. It has not been suggested that this condition imposed on Kiwi an obligation to pay any charges which were not otherwise authorised. As between Kiwi and WRAL, the latter made itself contractually liable for any MAF charges.

24. So the position at the end of 1995 was that WRAL was reluctantly paying MAF costs in respect of its border controls at Hamilton (and PNAL was about to start paying in respect of border controls at Palmerston North) while no border control charges were being made (in respect of passenger operations) at any of the metropolitan airports. At this stage neither side seems to have obtained legal advice as to the effect of the 1993 Act. But early in 1996 officials at MAF took legal advice, first from their own lawyers and then from the Crown Law Office.
25. On 12 February 1996 MAF's solicitor advised that MAF was not entitled to charge for inspection services (at either metropolitan or regional airports) on the basis of section 37(1) of the 1997 Act. She also expressed the preliminary view that MAF could probably not charge under section 135 either, because of the absence of relevant regulations.
26. On 21 February 1996 Mr Bongiovanni prepared a briefing paper for the Director-General, based on the solicitor's advice. His briefing paper identified four key options, of which the first was:

"Status-quo: we'd have to get Ministerial sign-off on this one as it would seem we are ultra vires, plus (probably) formal documented agreement from the airlines and airport companies. The dangers, of course, come from bodies in the Regulation Review Committee, the Auditor-General et al, who would probably come down on us like a ton of bricks if they discovered what was happening. This is possible as a short-term option at least until we get the wider funding/cost recovery issue sorted out (hopefully by July 1996)."

The other options were to discontinue charging and seek additional Crown funding; to stop charging and find extra money within Vote Agriculture; and to withdraw approvals and service.

27. On 28 March 1996 Crown counsel (after giving preliminary advice on 4 March) agreed that section 37 was not in point but did not regard the absence of relevant regulations as conclusive. He advised (para 12),

"One would expect that in the case of long-term or permanent charging regimes, regulations or levy orders would be used. Over time the Ministry should in the interest of equity seek to ensure that like users of consumer services such as inspection fees should be treated alike."

28. The fourth question put to Crown counsel was:

"If cost recovery is possible, can a differentiation be made between the two 'sets' of airports, so that some are charged and some are not, as presently happens? This differentiation would not be envisaged as permanent but would exist until a uniform cost recovery regime could be put in place."

His advice on this question was as follows:

"On the face of it we consider that the differentiation in the circumstances referred to in your question four is permissible. This difference in treatment is in administrative law terms undesirable and should be regularised as soon as practicable so that all parties in a similar position are treated the same. However, on the basis that: (a) there are genuine historic reasons for the current differences in treatment, (b) there is an inevitable transitional phase involved in implementation of this major piece of new legislation; and (c) the changing and dynamic situation brought about by significant changes in the aviation scene in recent times (eg. rapid entry of new players and expansion of services); would, in our view, in administrative law terms tend to establish that there are genuine reasons for the difference in treatment which are not therefore arbitrary and discriminatory."

29. Although this advice was by no means unqualified, Mr Bongiovanni regarded it as heartening. Nevertheless in a memorandum dated 2 April 1996 he expressed doubt as to whether what had happened at Hamilton met section 135's requirements of equity and efficiency. Similarly in a memorandum dated 17 April 1996 to the Minister of Agriculture Mr McKenzie of MAFRA said that there was to be discussion of "how much longer the inequity can remain". Faxes sent by Mr Hyde at the end of April 1996 show that he too was still concerned about the issue of equity. Nevertheless on 31 May 1996 he wrote to Mr O'Connor asking him to agree in writing to specified hourly charges for MAF officers.
30. Mr O'Connor replied on 11 June 1996 stating among other things,

"From the tone of the letter it seems as if [WRAL] has no option but to agree to the charges proposed."

However he raised a number of objections, including an expression of concern at the discrepancy between the provision of MAF services at Hamilton (on the one hand) and at the metropolitan airports (on the other hand).

31. At about the same time Mr Hyde wrote letters to Mr Garry Goodman, the Manager of PNAL, and to Mr Stuart Robertson of Freedom (Mr Robertson was then based at Auckland, but the letter related to charges at Dunedin). The letters were in identical terms to those of Mr Hyde's letter to Mr O'Connor. Mr Goodman agreed to the requested charges with a reservation. Mr Robertson agreed to them without qualification.
32. Dr Ballard had ceased to be Director-General in February 1996. There was an interim period before Professor Ross took up the position of Director-General in August 1996. During the interim period there was a crisis when fruit-fly was discovered in the Mount Roskill area. This led to an unexpected increase in Government funding for biosecurity, as mentioned in Dr Ballard's affidavit mentioned above.
33. In August 1996 Freedom obtained a licence to operate scheduled international services. At about the same time the managers at Dunedin Airport asked MAF to send its bills direct to Kiwi. Kiwi stopped trading soon afterwards.
34. Their Lordships have had considerable difficulty in obtaining even a rough estimate of the scale of the inequity (as between the metropolitan airports and the regional airports) which Mr Hyde and others had perceived. Wild J stated (para [21]) that money appropriated by Parliament ranged from 52.4% to 58.7% of total expenditure on biosecurity border controls. The source of those figures is not clear, although it may be exhibit 'A' to the affidavit of Mr Peter Farley, a financial analyst who gave evidence for the Director-General. But before their Lordships it became apparent that the judge's figures, if correct, must have taken into account the charges for biosecurity clearance of freight levied at seaports as well as airports. The official statement of departmental appropriations for the year to 30 June 1996 showed the vote for border inspection and quarantine services as $18.776m and the actual expenditure as $18.552m; their Lordships were told that these figures covered both "revenue Crown" and "revenue other" -that is, both central government funding and charges to users. It is however common ground that the reference to "money appropriated by Parliament" in section 135(1) of the 1993 Act can only sensibly refer to revenue Crown.
35. A better idea of the scale of the inequity in respect of passenger flights can be obtained from figures in Mr Farley's affidavit relating to the "internal market" contract between MAFRA and MQS. These were as follows:

Output: Border Inspection. Aircraft and Passenger Clearance Contract

Year	Statutory Fees and Charges $	Crown Revenue Payable $	Total Contract Cost $
1995 to 1996	26,000	4,609,000	4,635,000
1995 to 1996	57,000	4,822,000	4,879,000
1996 to 1997	616,000	9,077,500	9,693,500
1997 to 1998	616,000	11,104,000	11,720,000

However, it is difficult to reconcile these figures with those in a paper for the Cabinet Committee on Industry and Environment obtained by Mr O'Connor under the Official Information Act 1982.

36. During 1997 Mr O'Connor and Mr Goodman continued to express dissatisfaction, both with the imposition of charges on the regional passenger operations alone, and with the scale of the charges. There were at times some acrimonious exchanges. They achieved some concessions as to the level of charges, but made no progress on the point of principle. In May Mr O'Connor sent MAF a legal opinion which WRAL had obtained, and eventually he received from MAF copies of the advice of Crown counsel. Mr O'Connor also made a complaint to the Ombudsman. On 21 July 1997 the Minister of Biosecurity wrote Mr O'Connor a letter which ended as follows:

"The question of whether, and the extent to which, the costs of passenger clearance at international airports are recovered from the users of the service is the subject of a paper which I expect to take to my Cabinet colleagues shortly. This paper will address the question you have raised. Following consideration of this paper officials will (as required by the Biosecurity Act) consult with affected parties, with a view to putting in place a more permanent cost recovery regime applicable to all international airports."

On 12 August WRAL's solicitors wrote threatening proceedings for judicial review. On 8 October the Ombudsman wrote declining to investigate the matter, on the grounds that he could not investigate the decisions of Ministers of the Crown, and because of an imminent Cabinet decision.

37. From documents obtained by Mr O'Connor under the Official Information Act 1982 it is apparent that different arms of the government were taking different views as to what general policy the government should adopt. A Treasury paper dated 29 July 1997 (annotated, apparently by a MAF official, as showing a poor understanding of the issues) set out two options:

"(1) Maintain the current Crown/private split but spread the charge equitably between regional and international airports. This would be achieved by charging all relevant airport companies $1.10 per passenger; or

(2) Move to full Crown payment directly or in stages ..."

The Minister for Biosecurity and the Minister of Customs seem to have taken a different view, which ultimately prevailed in Cabinet.

38. The Cabinet minutes of a meeting on 15 December 1997 included the following:

"(a) noted that current Government policy provides funding for MAF and Customs only at the three main international airports, with international operations at the regional airports already provided on a full cost recovery basis;

(b) noted that the regional airports were aware when they commenced planning for international flight operations that full cost recovery for the services in question would apply and agreed to the regime;

(c) agreed that passenger and aircraft/seacraft clearance services at the national border be subject to a 100% cost recovery regime;

(d) agreed that costs be recovered by way of a charge to the relevant port company (i.e. sea or airport) for the costs of providing services at each location, unless significant implementation difficulties arise in the course of consultation with affected parties;

(e) agreed that the cost recovery regime be implemented with effect from 1 January 1999;

(f) agreed that the current funding arrangements will continue until a new regime is implemented ..."

39. In March 1998 WRAL refused to pay an invoice from MAF for charges of about $25,000. After that WRAL made no further payments to MAF. It is convenient to record here that Freedom took a similar course (in respect of charges at Dunedin) in February 1999, and PNAL followed suit in April 1999.
40. At about the time when it stopped paying charges WRAL changed its solicitors. On 10 March 1998 its new solicitors wrote to the Assistant Director-General a letter which contained the following passage:

"Section 135 requires that the Director-General take all reasonable steps to ensure that costs are recovered in accordance with the principles of equity and efficiency. This requires that the Director-General fully considered what is required by the principles of equity and efficiency in the circumstances of each case. The decision by the Director-General in each of the 1995/96, 1996/97 and 1997/98 financial years indicates that the Director-General must have either:

(a) Formed the view that it was in accordance with the principles of equity and efficiency to require our client to meet the full costs of border control services while the airports listed in the Eighth Schedule were not required to do so; or

(c) Not considered the principles of equity and efficiency as required by section 135.

We would be grateful for your indication as to whether, and, if so, how, the Director-General applied the principles of equity and efficiency in forming the view that our client should meet the full costs of border control services at Hamilton Airport in each of the three financial years, and copies of any documents relating to that decision making process."

As Wild J observed, this letter may have been the catalyst for the second impugned decision, taken on 13 May 1998.

41. The identification of the second decision, and of the grounds on which it was taken, is much simpler than in the case of the first decision. Mr Fergusson, the Assistant Director-General, submitted to the Director-General a paper which ended with "Agreed/Not Agreed" and Professor Ross crossed out "Not Agreed" and signed it. The paper contained 12 numbered paragraphs, the first six being introductory (and including an extract from section 135(1)). Paragraph 7 was as follows:

"There are ... two basic options you could pursue in respect of cost recovery:

Option A

You could re-spread the Crown funding and the incidence of cost recovery over all airports at which international flights arrive; or

Option B

You could continue to recover the unappropriated costs from the new airports."

42. In paragraphs 8 to 11 of the paper the Assistant Director-General discussed the principles of equity and efficiency, with a conclusion in para 12. Their Lordships think it desirable to set out paras 10, 11, and 12 in full:

"10. Equity

Option A might at first glance appear the most equitable in that all airports would thereby be treated on the same basis. Turned around, the argument would be that it is inequitable to impose costs on some operations while subsidising the provision of those services to their competitors.

However, from another perspective, the existing airports had been established and set up on the basis of no cost recovery. They could of course have no guarantee that such a situation would continue indefinitely. (Government's intention was that the provision of funding for passenger clearance be reviewed. That review has resulted in a decision that such costs should be 100% recovered.) The existing airports would consider it inequitable that they be required to meet part of the costs of their competitors' entry into the market.

Costs should be borne by those who create the risk -international travel benefits specific sectors of the domestic economy, and it would be inequitable for all New Zealanders to pay to manage the negative externality that they generate. Rather, the economic costs of managing the biosecurity risk is appropriately borne by those who create the risk. As is noted below in the discussion on efficiency the proliferation of new airports both increased the biosecurity risk and imposed additional costs to manage that risk.

There has been a shift in philosophy from Crown funded to individual responsibility and user pays. This approach underpins the cost-recovery policy for border clearance services at regional international airports.

In general terms, New Zealanders benefit from having a country free from serious pests and diseases. However, in terms of least cost supply of this outcome, New Zealanders have choices. One option is to close the borders entirely which would achieve the desired benefit at least direct cost to the taxpayer. The whole economy would of course be affected by such a "fortress New Zealand" policy. In particular those who would suffer from such action include international travellers and those sectors of the domestic economy that benefit from tourism.

All international airports are responsible for some mix of cost-recovery services including standard inspection fees, overtime rates, and/or provision of premises. The new regional airport companies were able to factor the direct costs into operational and financial planning on establishment whereas established airports could not.

It should be noted that the airport companies recover these costs from the airlines, which affects their relative attractiveness as service providers. It should also be noted, that at this point only Waikato is challenging the current arrangements.

11. Efficiency

It is inherently more efficient to recover costs from a smaller rather than a larger number of players—however that is not a sufficient justification for a decision to support option B. The recovery of part of the costs of the provision of the services at all airports would (if of a sufficient amount—in this case the amount would be insufficient) encourage efficiency in the operation of the airports and airlines (as they relate to the provision of border services) and in the delivery of the services themselves.

The transaction costs associated with re-spreading would be very large relative to the amount of money recovered by the Government, unless the growth in regional airports increased in a totally unexpected way.

The facilities, staff and systems established at Auckland, Wellington and Christchurch have been established for a number of years and the regular flow of aircraft and passengers enable effective and cost efficient services to be maintained on an on-going basis. The services can be tailored to the risks presented by the passengers according to their point of origin.

In contrast, the new airports present a discontinuous flow of passengers and are more difficult to service as a consequence. Thus the Government and MAF were presented with greater risk and less efficient service requirements. It might well have been appropriate to respond that quarantine services should not be extended beyond the established locations. It should be noted in this context that surveillance costs, even in the new cost recovery regime are still taxpayer funded although the risk is exacerbated by every new point of entry. Such a restriction would not be consistent with the open skies policy but it does not follow that the Crown should accept reduced efficiency in the provision of essential biosecurity services.

It would be inefficient for New Zealand to pay for duplication of border clearance services at regional ports when these are currently provided to an adequate level at the main ports. If the new regional international ports bear these costs, then the direct costs of the inefficiency are borne by those responsible for it.

With port companies bearing a proportion of the costs, there is increased incentive to minimise the ongoing cost of supply of border clearance services with potential replication of "best practice" across other port operations resulting in net economic gains.

The recovery of costs only from those considering new investment in new airport facilities (or those who made such investments in light of the government's decision referred to in para 4 above) will encourage rational decision-making as to the need for new airports and as to their ability to compete with existing facilities.

Costs of services will be recovered in line with actual and reasonable costs and therefore, is not a tax.

12. Conclusion

In conclusion, on balance, and given that Government has decided on a full cost recovery regime for the provision of these services, I recommend that you agree to continue the current state of affairs whereby costs are recovered only from the new airports or airlines (as the case may be) pending the introduction of full cost recovery as foreshadowed."

43. This paper was copied, in full, to WRAL's solicitors on 26 May 1998. WRAL commenced proceedings for judicial review (CP 156/98) on 18 June 1998 and its restitutionary claim (CP 359/98) on 3 November 1998. PNAL and Freedom commenced their proceedings on 11 June 1999.
44. As already noted, the Cabinet had in December 1997 decided on the introduction of full cost recovery by 1 January 1999. By mid-1998 the target date had been put back to 1 July 1999. In December 1998 it was put back to 1 July 2000. The policy of full cost recovery (which would have required primary legislation as regards immigration controls, and secondary legislation as regards biosecurity and customs) had not been implemented when there was a change of government in October 1999. The new administration did not, at any rate initially, adopt its predecessor's policy on full cost recovery. Their Lordships were told on instructions that the Government is now considering adopting the policy of full cost recovery. But five years on from the second decision, the position seems to be little clearer, and little closer to finality, than it was in 1998.

The decisions below

45. Wild J held that neither of the two decisions was a proper basis for the charges levied on passenger flights at regional airports. He held that the first decision had not been taken by the right person, and also (para [111b]) that it was not arrived at on the principles of equity and efficiency, as section 135 required, but was based on erroneous or irrelevant considerations.
46. Wild J described the second decision as a different proposition, since it squarely addressed section 135. But the judge concluded that the decision was nevertheless unsound because it overlooked various relevant considerations, and attached weight to various extraneous or irrelevant considerations (see paras [94], [97] and [116] to [137] of his judgment).
47. As to the restitutionary claim, the judge considered the law as stated and applied by the House of Lords in Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 and the doctrine of money exacted colore officii as summarised by Skerrett CJ in Julian v Mayor of Auckland [1927] NZLR 453, 458 as applicable

"… where the plaintiff is entitled to have some service performed or act done upon payment of a fee, and that service has been performed or the act done, accompanied by the demand of an illegal or illegally excessive fee. In such circumstances the payment is held not to be voluntary, and the money recoverable as having been in substance exacted from the defendant colore officii."

Wild J concluded that MAF should refund to WRAL as money exacted colore officii so much of WRAL's payments to MAF as were excessive; and that the Director-General could not rely on change of position or any other defence. The judge invited the parties to try to agree the amount of the refund, and suggested a general basis of calculation. There was some difference of opinion before their Lordships, which they cannot resolve, as to how far the parties succeeded in reaching agreement.

48. The Court of Appeal took the same view as the judge on the issue of delegation of the first decision. But had the decision been taken under a proper delegation, the Court would have upheld it. It said of Mr Bongiovanni (para [106]),

"It does not seem from his affidavit that he considered the Parliamentary appropriation to be specifically attached to the Schedule 8 Airports. We interpret his position to be that because funding had been on the basis of the cost of providing services at the existing places of first arrival; and more services would have to be provided and therefore more costs incurred because of the advent of scheduled services at WRAL; and no further funds would be available to meet the increased costs; that additional cost would have to be recovered. That reasoning does not indicate an error of fact on Mr Bongiovanni's part. The reasons for his decision lie in his affidavit and include economic constraints, knowledge of Government policies, previous special arrangements in respect of charter flights out of Queenstown, for example, where approval for a charter was always on the basis that the charterer would agree to fund the cost of border clearance; and the likelihood that airlines or airport companies would or could pass on the charges to customers."

49. The Court of Appeal also took the view that the second decision was valid. It summarised (para [49]) the points which the judge had perceived to be the most important extraneous considerations:

"(a) It had the false premise that the Government had decided to recover costs at regionals until the Cabinet decided upon the issue of costs recovery generally. There was no such Government decision.

(b) Parliament had not tagged its appropriation for the metropolitans, but merely for border control services generally. So Mr Fergusson was wrong to refer to "the absence of a Crown appropriation" only in relation to the regionals.

(c) It was factually incorrect to say that only metropolitans had been set up on the basis of no cost recovery: WRAL had been established and had operated for six months before MAF imposed charges, prospectively and retrospectively.

(d) It treated Government policy to move toward full cost recovery as justification for continuing to recover costs only from regionals in the interim.

(e) In analysing equity in terms of risk: persons increasing biosecurity risk should meet the costs of controlling that increased risk."

50. However the Court of Appeal took the view (para [111]) that the judge's paraphrase of Mr Fergusson's memorandum was "subtly but significantly inaccurate". It also noted that the judge made a factual error about the Cabinet decision on 15 December 1997. It disagreed with the judge's analysis on a number of points, and concluded that the second decision was valid.
51. The Court of Appeal also criticised the judge's decision on restitution, observing (para [135]) that the regional airports could not be said to have been "charged validly in part and invalidly as to the excess". The Court took the view that it was still open to the Director-General to make a valid decision about charging for the period before 13 May 1998. It declined to grant declaratory relief in respect of the first decision. Accordingly the Court of Appeal allowed the appeal in its entirety and dismissed the cross appeal seeking full (and not merely partial) restitution of the MAF charges.

General and preliminary points

52. Before considering the two decisions in turn their Lordships make some general and preliminary observations. Both sides made submissions about the structure of section 135 of the 1993 Act, and the nature and width of the discretions which it confers. There was little between the parties on these points. Section 135 must be read as a whole, but subsection (1) can be seen as imposing a primary duty on any so-called recovering authority (in this case, the Director-General), and subsection (3) as conferring powers by which the recovering authority is to perform its duty. Neither side made much reference to subsection (2). Subsection (3) authorises a wide and disparate range of charging methods, and so emphasises the width of the discretions conferred by the section as a whole. Nevertheless the recovering authority must have regard to the principles of equity and efficiency, and that requirement qualifies what is in other respects a wide discretion.
53. Counsel for the appellants submitted that efficiency should be understood as economic efficiency rather than administrative efficiency, and as particularly directed to prohibiting any recovery scheme which was anti-competitive. However this submission was not developed and their Lordships do not accept it. They consider that efficiency as used in section 135(1) indicates a recovery scheme which is administratively workable and relatively straightforward and inexpensive to operate.
54. In the course of argument some reference was made to the maxim that "equality is equity". But that maxim provides no more than a fall-back position where no other basis of division is appropriate (see Jones v Maynard [1951] Ch 572, 575). So far as there is any need for exposition of the concept or principle of equity referred to in section 135(1) it is better described as fairness, or a proportionate sharing of benefits and burdens. If and so far as MAF's border control activities could aptly be described as services to passengers on incoming international flights (a point which their Lordships will return to on the topic of remedies) those passengers were intended to pay for the services under a recovery scheme which shared the direct and indirect costs of the services in a way which was reasonably fair and proportionate, while also being administratively workable and relatively inexpensive.
55. Their Lordships fully accept that different minds could take differing views (possibly even very differing views) as to how such a recovery system should be worked out. As already noted, section 135 (3) authorises a wide range of recovery methods. The Treasury paper of 29 July 1997 already mentioned (which someone in MAF regarded as showing a poor understanding of the issues) suggested a flat rate of $1.10 for every passenger at what it called "regional and international airports". That might or might not have spread the charge equitably, as the writer claimed. But it would at least have attempted to achieve a fair distribution.
56. The documentary evidence, some of which has already been identified, suggests that for the whole period relevant to this litigation, senior officials in MAF consciously preserved a system which they recognised as being (at least arguably) inequitable, partly because of their perception of the trouble, difficulty and unpopularity (with the metropolitan airports) of putting in place a recovery system which did at least attempt to achieve a measure of fairness. Dr Ballard's reference in his affidavit to "an administrative nightmare" is a notable example of this. Their Lordships are conscious that there may have been all sorts of difficulties, not fully explored in the evidence, in producing a perfectly fair recovery scheme which was administratively workable. Indeed, the notion of a perfectly fair scheme (whether or not administratively workable) may be a chimera. Any scheme would no doubt have called for adjustment and progressively finer and finer tuning as it developed. Their Lordships cannot however resist the conclusion that MAF took rather a defeatist attitude. That was particularly surprising since throughout the whole period (and especially after the Cabinet decision on 15 December 1997, which set a date) it was Government policy to introduce full cost recovery at all airports. There was no reason for the Director-General and other senior officials at MAF to think that the problem was going to go away.
57. It is appropriate to refer at this point to the judge's two apparent errors of fact. The percentages mentioned in para [21] of the first-instance judgment seemed to have been seriously incorrect, if intended (as they may not have been intended) to refer to recovery charges for passenger services at airports. MAF officials must have known, at the time, that the sums involved were relatively trivial as a percentage of the whole border control and quarantine services budget. Nevertheless the charges were not unimportant to a struggling independent airline like Kiwi, or to the managers of regional airports trying to break into the market for international flights. The error in the judgment, if it is an error, only emphasises that it should have been possible to find some fairly simple way of spreading a burden which was small in relation to the whole budget, but large for those on whom it was concentrated.
58. The judge's other error was in overlooking (in para [123]) the decision taken in Cabinet on 15 December 1997. The effect of the decision recorded in paras (a) and (f) of the minutes, taken together, amounted to a Cabinet decision to continue the inequitable recovery system. But its approval by Cabinet could not make it lawful if it was otherwise unlawful. The Court of Appeal recognised (para [50]) that "Cabinet could not displace the provisions of section 135".

The first decision

59. Their Lordships will initially consider the first decision on the supposition that it was a decision taken by the Director-General himself (that is, initially disregarding the issue of delegation). Wild J held it to be invalid, even if properly delegated, because (in short) it did not address (or even mention) the principles of equity and efficiency as required by section 135(1); and it was based on erroneous or irrelevant considerations, including in particular the supposition that the parliamentary appropriation was earmarked exclusively for the metropolitan airports (one individual officer's apparent antipathy to Kiwi getting any benefit at the taxpayer's expense seems of less importance).
60. The Court of Appeal dealt with this point quite shortly, in a passage in para [106] of its judgment already quoted. The Court of Appeal relied on its interpretation of Mr Bongiovanni's affidavit. With great respect to the Court of Appeal, their Lordships cannot accept that interpretation. The affidavit does not show that any senior official in MAF, at the time of the first decision, had any awareness of the requirements of section 135 of the 1993 Act. They seem to have believed that section 37 was in point until that belief was corrected by legal advice early in 1996. Mr Bongiovanni's affidavit asserts that the recovery arrangements were fair as between the various regional airports but there is notably no assertion that they were fair as between the regional airports (on the one hand) and the metropolitan airports (on the other hand) and it is hard to see how anyone could have formed that view.
61. The Court of Appeal did not refer to Dr Ballard's affidavit as relevant to the first decision, but counsel for the respondent placed great reliance on it before the Board. One passage of Dr Ballard's affidavit has been set out above. His reference in that passage to the increased appropriation of funds (after the discovery of fruit-fly in 1996) not including the cost of border control services at the regional airports occurred long after the first decision. But Dr Ballard seems (in paras 13, 14, 19 and 27 of his affidavit) to have made the same assumption on earlier occasions. Para 21 shows that Dr Ballard was aware of possible inequity in what happened, but thought that it could be justified as he "was not dealing with airports which were all alike".
62. This supposed distinction contrasted "long established operations" at Auckland, Wellington and Christchurch with "new provincial airports which could take account of all known and likely operating expenses, including those of border control". But that was to confuse establishment costs with operating costs. It was also factually incorrect, as regards WRAL. Nothing in section 135 justified such a distinction. Moreover in para 22 of his affidavit Dr Ballard, having identified high-risk airports (Auckland and Christchurch, which both had flights from Asia) as a special priority, seems to have seen no inequity in lower-risk airports having to bear a disproportionate share of the burden of costs. Here Dr Ballard failed to distinguish between operational priorities and issues as to the ultimate incidence of costs.
63. Their Lordships have carefully considered whether the first decision can be upheld on the basis that it was taken at a very early stage in the history of international flights to the regional airports, when their future was still uncertain. That factor may go some way to explaining and mitigating the unfairness of the decision, but it cannot in their Lordships' view save the decision. The 1993 Act had by then been in force for nearly two years, and the Director-General and his senior staff should (especially in view of known constraints on government expenditure) have been aware of the terms of section 135. They may have had doubts about the long-term viability of international flights to the regional airports, and they certainly seem to have found the need to provide further border controls an unwelcome addition to their responsibilities. But it was their statutory duty to provide those services, once regional airports had been designated under section 37, and to devise and put in place a fair system to recover the difference between central government funding and total expenditure. It was no part of their function to discourage regional airports from venturing into international flights, and their Lordships must firmly reject the submission, advanced by counsel for the respondent, that it was proper for the Director-General to do so.
64. For these reasons their Lordships consider that the Court of Appeal was wrong to differ from the judge as to the validity of the first decision (apart from the delegation issue). It is not therefore necessary to express a view on the delegation issue and their Lordships prefer not to do so, since they heard little argument as to how particular statutory provisions in force in New Zealand (and in particular, section 41 of the State Sector Act 1988) affect the general principles in Carltona Ltd v Commissioners of Works [1943] 2 All ER 560.

The second decision

65. The second decision is simpler to address because the reasoning on which it was based appears on the face of the memorandum prepared by Mr Fergusson and signed by Professor Ross. Both Wild J and the Court of Appeal analysed the memorandum at some length. The Court of Appeal regarded the judge's analysis as involving "subtly but significantly inaccurate" paraphrases. Their Lordships find themselves unable to accept that criticism of the judge's careful judgment.
66. The five points on which the judge placed particular reliance have been set out above (para [49]). The first point involved the judge's factual error about the Cabinet decision. But as the Court of Appeal itself noted, not even a Cabinet decision could displace the provisions of section 135. The other four points call for detailed discussion.
67. The second point is the recurring issue of earmarking of parliamentary appropriations. The Court of Appeal quoted from para 4 of Mr Fergusson's memorandum:

"No additional appropriations were provided to cover costs at these [regional] airports ...".

The Court commented that this statement was literally correct, and no doubt it was. But it conveyed an incorrect suggestion, that is that parliamentary appropriations were provided, with some degree of specificity or earmarking, for the metropolitan airports. But (as the Clerk of the House of Representatives pointed out in the note already mentioned) that is not how the government financial system worked. There was an appropriation for border control and quarantine services, but no further earmarking. Because of the incorrect suggestion conveyed by para 4, para 6 of the memorandum (which would otherwise have been unexceptionable) also became ambiguous and potentially misleading:

"In the absence of a Crown appropriation, you are required to recover the costs of passenger clearance in accordance with the principles of equity and efficiency, there being no applicable regulations."

Read with para 4, it contained at least a suggestion that this requirement applied only to regional airports.

68. The third point was the factual error which the judge perceived the Director-General to have made about the basis on which Hamilton Airport started regular international flights, and the confusion which he perceived between establishment costs and operating costs. The Court of Appeal (para [118]) noted correctly that this could apply only to WRAL (not to Kiwi or Freedom), and read the evidence as showing that WRAL knew of the possibility that charges would be made for border control services. It is hard to extract that from paras 13-17 of Mr O'Connor's affidavit. Mr Small's letter of 20 July 1995 acknowledged that "charges were not envisaged at the time of the Ministry approval of the international flights".
69. The Court of Appeal also dismissed (in a very short and rather obscure passage at para [119]) the apparent confusion between establishment and operating costs. Their Lordships have difficulty with this passage. The evidence shows that (apart from X-ray machines installed at the metropolitan airports after the fruit-fly episode) the principal direct cost component was the remuneration (and in the case of some regional airports, travel expenses) of MAF personnel. These were plainly operating costs rather than establishment costs. Mr O'Connor's evidence was that the initial cost of temporary facilities for MAF at Hamilton Airport was no more than about $1,000. The judge was in their Lordships' opinion correct to describe as an "odd distortion" Mr Fergusson's statement (in para 10 of his memorandum) that

"the existing airports would consider it inequitable that they be required to meet part of the costs of their competitors' entry into the market."

70. The fourth point was how far the Director-General was entitled to rely on the interim nature of the problem, pending implementation of the Cabinet's decision as to full cost recovery. The judge said of this (para [126]),

"There is irresistible force in the plaintiffs' submission that, in the interim until full cost recovery was implemented, it would make more sense, and involve no inequity, to start requiring the metropolitans to meet some of the costs of services provided to them. I agree with the plaintiffs that there is erroneous and illogical reasoning on these aspects also."

71. The Court of Appeal (para [121]) did not agree, commenting that

"the relevant test is not whether a Court thinks something would be better but whether the decision-maker was entitled to come to the view he did."

That is of course entirely correct. But by May 1998 MAF had already been applying for nearly three years a scheme of cost recovery which many of its senior officers had serious doubts about. It must already have appeared probable that there would be slippage in the timetable for the introduction of full cost recovery. Subsequent events merely confirm how unsatisfactory it was to continue the unfair system even as an interim measure. On this point also their Lordships respectfully prefer the view of Wild J to that of the Court of Appeal.

72. The fifth point was Mr Fergusson's statement in para 10 of his memorandum:

"Costs should be borne by those who create the risk ... the proliferation of new airports both increased the biosecurity risk and imposed additional costs to manage that risk ... This approach underpins the cost-recovery policy for border clearance services at regional international airports."

The judge thought that consideration of risk could not justify the imposition of charges on the regional airports alone, especially as Auckland and Christchurch were the airports which served passengers coming from high-risk areas. The Court of Appeal (para [123]) differed from the judge. Their Lordships respectfully prefer the judge's view.

73. They also see force, as the judge did, in a general criticism made of the second decision, that it (para [132] of the first-instance judgment) is a rationalisation of or justification for the status quo, rather than a genuine and open-minded attempt to make a decision in terms of section 135. The plaintiffs' submission put it this way:

"... MAF was still locked into a mental paradigm of continuing to justify the pre-existing, unsatisfactory (but expedient) differential charging policy."

The fact that the Director-General himself, Professor Ross, did not see fit to make an affidavit justifying the second decision adds force to this criticism.

74. Drawing the threads together, their Lordships cannot avoid the conclusion that both decision-makers failed in their duty to impose an equitable cost recovery system. The first decision seems to have been based on inadequate advice and reflection. The second decision (consisting of the Director-General's endorsement of his subordinate's memorandum) was apparently reasoned, but the reasoning simply did not provide any justification for the stark disparity in the treatment of regional airports and metropolitan airports. This differential charging scheme may have been convenient and economical, but it was not equitable. It did not accord like treatment to parties which were essentially in the same situation. For these reasons their Lordships have come to the conclusion, as the judge did, that neither the first decision nor the second decision can stand. Both were flawed by being based on erroneous or irrelevant considerations. Their Lordships agree with the judge that these considerations must have materially affected the decision-making process.

Restitution

75. This part of the appeal was not fully addressed in oral argument, mainly because of time constraints. The respondent's printed case advanced nine grounds on which the appellants should be refused restitutionary relief. These were not all developed in oral argument but none was actually withdrawn, and their Lordships will address all of them at least briefly. They will also address the topics of delay, acquiescence and unfairness to other taxpayers raised separately in the respondent's case as grounds for refusing either restitutionary or declaratory relief. Before their Lordships the respondent did not rely on the defence of change of position which had been relied on below.
76. Of the nine grounds mentioned above, three (that Freedom could have used the metropolitan airports; that all the appellants could have waited for the government to finalise a comprehensive policy; and that the Director-General had a wide discretion) appear to be little more than an attempt to reopen the issues of the validity of the two decisions. Two other grounds (that a restitutionary remedy is inapt and that the Court of Appeal's decision was tailored to the circumstances of the case) cannot stand once the Court of Appeal's views on validity are set aside, and MAF is seen to have exacted charges which were not lawfully imposed. But it is necessary to consider in more detail the respondent's submissions (i) that Freedom obtained a "windfall" gain; (ii) that the appellants received consideration and did not (as in Woolwich) pay taxes which were unlawfully demanded; (iii) that the judge's solution made him the decision-maker; (iv) that relief would be unfair to other taxpayers; and (v) that any relief should have been refused on the grounds of delay, waiver and acquiescence.
77. The "windfall" argument is also known to restitution lawyers as the defence of "passing on". If A has been unjustly enriched at the expense of B (a trader) but B has been successful in passing on the detriment to his customers in the form of increased charges, arguably A's enrichment is seen, at any rate with hindsight, not to have been at the expense of B. The defence of passing on has been rejected in Australia (Mason v New South Wales (1959) 102 CLR 108 and Commissioner of State Revenue v Royal Insurance Australia Ltd (1994) 126 ALR 1, to which must now be added Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 185 ALR 335) and in England (Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380). A different view has been taken in Canada (Air Canada v British Columbia (1989) 59 DLR (4th) 161).
78. This point was not fully addressed in the courts below, Wild J treating it as relevant but not decisive to the granting of a discretionary remedy. The Court of Appeal seems not to have commented on this point. Their Lordships do not find it necessary to express a definite view on the point of principle, because if the defence of passing on is to be relied on, the burden of establishing it falls on the defendant. The respondent relied on the evidence of Mr Farley that the appellants had budgeted for MAF charges (unsurprisingly, since MAF was adamant that it had the right to charge and intended to do so). But there was no evidence that the charges were effectively passed on to passengers travelling to the regional airports in such a way as to avoid loss to the appellants. On the contrary, the evidence of both Mr O'Connor (second affidavit, paras 63-5) and Mr Goodman (affidavit of 8 June 1999, para 50) was that the charges were not passed on, because the market would not stand it. The appellants had to absorb the charges themselves. The factual basis for the defence of passing on is therefore simply not made out.
79. In the Woolwich case Lord Goff of Chieveley stated its principle as follows [1993] AC 70, 177,

"… that money paid by a citizen to a public authority in the form of taxes or other levies paid pursuant to an ultra vires demand by the authority is prima facie recoverable by the citizen as of right."

The Woolwich case was concerned with income tax, and it is not clear whether Lord Goff of Chieveley intended his reference to other levies to be limited to levies similar to taxation. The Court of Appeal thought it unnecessary to invoke the Woolwich principle, but did not explain their reasons for that view. In particular, the Court did not express the view that MAF had provided consideration for the charges which it imposed. The absence of consideration was given some passing references in the Woolwich case (see the speech of Lord Goff of Chieveley at page 166C and G, and that of Lord Browne-Wilkinson at page 198). But those references were not necessary to the decision, and Professor Burrows among others has suggested (The Law of Restitution, Second Edition (2002) page 441) that they are unhelpful.

80. It was not suggested in argument that MAF's charges to the appellants constituted a tax. The charges were however levied under statutory powers (indeed, in performance of a statutory duty under section 135 (1) of the 1993 Act) and those who paid the charges obtained no commercial benefit from doing so, beyond the bare fact that biosecurity controls were applied in respect of incoming flights in which they were interested. There was no consideration in any normal commercial sense, and their Lordships can see no reason to deny a restitutionary remedy on that ground. Their Lordships also note (without basing their decision on it, since it was not cited or discussed in argument) that one of the cases referred to with apparent approval by Lord Goff of Chieveley in Woolwich, South of Scotland Electricity Board v British Oxygen Company Ltd [1959] 1 WLR 587, was a case of a public board overcharging for electricity supplies which were of commercial benefit to the recipient, but the House of Lords did not doubt that excessive charges were recoverable by the company which had paid them.
81. The Court of Appeal (when it allowed the Director-General's appeal in March 2002) thought that it was still open to the Director-General to fix valid charges for the period before 13 May 1998. In support of that view the respondent referred to the decision of the Board in Wang v The Commissioner of Inland Revenue [1995] 1 All ER 367. Their Lordships feel considerable doubt whether the principle in that case would now permit the Director-General to put in place retrospectively a lawful system of charges in respect of the whole period since 1995 down to the present time. But without expressing any definite view on that point, their Lordships see no reason to reject as inappropriate the relief which Wild J granted. The Director-General's persistence in an unfair and unlawful system of charging had continued for nearly six years when the matter was decided by Wild J. It has now continued for eight years. In those circumstances the Court has the right and the duty, not to substitute its own view for that of the statutory decision-maker, but to indicate the proper basis on which a restitutionary remedy should be granted in respect of money unlawfully exacted.
82. In Woolwich Lord Goff of Chieveley (at page 174) expressed doubt as to whether a special defence might not be called for in

"circumstances in which some very substantial sum of money may be held to have been exacted ultra vires from a very large number of taxpayers."

In Air Canada v British Columbia (1989) 59 DLR (4th) 161 the majority of the Supreme Court of Canada were also inclined to the same view. La Forest J referred (at page 195) to the severe strain on the United States economy imposed by the decision of the Supreme Court in United States v Butler 297 US 1, 80L ed 477 (1936), where the decision that a tax was unconstitutional led to a liability to repay almost $1 billion ("a respectable amount now but overwhelming during the depression"). However it is unnecessary to pursue that point further in this appeal since the amount at stake, although significant for the appellants, cannot possibly be regarded as such as to threaten the disruption of public finances in New Zealand.

83. Finally their Lordships must consider the issues of delay, waiver and acquiescence. Before Wild J the Director-General relied on these as grounds for refusing relief as a matter of discretion. Wild J rejected this submission (para [150]) without giving reasons. The Court of Appeal held that discretionary relief should be withheld, but that followed from the view which it took as to the validity of the second decision, and the first decision having been bad only as regards delegation. The Court of Appeal did not express any disagreement with what Wild J had said about delay, waiver and acquiescence as such.
84. Their Lordships see no reason to conclude that the judge exercised his discretion wrongly on this point. Counsel for the respondent submitted that WRAL and Freedom had on several occasions secured concessions from MAF, as a result of complaints, and that they should be treated as having closed the transaction by way of compromise, so as to disentitle them to any relief which they might otherwise have obtained. However the relatively small concessions which WRAL and Freedom obtained were concerned with details of charges which were imposed on the appellants, and were not imposed on or in respect of the metropolitan airports. The appellants never abandoned their objection in principle to that discrimination. They paid the charges because MAF insisted that they were due, and until they resorted to litigation the appellants saw no alternative to paying them. There is no injustice in their claims to partial recovery being allowed. But their Lordships can see no ground for departing from the judge's decision to allow partial recovery only (that is, of the excess over what would have been a fair and proportionate charge).
85. For these reasons their Lordships will humbly advise Her Majesty to allow the appeal, to set aside the order of the Court of Appeal and to restore the order of Wild J. The respondent must pay the appellants' costs in the Court of Appeal and before their Lordships' Board.