The Industry Commission also noted in its 1995 Report 'Competitive Tendering and Contracting by Public Sector Agencies', that the use of contracting out has not only increased in recent years but the nature of services contracted out has also changed. Prison management and operation is one example of the expanded scope of contracting out. Australia now has several privately managed prisons, one of which is in Mount Gambier.

The shift from the contracting out of traditional service functions, such as cleaning and waste disposal towards what has been historically regarded as 'core-government' functions raises complex legal questions associated with the operation of 'Crown immunity' or 'Crown privilege'.

These legal questions raise in turn issues of financial risks and liabilities which may not be fully appreciated by the individual government agencies engaging in the contracting out of their services. For this reason I am of the opinion that this is a matter of importance to draw to the attention of the Government and the Parliament.

The South Australian Government, as the Crown in right of South Australia, enjoys certain privileges in many of its activities as a consequence of the doctrine of Crown immunity. This doctrine has the effect of giving the Crown immunity from legal liability in certain circumstances. Where the Crown contracts out any of its core functions the legal relationship of the parties, and the legal rights of third parties may be affected by the operation of the doctrine.

Contracting out of services may be undertaken by:

• government departments;
• statutory authorities;
• government owned/controlled corporations.

While identifying government departments as the Crown in right of South Australia is uncontroversial, drawing the outer limits of the scope of the Crown is complex and open to judicial debate. Historically the courts identified bodies as the Crown by applying the Îfunction test'. For example, the High Court, in the Bradken Case, held that the Railways Commissioner of Queensland was an emanation of the Crown because, ÎIt has always been recognised in Australia that the conduct of railways is a function of the government of the states'¹⁵⁶. However, developments in the contracting out of government services over the last 20 years have been such that the courts have increasingly relied upon a Îcontrol test' in determining whether a body is the Crown. In 1991 in the Townsville Hospitals Board Case the Chief Justice of the High Court stated:

However, the function test is not dead and in 1992 the Supreme Court of New South Wales held that the Prospect County Council was entitled to Crown immunity on the basis that it carried out a Crown function ö the supply of electricity under the New South Wales Electricity Act 1945¹⁵⁸.

The issue of whether various 'privatised' bodies can benefit from Crown privileges has also been considered by the courts. In some cases the legislation establishing these bodies specifically excludes this possibility, eg section 6 of the State Bank (Corporatisation) Act1994. Section 6 provides as follows:

The possibility that government controlled corporations incorporated under the Corporations Law are manifestations of the Crown was mentioned with approval by French J in State Government Insurance Corp v Government Insurance Office of New South Wales (1991) 101 ALR 259. However in Kinross v GIO (1994) 129 ALR 283, the court held that the GIO, once fully privatised, no longer enjoyed Crown immunity.

Subject to the following discussion of the effect of the Acts Interpretation Act 1915, the principal benefit of the doctrine of Crown immunity is the presumption that a statute does not bind the Crown unless by 'necessary implication', the statute evinces an intention to bind the Crown.

This general principle is limited as a consequence of section 20 of the Acts Interpretation Act 1915, which provides that, unless the contrary intention is clear, the Crown is bound by legislation enacted after 20 June 1990. However, section 20 expressly states that criminal sanctions will not be imposed on the Crown as a result of the section¹⁵⁹. Consequently, where the Crown engages an agent (or in some circumstances an independent contractor) that third party may still get the benefit of Crown immunity from criminal sanctions, such as those provided for in health and safety legislation, unless that legislation expressly binds the Crown.

It is also to be noted that the liability of the Crown regarding contracts may be limited, or extinguished, by the doctrine of 'Executive Necessity' and the rule that the Crown may not fetter statutory or executive discretions by contract.

It should be noted that the operation of these various doctrines is complicated by the application of Crown proceedings legislation, such as the Crown Proceedings Act 1992. The Crown Proceedings legislation (common to all Australian jurisdictions) provides that ηproceedings may be brought and conducted by or against the Crown in the same way as proceedings between subjects'. However, in addition to this provision the Crown Proceedings Act 1992 also confers upon the Crown other benefits in relation to injunctive relief and provides specific procedures relating to the enforcement of judgments against the Crown.

In the contracting out of government services a key consideration ought to be whether, by operation of law, the act of contracting out actually confers the benefits enjoyed by the Crown on third parties.

Where a third party acts as the agent of the Crown in relation to the provision of services which have been traditionally considered a function of the Crown, that agent may be entitled to claim immunity from suit and Statute in certain circumstances. That is, a private corporation, which is bound by the provisions of a Statute, in respect of all its other activities may be entitled to claim immunity from Statute when it is acting as agent for the Crown.

In New South Wales Bar Association v Forbe Macfie Hansen Pty Ltd (1988) 82 ALR 431, it was held that the exemption from the operation of the Trade Practices Act 1974 extended to an advertising agency employed by New South Wales Ministers in their official capacity. In another case, persons involved in a contractual arrangement with the New South Wales Water Authority could not be the subject of injunctive relief under the Trade Practices Act 1974.

Further, third parties may be entitled to claim the benefits of Crown immunity from Statute where to deny it would affect the interests of the Crown.

This principle has recently been considered in Woodlands & Others v Permanent Trustee Company Limited & Ors (the 'Homefund Case') (Full Federal Court of Australia, 25July1996). In that case, the New South Wales Government had contracted with Permanent Trustee and others to establish a home finance scheme. The plaintiffs alleged the borrowers had breached the Trade Practices Act1974. The Court approved an earlier UK case, extracting from it the principle that (at p. 40):

The extension of Crown immunity to third parties may be appropriate in certain circumstances. It may in fact be necessary to secure an independent contractor willing to embrace the task of carrying out traditional government functions that may otherwise involve considerable legal risks. The conferral of privileges by operation of law should be understood and explicitly undertaken with a conscious awareness of the consequences, otherwise members of the public may be denied legal remedies in circumstances where the Government had not anticipated such a possibility.

In other circumstances an independent contractor providing a service to, or on behalf of, the South Australian Government may not be entitled to Crown immunity and may engage in activities which generate a liability for the Crown. In this respect it should be noted that the Woodlands Case is on appeal to the High Court and the question of the application of Crown immunity to government agents is far from settled. The heightened risk to the South Australian Government of liability arising from the activities of independent contractors arises from:

• the possibility that Crown immunity does not extend to the contractor;
• the possibility that the South Australian Government may be liable for acts of agents;
• the possibility that the South Australian Government may be liable for the acts of independent contractors where it has a non-delegable duty of care;
• the loss of a direct capacity to control activities that may give rise to risks of liability.

Liability of the South Australian Government in these circumstances may arise both under statute and in tort.

Notwithstanding the fact that insurance arrangements may assist in managing the exposure to risk and liability, the issue of Crown immunity should be assessed as a separate matter.

Where a statute expressly binds the Crown, or a government agency which is not the Crown, the Government may incur a legal liability under traditional agency principles, when the Crown or government agency engages an independent contractor to act as its agent. This may arise, for example, when the Government engages an agent to manage or operate facilities or infrastructure owned by the Crown, such as a prison.

Alternatively the Government may incur a liability when it engages a contractor to act as its agent to deliver a government service. For example, where the Government contracts with a private hospital to provide medical services to public patients. Where that hospital is the Government's agent and it fails to comply with statutory provisions relating to public health services, the Government may be liable as the principal.

As a general principle, the Government will not be liable for the negligent acts of independent contractors which are not its agents. However, on the basis of the principles set out by the High Court in Stevens v Brodribb¹⁶⁰, the Government may still be liable for the acts of independent contractors where the nature of the activity is such that a non-delegable duty of care is imposed on the Government. A non-delegable duty of care may be imposed in cases involving hazardous activities such a tree felling, prison management and water treatment.

The South Australian Government, along with many other Australian governments, is engaging in the contracting out of what was traditionally regarded as core government functions in the pursuit of greater efficiencies and effective service delivery. However, because of the operation of the doctrine of Crown immunity and privilege, and the existence of statutory duties and requirements in areas such as health care, prisons, and other areas of traditional government activity the contracting out of government services raises complex questions of legal entitlements and risks. If these legal entitlements and risks are not properly understood there is a risk that the agencies concerned will:

• unintentionally and inappropriately by operation of law allow the conferral of Crown immunities upon private contractors; and/or
• undertake the risk of a legal liability arising from the activities of an independent contractor over which it may have insufficient control.

Having regard to the risks that have been discussed in this section, Audit recommends that a precondition to the contracting out of government services is the carrying out of a legal risks and liability impact assessment. This assessment should be documented and, in my opinion, should be an integral part of all analyses presented to the Executive Government regarding all major outsourcing projects.

Such an assessment will ensure that Crown privileges that arise by operation of law are appropriate in the circumstances of a particular case. Where risk exposure is identified, steps can be taken to minimise and manage those risks and to provide for the allocation of that risk between the parties on a basis that is clearly understood.

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