GOVERNMENT CONTRACTS: FETTERS ON THE FUTURE EXERCISE OF STATUTORY AND PREROGATIVE POWERS: IMPLICATIONS FOR SUCCESSOR GOVERNMENTS: CROWN PROCEEDINGS ACT 1992: AUDIT RESPONSIBILITIES
WHY THIS MATTER IS IMPORTANT
overnment has the responsibility to govern in the public interest. For the reasons discussed herein, certain contractual arrangements may, for practical financial and other considerations rather than strictly legal reasons, operate as a fetter, and, be such as to disable and/or limit the capacity of the Executive Government of the day and successor governments from being able to act in matters that become of importance to the economic and social welfare of the State
47.INTRODUCTION
There is, in all government contractual relationships, an inherent fetter or constraint imposed not only upon the Government, but also upon those parties with whom it contracts. Any such 'constraint' is in terms of the achievement of the intended objective of the contract, eg the construction of a hospital, supply of goods and services, etc. A fetter in this sense of governmental contracting is accepted as appropriate and is uncontroversial. The commentary in this section of the Report is not concerned with these matters, but rather with those long term contractual relationships that operate as a practical fetter on the future policy flexibility of the Government of the day and successor governments.
The Government (ie South Australia) as a party to a contract is a legal person and does not change if there is an election and a change of government in the political sense. In New South Wales v Bardolph (1934) 52 CLR 455 at page 463 Evatt J remarked that 'the repudiation of subsisting agreements by a new administration can seldom be ventured upon with success'.
Subject to any constitutional limitations, it is of course, open to the Parliament in its legislative capacity to override any prior government contractual obligations
48. However, the commercial and other impediments in taking such action by the Legislature may themselves make this course of action impossible49.THE AUDIT RESPONSIBILITY
The Audit responsibility is, inter alia, to identify and, if considered important, report upon matters concerning the 'propriety' and/or 'lawfulness' of processes associated with Executive Government financial transactions
50. In the context of the operation of a fetter on Executive Government action, there is a particular relevance for State Audit where contractual undertakings may disable the Government or a public authority from the performance of a statutory function or may impose an anticipatory fetter on the future exercise of a statutory discretion.In this section, my objective is to review some relevant principles and to raise for the information of the Government and the Parliament some matters that, in my opinion, are important to draw to attention. In my opinion, these matters will assist in providing a framework for analysis of current long term contracts that have been entered into by the Government and contracts that may be intended for the future.
THE DOCTRINE OF EXECUTIVE NECESSITY
No commentary on the matter of a contractual fetter on the capacity of the Executive Government to act in the future would be complete without reference to the doctrine of 'executive necessity' and its relevance as a consideration for government contracts in South Australia.
Some Relevant Judicial Statements Regarding the Doctrine of Executive Necessity
This doctrine was acknowledged in the latter part of the 19th century and was articulated with respect to Government Executive (ie 'prerogative' as distinguished from 'statutory') authority in the case of 'The Amphitrite' (1921) 3 KB 500. Rowlatt J at page 503 of 'The Amphitrite' stated the position regarding executive necessity in the following terms:
· it is not competent for the Government to fetter its future executive action which must necessarily be determined by the needs of the community when the question arises. It cannot by contract hamper its freedom of action in matters which concern the welfare of the State
51.In the case of Northern Territory of Australia v Sky West Pty Ltd
52 Kearney J made the following observation:In general and for good reasons, a government rightly regards itself as bound to carry out a contract it has lawfully and properly entered into, when the other party is not in breach. These reasons are rooted in common sense and good government - in general, in a proper concern to protect the public revenue against unnecessary and unwarranted loss, to preserve the Government's reputation for integrity and to retain its credibility, particularly with the business community · But a government is not only a party to a contract; through its control of Parliament it is a law-maker. In that capacity it has an interest in ensuring that the people respect and observe the law, and to do so it must display by its actions some minimum respect for its own rules. Further it is in the public interest that when a government contracts with an ordinary person, it deals fairly with that person, and is seen to do so. Accordingly it would be a serious matter for the rule of law if a government were perceived as refusing without proper cause to perform a contract for services to the public entered into in accordance with all the legal safeguards designed to protect the public interest.
In Commissioners of Crown Lands v Page (1960) 2 QB 274 at page 287 Devlin LJ stated:
When the Crown or any person is entrusted, whether by virtue of the prerogative or by statute with discretionary powers to be exercised for the public good, it does not, when making a contract in general terms, undertake (and it may be that it could not even with specific language validly undertake) to fetter itself in the use of those powers, and in the exercise of discretion. [my emphasis]
For the information of the Parliament I have included hereunder the following comments from 'Liability of the Crown' by Professor P W Hogg. In my view, this commentary is a helpful summary concerning a particular approach to the operation of this doctrine.
The vice of The Amphitrite rule is that it subjects the contractor to a risk which is not among the provisions of his contract, and which is actually inconsistent with any provisions providing for variation or dischargeöwhich will invariably be accompanied by provisions compensating the contractor. Where, as in The Amphitrite, the government decides to act inconsistently with obligations which it has deliberately undertaken, the application of the ordinary law will safeguard the contractor's profit by compelling the government to pay damages (or renegotiate). So long as the remedies of specific performance and injunction are withheld, the ordinary law adjusts the conflict between public purposes and private interests quite satisfactorily. In those rare cases where the government cannot countenance either the payment of damages or renegotiation, it can secure the passage of Parliamentary legislationöretrospective if necessaryöto override the private rights
53.It is generally accepted in Australia that the circumstances in which the doctrine of executive necessity will be invoked are rare
54. In the vast majority of government contracts the doctrine is not a relevant consideration as both the Crown and the contractor benefit from the fact that contractual commitments by the Government should be reliable.ANTICIPATORY FETTERS ON STATUTORY DISCRETIONS
The law regarding this matter was the subject of comment by the High Court of Australia in Ansett Transport Industries (Operations) Pty Ltd v the Commonwealth of Australia (1978) 52ALJR254. In that case Mason J at page 262, after discussing the doctrine of executive necessity in its application to government contracts, observed as follows:
Public confidence in government dealings and contracts would be greatly disturbed if all contracts which affect public welfare or fetter future executive action were held not to be binding on the Government or on public authorities. It would be detrimental to the public interest to deny to the Government or a public authority power to enter into a valid contract merely because the contract affects the public welfare. Yet on the other hand the public interest requires that neither the Government nor a public authority can by a contract disable itself or its officer from performing a statutory duty or from exercising a discretionary power conferred by or under a statute by binding itself or its officer not to perform the duty or to exercise the discretion in a particular way in the future.
THE CROWN PROCEEDINGS ACT 1992
It has been suggested that as a result of the Crown Proceedings Act 1992 the doctrine of executive necessity does not operate in South Australia. See B Selway 'The Constitution of South Australia' [(1997) The Federation Press at page 195], where the learned author notes as follows:
The Crown Proceedings Act 1992 may have affected any special rules or principles applicable to Crown contracts; for example, the principle of executive necessity may no longer be available to enable the Crown to breach its contracts. [my emphasis]
If, as a matter of construction of the Crown Proceedings Act 1992, the principle of executive necessity has been abrogated in South Australia, apart from overriding the contract by legislative intervention, the consequences are such that governmental contracts limit
55 the policy flexibility of not only the Government executing the contract, but also successor governments.In Functional Terms Some Government Contracts Represent an Exercise of De Facto Legislative Power
Contractual arrangements of government have a consequence not only for the contracting parties, but also in some cases, the wider community who may be affected by the services being provided under the contract. In essence, if as a result of the enactment of the Crown Proceedings Act 1992, the doctrine of executive necessity does not operate, in my opinion, the terms of the contract, being a legally enforceable instrument in the courts, become, in substance, an exercise of defacto legislative power by government outside of the Parliamentary legislative process.
Where a private contract is used as the basis for the delivery of a government service, there is a substantial change in the flexibility available to government to adjust practices and procedures concerning the services delivered by the contractor. Flexibility cannot be expected when a change could be commercially prejudicial to the interests of the contractor. Where all parties cannot agree to a variation of the contract it is enforceable through the courts in the terms as originally agreed.
IMPLICATIONS FOR SUCCESSOR GOVERNMENTS
Where commercial and/or public interest immunity from disclosure is claimed for a contractual arrangement, a successor government of a different political persuasion to the Government that executed the contract will be unaware of all of its obligations until such time as it takes office. This may have a consequence for the implementation of policies that it promoted as part of its election campaign.
In a practical sense, when a long term contractual relationship has been undertaken with the private sector for the delivery of a service to government and/or the community on behalf of the Government, eg the contracts with EDS with respect to information technology and United Water with respect to water and wastewater management, the Government may be 'locked in' to continuing to provide that service through contractual arrangements with the private sector. One of the reasons for this is that the cost of resuming those services 'in-house' may be too great having regard to other commitments of government at the time. Further reasons that may mitigate against the ability to resume control of a particular service 'in-house' are that government may not have access to necessary 'data' and 'personnel expertise' within the public sector.
In this respect the initial decision to contract out a particular service may become an irreversible policy decision that, when combined with other factors, operates as a practical financial and operational fetter on future governments
56.In my opinion, it is important that an analysis of the possibility/potential of this type of contingency, ie 'lock in', should form an integral part of the initial decision making process in accordance with the Prudential Management Framework that has recently been promulgated by the Government. This is particularly the case where the service in question is critical to the capacity of the Government to govern.
TERMINATION FOR CONVENIENCE CLAUSES
Where a government has entered into a material long term contract and wishes to provide for the possibility of a future change of policy and the right to cancel rather than to renegotiate the terms of the contract, one solution to deal with this situation has been to insert a 'termination for convenience' clause into the contract with a provision for compensation to the contractor
57. The amount of the compensation payable would be as determined by the parties to the contract. However, not all long term contracts for the delivery of services provide for this contingency. Furthermore, where the terms of the contract are 'confidential' the Parliament will not be in a position to be informed as to how the termination for convenience will operate in practical financial and operational terms58.CONCLUDING COMMENTS
The changing pattern of public administration in South Australia with the increasing use of the instrument of contract to discharge the responsibilities of government gives rise to a number of matters of importance that, in my opinion, should be drawn to the attention of the Government and the Parliament.
Where the terms of a contract are made public there is a 'self executing control' that operates to reduce the risks inherent in the use of contract for public administrative purposes. In these circumstances the Parliament and the community are able to be informed of the obligations that the Government has made and appropriate comment and scrutiny of the Executive Government can be undertaken.
In those cases where the terms of the contract are not public and there is no 'termination for convenience' clause included, this may operate as a significant hidden fetter on the Executive flexibility of a successor government.
RECOMMENDATIONS
Having regard to the fact that contractual arrangements can and do fetter both the Government of the day and successor governments it is recommended as follows:
47 See also D Rose; 'The Government and Contract', in
'Essays on Contract' (1987 Finn Ed LBC) p. 233. In this essay under the subheading
'Fettering Statutory Discretions' the author discusses a number of important
considerations associated with this matter. At p. 243 he observed as follows:
It may often be the case that all the parties understand that particular terms might
not be legally effective but nevertheless agree to the inclusion of the terms on the
understanding or expectation that the current or future government will be morally
obliged, or liable to political pressure, to comply with the agreement. back
48 See West Lakes Ltd v South Australia(1980) 25 SASR
389 at p. 390, King CJ stated as follows:
Ministers of State cannot, however, by means of contractual obligations entered into
on behalf of the State fetter their own freedom, or the freedom of their successors or the
freedom of other members of parliament, to propose, consider and, if they think fit, vote
for laws, even laws which are inconsistent with the contractual obligations. To enter into
a contract containing a provision purporting to fetter members of parliament in their
deliberations and to attempt to endorse any such contractual provision would, in my
opinion, be the clearest breach of the privileges of the parliament and of the members
thereof. back
49 See D Rose comment footnote 1 above. back
50 Public Finance and Audit Act 1987, subsection 36(1)(a)(iii). back
51 In Ansett Transport Industries (Operations) Pty Ltd v
the Commonwealth of Australia and others (1978) 52 ALJR 254 at 262 Mason J observed that:
This statement (ie the Statement of Rowlatt J above) has been criticised on the
ground that it is expressed too generally. So it is. See also footnote 2 above and the observations of King CJ.
52 (1987) 48 NTR 20 at p. 46. back
53 P W Hogg; 'Liability of the Crown' (1971) Law Book Company at pp. 139-140. back
54 See later in this section 'The Crown Proceedings Act 1992' where the matter of the applicability of this doctrine in South Australia is further discussed. back
55 The limitation is that, apart from paying damages for breach or the counter party agreeing to forego its contractual rights, the contract will bind the Government unless it legislates to abrogate its responsibilities. back
One practical matter that can materially contribute to a 'lock in' situation is where the Government's right of ownership of intellectual property is critical to the capacity to continue to provide a service and this particular matter is not adequately protected. This is, of course, a matter that can, and in my opinion, should be dealt with in the contract concerned. (See Part A .3 'Audit Overview - 1996-97 Auditor-General's Report', p. 45 et seq). This particular issue was also the subject of evidence to the Industry Commission by the Australian Law Reform Commission. The President of the Commission in his evidence on 18 April 1995 on the matter of the need to ensure access and/or ownership to intellectual property stated at p. 911 as follows:
You can be · sure that when you get to the point of it being vital if you don't own it and you're not adequately contracted for access at that point, · the premium you're going to · be faced with will be quite significant.
See also Part A.4 of this Report 'Information Technology in South Australia' and in particular, the commentary 'Initiation and Management of Contracting Out Process'. back
57 See Auditor-General's 'South Australian Water Corporation - (Report on Summary of Confidential Government Contracts under section 41A of the Public Finance and Audit Act 1987)' at p. 34. back
58 See ibid p. 5. Amounts payable for termination for convenience are at present excluded from the summary under the Parliamentary Compact Framework for the preparation of a section 41A summary by the Auditor-General. The Framework could of course be amended. back