Commonwealth officials have a duty under s 25(1) of the Public Governance, Performance and Accountability Act 1993 (PGPA Act) to exercise their powers, perform their functions and discharge their duties with care and diligence.

Section 25 is one of a number of general duties that apply to all Commonwealth officials under the PGPA Act. These duties are modeled on provisions of the former Commonwealth Authorities and Companies Act 1997 (CAC Act) and based on the fiduciary duties in the Corporations Act 2001 (Corporations Act).

Unlike the corporate regimes on which they are based, the general duties of officials under the PGPA Act extend to ’all individuals who are in, or form part of, a Commonwealth entity’[1] regardless of their seniority or management responsibilities. This includes all officers, directors, members and statutory office holders, as well as all staff.[2]

Accordingly, all Commonwealth officials should be aware of these specific legal duties as part of performing their everyday functions, including how the duty to exercise care and diligence relates to their role in undertaking procurements on behalf of their Commonwealth entity. For complex and high value procurements, discharging this duty can be onerous.

Drawing on principles from the Corporations Law, this article considers some of the key principles that all Commonwealth officials involved in procurement, including those officials who are ‘decision makers’, should take into account as part of complying with their PGPA Act official duties when spending public money.

THE DUTY OF CARE AND DILIGENCE UNDER THE PGPA ACT

Section 25(1) prescribes both the duty and the standard of care and diligence that public officials are required to exercise in performance of his or her functions and powers.

The standard is effectively that of a reasonable person in the official’s position. This is determined objectively by looking at:

  • the entity’s specific circumstances
  • the position that is held by the official
  • the individual responsibilities of the official within that entity.

Despite being envisaged by s 25(2), specific circumstances in which the obligations in s 25(1) are taken to be met are yet to be prescribed in the Public Government, Performance and Accountability Rule 2014 (PGPA Rule).

RELEVANT PRINCIPLES FROM THE CORPORATIONS LAW

Section 180 of the Corporations Act codifies the law with respect to the fiduciary duty of company directors and officials to act with care and diligence. Like s 25 of the PGPA Act, the duty under s 180 reflects what is objectivelyexpected of a reasonable person in the same position, takes into account the circumstances of the company and the person’s official position within the company, as well as any additional responsibilities acquired by them.[3]

General standards and skills

Under the corporate duty, directors are expected to ‘take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed on him or her’[4]. This is critical to the management of foreseeable risk to the company. As a principle, this is also a relevant standard to apply to the effective discharge of an official’s duties under s 25 of the PGPA Act when undertaking any Commonwealth procurement under which public monies are expended.

Courts have identified a number of baseline standards expected of all company directors pursuant to this corporate duty. These include, among other things, having the basic financial skills required to interpret the company’s records; spending adequate time on company business (which in many cases will mean more than simply attending board meetings); maintaining familiarity with the financial status of the company by appropriate means and keeping a reasonably informed opinion of the company’s financial capacity. [5] Many companies, of course, mandate appropriate training in this regard as a pre-requisite to holding a position on their Board.

Specialist skills

Courts have also applied a higher standard of care and diligence owed by a company director where they bring, or purport to bring, specialist skills or expertise to their role.[6] Conversely, the courts have held that the standard of care owed by a director will not necessarily be reduced because they lack the requisite experience and knowledge.[7] This is a particularly important principle for directors who have specialised skills, whether they be legal, technical or financial, and who are asked to consider specific information related to those skills as part of Board deliberations.

Business judgement and reasonable reliance on advice

Section 180(2) of the Corporations Act deems a director to have satisfied their duty of care where they make a business decision which they believe is in the best interests of the company.  Directors have the protection of this ‘safe harbour’ so long as the judgment is made in good faith for a proper purpose, they do not have a material interest in the relevant matter, and they have informed themselves about the subject matter to the extent that they reasonably believe is appropriate.

In addition, a director’s reliance on information or advice provided by others is deemed under s 189 of the Corporations Act to be reasonable where it was made in good faith after making a reasonable assessment of the information or advice. The rule will not apply if the director knew, or ought to have known, facts that render reliance unreasonable in the circumstances.[8]

Both rules are a concession to the reality of corporate governance and the commercial environment in which companies operate. The first recognises that while the interests of shareholders need to be adequately protected, company directors need some scope to be innovative and entrepreneurial when making business decisions which necessarily involve taking risk. The second addresses the practical necessity, particularly in larger companies, for directors to be able to rely on their officers and advisers in their day to day work.

WHAT DOES THIS MEAN FOR COMMONWEALTH DECISION MAKERS?

Officials’ duties under the PGPA Act are designed to protect the proper use and management of public resources entrusted to the care of Commonwealth entities. Given that underlying aim, and that public officials are generally held to higher standards of accountability and scrutiny than their private sector counterparts, the standard of care and diligence owed by public officials under the PGPA Act is arguably broader than that imposed under the Corporations Law.

Unlike the role of company directors, it is difficult to identify the baseline competencies expected of decision makers involved in Commonwealth procurement. There is, for example, no general requirement for Commonwealth officials who are delegated ‘decision makers’ to have a particular level of financial literacy despite, in some cases, being responsible for high value transactions.

Decision makers come from diverse professional backgrounds and possess varying qualifications and skills. Like s 180 of the Corporations Act, there is no express reference in the formulation under s 25 of the PGPA Act to an official’s qualifications or skills. However, it is possible that this will be taken into account as the courts have done when applying the duty owed by company directors. A decision maker could therefore be in breach of their duty where matters which would ordinarily be identified and investigated by a reasonable person with the same qualifications or skills, are overlooked. For example, a decision-maker who is a Chief Information Officer of a Commonwealth entity may be held to a higher standard in circumstances where that person is asked to decide on a procurement for technology, particularly if the competing solutions being assessed are complex from a technical perspective.

Further, officials who lack the skills or experience to understand the information relevant to the decision, and fail to take reasonable steps to address this, risk being in breach of their general duties under the PGPA Act.

Regardless of their skills or experience, it is therefore incumbent on officials who are involved in procurement to take reasonable steps to place themselves in a position to properly assess the consequences of their actions. How much time and effort should be expended on this depends on the nature of the procurement. A complex, high value procurement will demand greater care and diligence from those involved in it. For example, a decision-maker who approves a recommendation to enter into a $20 million contract after spending only half an hour reviewing an evaluation report may well, from an objective viewpoint, not have placed themselves in a position to properly assess the consequences of their decision.

Despite it being foreshadowed in the Explanatory Memorandum to the Public Governance, Performance and Accountability Bill 2013, the PGPA Rule is yet to contain provisions equivalent to the business judgment and reasonable reliance rules under the Corporations Act (discussed above). In particular, this creates some uncertainty around the application of an official’s duties in the Commonwealth procurement context and the extent to which officials can reasonably rely on the advice of others.

Decision makers routinely rely on the advice of internal and external advisers when making key decisions about procurement.  Given the absence of a default ‘reasonable reliance’ defence under the PGPA Act at this stage, decisions makers should turn their mind to whether it is reasonable to rely on advice received and whether it places the official in a position to satisfy his/her own duties, including those under s 25(1) of the PGPA Act. For example, further advice may need to be sought by a decision-maker where the information provided is not sufficiently clear, seems incorrect or incomplete or where the decision-maker has any doubts about the competency of the person who provided it.

KEY POINTS

All ‘officials’ involved in procurement are under an obligation to perform their functions according to the legal standards of care and diligence as set out in s 25 of the PGPA Act. This has particular application for decision makers involved in Commonwealth procurement given the nature of their role.

In light of these duties, officials involved in Commonwealth procurement – in particular officials who are decision-makers for procurements –  should (at a minimum) consider the following points as part of discharging these duties:

OFFICIAL DUTIES: CARE AND DILIGENCE – TIPS FOR PROCUREMENT DECISION-MAKERS

DO take steps to adequately inform yourself about all significant matters relevant to the decision to be made by you.

DO place yourself in a position to understand the consequences of your decision to approve or reject a particular course of action, including the risks.

DO be aware that the standard of care and diligence owed by you, may be referable to any special skills or qualifications that you possess or bring to your role.

DO NOT ‘blindly’ rely on advice of others, but enquire further if you have doubts or questions about the information provided or the expertise of those who provided it.

DO spend adequate time, having regard to the value and complexity of the procurement, considering all relevant information (This may have practical implications for setting evaluation timeframes etc).

DO have due regard to, and comply with, any applicable legal requirements (CPRs) or other relevant guidance and procedures (policies, instructions etc).