With the Commonwealth Government’s early decision to set the date for the next federal election and the Opposition’s continued commitment to repeal the Clean Energy Act and associated programs, government agencies involved in achieving the goals of the Clean Energy Future Package may have some difficult decisions to make over the coming months. It is timely to examine how the recent decisions in NSW Rifle Association Inc v The Commonwealth of Australia [2012] NSWSC 818, regarding the doctrine of executive necessity, and ANZ v Andrews [2012] HCA 30, regarding the doctrine of penalties, may impact on the contracts associated with the roll out of the Clean Energy Future Package that the Government has entered, or will enter, into before the caretaker period formally commences. These considerations are also relevant to any other contract entered into by an agency in relation to matters where the Government’s policy position is significantly different to that of the Opposition.

When there are significant changes in policy, agencies are often required to examine existing contracts that do not assist the new policy, to identify if those contracts can be terminated and what the potential consequences of termination may be. The decisions in NSW Rifle Association and Andrews have added a new perspective to this issue.

Executive necessity – will it work?

The doctrine of executive necessity provides that the Crown cannot contract to fetter its future executive discretion by binding itself to a particular contractual position. While the precise scope of the doctrine has long been an issue for judicial consideration, it had previously been generally accepted that the doctrine permitted the Crown to remove itself from contractual obligations where this was necessitated by a change in policy.

In NSW Rifle Association, the Commonwealth argued that it could terminate an occupation licence held by NSW Rifle Association Inc over Commonwealth land by relying on the doctrine of executive necessity rather than the express right to terminate for breach. The NSW Supreme Court held that the obligations on the Commonwealth under the licence did not fetter any statutory duty or discretion, and accordingly, the licence was only able to be terminated in accordance with the express provisions. This narrowed further what was historically considered to be a broad exit power in favour of government agencies.

There was also some discussion about the historical distinction that has been made between pure commercial contracts and other government contracts. White J considered that such a distinction was imprecise and not logical and that the public must have confidence in all of its dealings in contracting with government.

This issue is relevant to the political debate – and corresponding regulatory uncertainty – about whether the Government’s Clean Energy Future Package is here to stay. If the legislation is repealed, will agencies be able to walk away from contracts in the absence of an express right to terminate? Is there a distinction that can be drawn between pure commercial contracts (such as procuring goods and services) and other contracts that are entered into by the Commonwealth in its inherent power as the Crown (such as funding agreements)?

The answers to these questions will have a significant bearing on private sector parties – those providing goods and services to Government and recipients of the various funding programs – as they navigate, and attempt to manage, the uncertainty of this increased sovereign risk of contracts that allocate a carbon cost and those tied to the Clean Energy Future Package.

Future proofing – avoiding the doctrine

It is unclear, in the wake of NSW Rifle Association, what the future of the doctrine of executive necessity will be and what circumstances may be required before a court will allow the Commonwealth to use the doctrine as a basis for termination outside the express terms of a contract. Therefore, it is important that agencies consider alternative options for termination of a contract and have express agreement to those options as part of the upfront bargain.

The standard clauses used for this purpose are termination for convenience clauses. These clauses are widely used and intended to provide certainty to contracting parties about the potential circumstances for termination and the consequences of same. The main benefit is that an express agreed term removes any question about whether an agency has a right to terminate in the circumstances described in the clause.

Where an agency proposes to set out the circumstances for termination (that is, where it will be something other than mere convenience), it is crucial that those circumstances be clear and readily identifiable. For significant projects, an agency may consider a checklist of clear requirements or termination triggers. Such triggers may include, for example:

  • a change of law - particularly relevant for carbon price pass through where significant sums of money are being transferred now in contemplation of long term future liabilities, or
  • frustration of contract - useful where the performance of milestones under a funding agreement depend on the actions of third parties, such as the acquittal of carbon emissions units.

Increasingly, a more favoured form of the termination for convenience clause is to provide only for termination at the Commonwealth’s absolute convenience. Most commonly, and understandably from the contractor’s position, those clauses also provide a mechanism for compensation. In negotiating such clauses, however, the Commonwealth needs to take care as to the compensation it agrees to, as high levels of compensation may have the effect of rendering the termination for convenience clause invaluable or redundant.

Expansion of the penalties doctrine

The recent High Court decision of Andrews expanded the circumstances in which a contractual requirement to pay a fee may be held to be void on the basis that it constitutes a penalty. The Court unanimously held that the penalty doctrine might apply where a payment or a forfeiture of property is triggered by non-performance of some condition and was not limited to situations of breach of contract, even if there was no (express) contractual promise that the condition would be performed.

Consequence of Andrews

The expanded range of clauses to which the penalty doctrine may apply could have significant consequences for contractual arrangements requiring the payment of amounts on the occurrence of stipulated events which may not constitute breach of contract. Agencies should be aware of the new position when negotiating such clauses because there is a risk that these clauses could be determined to be void or unenforceable as penalties where the amount payable is out of all proportion to the actual loss (if any) suffered by the payee as a result of the event.

This is particularly important for funding agreements where an agency may wish to include a trigger for repayment of funding, or a reduction in funding. For example, for programs under the uncertain Clean Energy Future Package, recipients of funding will be seeking certainty that the full funding amount will be paid. On the other hand, agencies will be seeking certainty that they can require a repayment or may provide a reduced level of funding in particular circumstances (i.e. – if the Clean Energy Future Package is repealed or significantly amended).

When entering into contracts requiring payment (or a repayment) to be made upon the occurrence of a stipulated event, agencies should take care to ensure that such payments are structured to either:

  • relate to the provision of some corresponding benefit
  • relate to the service provided by the payee, or
  • be a genuine pre-estimate of damage or loss suffered by the agency as a consequence of the event.

Summary

For commercial contracts where an agency has contracted for carbon cost pass through (from the agency to the contractor), and the legislative scheme imposing that cost is no longer in place, or is in a substantially different form, the agency should take care to identify how the required payment or repayment will meet one or more of these threshold tests. For funding agreements where an agency has granted funds under a program associated with the Clean Energy Future Package, and that program is altered or abolished for the election, meeting one of these thresholds for a payment or repayment may be very difficult.