The Federal Court has held that the Water Act 2007 (Cth) (Act) is not unconstitutional in Lee v Commonwealth of Australia [2014] FCA 432 (Lee). The challenge to the Act was brought by two horticultural farmers from Victoria and South Australia, who represented a group of farmers with similar interests (Applicants). The respondents were the Commonwealth and the Murray Darling Basin Authority (Authority). Justice North found that the Water Act 2007, including the development of the Basin Plan, was not invalid on the basis that the provisions in question were made under the 'external affairs' power of the Constitution1 and not made 'in trade or commerce'.2   

History

The Murray Darling Basin (Basin) is the catchment area for the Murray and Darling Rivers and their tributaries, extending from north of Roma in Queensland to Goolwa in South Australia. It supports Australia's most important agricultural region and has 16 wetlands that are recognised under the Ramsar Convention on Wetlands of International Importance. 

In recent years, major regulatory reform to regulate water resources in the Basin has been undertaken to address the over-allocation of water entitlements and over-use of water allocations. The main legal instrument that gives effect to the reforms is the Water Act 2007. At the heart of this new regime is the Murray Darling Basin Plan (Basin Plan). Prepared by the Authority, the Basin Plan provides strategic direction for the integrated and sustainable management of water resources in the Basin.

The Basin Plan, issued in November 2012, includes enforceable limits on the quantities of surface water and groundwater that can be taken from the Basin, to address the declining health of the Basin due to unsustainable levels of extraction for irrigation and other uses. The sustainable diversion limits (SDLs) of 2750 gigalitres less per year than current diversion in the Basin is to be achieved by 2019, with water entitlements being purchased by the Commonwealth and allocated to the environment.

The introduction of the Basin Plan was contentious, with many States concerned that the reduction in water diversions for consumptive use would cause significant economic hardship to farmers. It was in this context that the Applicants in Lee brought their claim to the Federal Court, after it had been remitted there from the High Court. The Applicants' farms had been significantly impacted and devalued by the drought and the unbundling of water entitlements from land rights under the Act.

Why claim?

The Applicants challenged the validity of the Act on the grounds that it breached the following sections of the Constitution:

  • section 92 – the provision that establishes that interstate trade within the Commonwealth is to be free
  • section 99 – the provision that states that the Commonwealth shall not make any law 'in trade, commerce or revenue' giving preference to one State over another
  • section 100 - the provision that limits the Commonwealth's ability to abridge the right of a State or its residents to use river waters for conservation or irrigation.

The major focus of the challenge was the specification of the SDLs in the Basin Plan which, the Applicants claimed, would lead to a significant reduction in the water entitlements that they had previously held in breach of section 100.3

The section 99 claim focused on the division of the Basin States into water resource plan areas. Broadly, the Applicants asserted that some parts of some States are preferred over other parts of those states or other States. This is because, under the transitional provisions, some pre-existing water resource plans cease to have effect later than others.

Further, the Act only provides that the SDLs be calculated for each water resource plan area but does not state that the reduction to achieve the Basin SDL must be the same for each area. Therefore, the Applicants contended that some water resource plans were preferred over others because the Basin Plan provides for greater relative reductions through SDLs in some areas than in others.

Lastly, the Applicants argued that the operation of the Act resulted in the acquisition of property not on just terms, breaching section 254(1) of the Act, which states that the Commonwealth is liable to pay compensation for property acquired not on 'just terms' under the Act.

Federal Court decision

The Federal Court found the Applicants' claims had no reasonable prospect of success and awarded judgment for the Commonwealth and the Authority pursuant to section 31 of theFederal Court Act 1976(Cth).

The Court observed that the key principle in determining the constitutional claims was the characterisation of the legislative provisions of the Act, which involved considering the objectives of the Act and reading the provisions in their totality.4

Sections 99 and 100 claims

According to the Court, the prohibition on Commonwealth legislative power for sections 99 and 100 only applies to a law or regulation of trade, commerce or revenue. In characterising the Act for these sections, the Court held that the objectives of the Act explicitly referred to ensuring compliance with international agreements.

Despite the fact that the Act did regulate some aspects of trade and commerce, the objectives in the Act, such as ecologically sustainable development and the use of water resources for environmental purposes, were all expressions of the primary objectives and thus existed to give effect to international agreements concerned with environmental protection. Consequently, the Court characterised the Act as a law made under the Government's constitutional power to legislate on external affairs, found in section 51(xxix) of the Constitution, and the Applicants' claim was found to be invalid.5

Section 92 claim

The court also found that the Applicants' arguments under section 92 of the Constitution, that the provisions of the Act restricting interstate trade and commerce, were invalid. To establish a claim under this section, it was necessary to identify a relevant market and show there was discrimination against the portion of the market operating between states (interstate market) in a protectionist way, resulting in a competitive advantage towards the portion of the market operating within the state (intrastate market).

It was also held that the provisions of the Act concerning the fixing of the SDLS did not meet the necessary requirements, as they operated without discrimination between interstate and intrastate trade. SDLs were found to be a mechanism fixed by reference to environment water needs, as opposed to market needs.6

Section 254 claim

The Court also rejected the Applicants' claim for compensation on section 254 of the Constitution, finding that there was no acquisition of property in the carryover entitlements held by the Commonwealth, only a potential deprivation of rights. A deprivation is not an acquisition of a property right.7

It was acknowledged that while the legislative and policy changes regarding the Basin had contributed to the difficulties experienced by the Applicants and other irrigation farmers, the Applicants' submissions lacked careful legal analysis and seemed to focus more on the desire to expose the problems suffered by the Applicants.8