This case deals with the obligations of good faith and reasonableness in the exercise of express rights to terminate a licence and the ability of the Commonwealth to rely on the doctrine of executive necessity to terminate a contract where there has been a change in government policy.

Key learning

NSW Rifle Association Inc v Commonwealth demonstrates the willingness of New South Wales courts to rely on concepts of good faith and reasonableness to read down contractual termination rights. The case is significant in that, not only did the Court require that the Commonwealth exercise its termination rights for proper purpose and in good faith, but it also required the Commonwealth to act reasonably in issuing remedy notices and in fixing the period for remedying defects.

The case also illustrates the limited applicability of the doctrine of executive necessity, suggesting that the Commonwealth (and the States) will only be able to invoke this doctrine to avoid its contractual obligations in the rarest of circumstances.

Case note

The NSW Rifle Association (NSWRA) had been granted a licence to use certain land and buildings owned by the Commonwealth on the Malabar Headland (the ANZAC Rifle Range). This licence had been entered into in 2000 by the Commonwealth as a result of a decision by the Liberal–National coalition government to grant the NSWRA a licence to use the ANZAC Rifle Range until an alternative firing range at Holsworthy was constructed and made available for use by the NSWRA. The licence deed provided that the licence would terminate upon the Commonwealth issuing a Relocation Notice stating that the Holsworthy facility was ready for use.

However, in 2011, the Labor government decided to transfer the land to the NSW government for use as a national park, without providing the NSWRA with an alternative firing range. The Commonwealth sought to terminate the licence by relying both on the doctrine of executive necessity and on an express right that allowed the Commonwealth to terminate the licence if the NSWRA had not remedied a breach specified in a remedy notice “within fourteen days or such longer time as is specified in the notice”. The NSWRA challenged the validity of these attempts to terminate the licence.

In assessing the Commonwealth’s exercise of its express termination right, White J of the New South Wales Supreme Court read down the Commonwealth’s termination right by references to broad doctrines both of good faith and of reasonableness. White J found that these duties arose for the following reasons:

  1. The licence entered into by the parties was similar to a commercial lease — a class of contract in respect of which the duties of good faith and reasonableness are implied as a matter of law.
  2. As a matter of construction, the Commonwealth’s power to issue notices requesting the NSWRA remedy defects was to be exercised only for the purpose of giving the NSWRA the opportunity to remedy those defects. To White J, not only did this require the Commonwealth to issue the remedy notices in good faith, but the Commonwealth was also required to exercise its unilateral right to allow for an extended remediation period so as to give the NSWRA a reasonable opportunity to remedy the defects.
  3. The implied terms of good faith and reasonableness were analogous to the principles under which equity restrains the exercise of a power for an improper purpose.
  4. The implied terms of good faith and reasonableness satisfied the criteria for ad hoc implication of terms set out in BP Refinery (Westernport): namely, they were capable of clear expression, so obvious that they went without saying and necessary to give business efficacy to the contract (or, as modified in this non-business context, to give efficacy to the intended relationship between the parties).

Since the remedy notices were issued for an extraneous purpose (to evict the NSWRA) and the Commonwealth had admitted that it would not have been possible for the NSWRA to carry out the significant remedial works described in the remedy notices in the 14 day period specified in the notices, White J found that the Commonwealth had acted unreasonably in issuing the notices and in only allowing the NSWRA 14 days to remedy the defects. Hence, his Honour ruled that the remedy notices were invalid.

White J also rejected the Commonwealth’s contention regarding the doctrine of necessity. His Honour found that the doctrine was inapplicable since, by entering to the licence deed, the Commonwealth was not fettering the future exercise of a public law discretion arising from either statute or a prerogative power. Instead, the Commonwealth was simply exercising its powers and binding itself as an owner of the land and, in that capacity, stood in the same position as any other party. Accordingly, White J concluded that the Commonwealth’s change in policy did not entitle the Commonwealth to terminate the licence either at will or upon reasonable notice.

To see the full judgment in this case, please click here.