By Richard Morrison
The scope of the doctrine of executive necessity, the public interest-based concept that contracts and agreements are unenforceable if they fetter statutory executive discretions and powers, has been examined by a recent Supreme Court of NSW decision.
In NSW Rifle Association Inc v Commonwealth of Australia, the court examined the limits of the doctrine of executive necessity and found the Commonwealth had an implied contractual duty to act reasonably and in good faith.
Importantly, the case provides useful guidance on a number of issues the Commonwealth needs to consider when managing the termination of contracts.
Background to the case
The New South Wales Rifle Association (NSWRA) occupies the ANZAC Rifle Range at Malabar, where the local member has long campaigned for the land to be transferred to the State of NSW for use as a national park.
The NSWRA currently operates under a licence negotiated with the Commonwealth in March 2000 (the Licence). Before the Licence, the NSWRA occupied the range under a permissive occupancy for more than 30 years, despite an unsuccessful attempt (by a previous government) to terminate the permissive occupancy on reasonable notice.
That attempted termination was the subject of separate court proceedings, where the court found that the three months' notice given by the Commonwealth was not reasonable, indicating that a period of three years might be reasonable in the circumstances.
The judge found that it was incorrect to say that the doctrine permits the Commonwealth to break a contract for policy reasons.
After that case there was a change of government, which led to the parties entering into the Licence. The term of the Licence was until the later of 30 June 2001 or the date the Commonwealth served a relocation notice. This was based on an agreement that the NSWRA would occupy the range until an alternative site was nominated by the Commonwealth.
The Licence also gives the Commonwealth a termination right if the NSWRA is in default. Clause 10.1(b) provides that the NSWRA would be in default if the Commonwealth serves a notice requiring the NSWRA to remedy a breach of the Licence, and that breach is not remedied within 14 days or within a longer timeframe specified in the notice.
As late as September 2011, the Commonwealth's advice to the NSWRA was that occupation of the range would continue until an alternative site was found. In early October 2011, the Commonwealth changed tack; retracting this advice and raising concerns about contamination, health and safety risks on the range. Then, in late October 2011, the Commonwealth purported to terminate the Licence based on giving reasonable notice of termination, by giving three months' notice.
In December 2011, the NSWRA commenced proceedings in the NSW Supreme Court, claiming the termination to be invalid.
In early 2012, the Commonwealth changed tack again, withdrawing its notice of termination and issuing three remedy notices under clause 10.1(b), asserting a number of breaches of the Licence. The NSWRA was unable to remedy the breaches within the required timeframe and the Commonwealth purported to terminate the Licence.
The key issues were the validity of the Commonwealth's conduct in issuing the remedy notices, and the question of whether it could terminate the Licence as a result of the NSWRA's failure to comply with those notices.
The arguments
The NSWRA submitted that the Commonwealth had a duty to act reasonably and in good faith in exercising its power under clause 10.1(b) and that, in requiring the breaches to be remedied in 14 to 16 days, the Commonwealth had breached this duty. The NSWRA relied upon the Commonwealth's admission that the breaches couldn't have been remedied within the time specified.
The Commonwealth sought to rely upon the doctrine of executive necessity, which it pleaded:
- gives rise to an implied term that the Commonwealth may determine the Licence as a matter of convenience or in the exercise of Commonwealth's executive discretion, and
- displaces, or otherwise qualifies, any implied term of good faith on the Commonwealth's exercise of its rights under the Licence so that its executive discretion to determine the use of the land (i.e. that it should be used as a national park) is not fettered.
The decision
Ultimately, White J held that the Commonwealth:
- was not entitled to rely on the doctrine of executive necessity to terminate the Licence as a result of a change in public policy
- was required, by reason of an implied contractual term, to act reasonably and in good faith in exercising its powers under clause 10.1(b), and that it had not done so in giving the remedy notices to the NSWRA on the terms that it did, and
- was not entitled to terminate the Licencedespite the NSWRA's failure to comply with the remedy notices.
The scope of the doctrine of executive necessity
According to the doctrine of executive necessity, the Crown cannot contract to fetter the future exercise of a statutory power or discretion required to be exercised in the public interest or by criteria in the statute.
White J considered that this doctrine operated so that the Commonwealth, when contracting in one capacity, cannot fetter a power that it has in another capacity that is to be exercised in the public interest.
How reliable is the doctrine of executive necessity?
In a comprehensive analysis of the relevant authorities and commentaries, the judgment draws a distinction between:
- situations that are Crown-specific, such as those that involve dealing with war, the welfare of the state or that involve matters of Crown prerogative or statutory duty, and
- other cases where the Crown has rights orexercises powers like any other subject.
The court highlighted the delicate balance required for this doctrine, involving the balancing of the need to:
- avoid undermining public confidence in government dealings and contracts, which would occur if governments and public authorities were not bound by their arrangements, and
- uphold the principle that governmentsand public authorities cannot excuse themselves from statutory powers and duties, or those that exist uniquely for the Crown.
White J found that it was incorrect to say that the doctrine permits the Commonwealth to break a contract with impunity if it needs to do so for policy reasons.
White J held that, in this case, the Commonwealth wasn't entitled to rely on the doctrine as:
- the Commonwealth was not seeking to exercise a power or discretion in a different capacity from that in which it was contracted (i.e. as the owner of the land), and
- the Licence, albeit an obstacle to theCommonwealth's changed policy, did not fetter the exercise of a future duty or discretion.
In this decision, the validity of the fundamental doctrine was not questioned. So while the Commonwealth can continue to rely on it, the Court arguably limited its scope and the circumstances in which it may justify contractual termination.
Before relying on the doctrine, the Commonwealth should consider whether:
- it is seeking to exercise a power or discretion in a different capacity from that which it relied on in entering the contract
- the contract fetters a future statutory power, or whether is it only a problem in the context of a policy change, and
- it is possible to comply with both itscontractual obligations and its policy objectives, and whether it should document its attempts to do so?
In this case, the Commonwealth could have acted consistently with both the Licence and its change in policy if it had provided an alternative site for the NSWRA. While the point was not made in the judgment, this alternative approach must have influenced White J's reasoning on the application of the doctrine of executive necessity to the facts.
Other issues for the Commonwealth
The case raises a number of other issues for Commonwealth decision-makers.
The implication of the obligation of good faith and reasonableness
This decision highlights that a contract with the government does not displace an obligation of good faith and reasonableness; if anything, it's a factor that implies that obligation.
Termination for convenience clauses
Another issue that the decision highlights is the usefulness of termination for convenience clauses. Most government contracts contain a termination for convenience clause, which is often thought to contractually enshrine the doctrine of executive necessity. Although it wasn't expressly discussed, the Court's limitation of the doctrine and its findings of an implied term of reasonableness and good faith could similarly limit the Commonwealth's right to exercise its power under such a clause.
However, there are differences between the standard termination for convenience provision and the doctrine of executive necessity, as the contractual right to terminate for convenience usually entitles the contractor to reasonable costs related to the termination. This protection for the contractor may support an argument that the basis for validly exercising a contractual termination for convenience right shouldn't be as limited as the common law doctrine of executive necessity.
What is the purpose behind the exercise of the contractual right?
The case also highlighted the need to make sure that any use of contractual power is in line with the purpose of that power. In this case, the court focused on the purpose of the remedy notices in its analysis of both the issue of termination validity and the duty of good faith. That purpose was primarily to provide for the remediation of problems at the range, not to position the Commonwealth to be able to terminate the Licence.
The finding also illustrates the dangers of "sitting" on problems for extended periods and of "assuming" responsibility for problems or issues. In its analysis of the timeframes set by the Commonwealth for remediation and of the NSWRA's ability to comply with the remedy notices, the court was critical of the remedy notices. The notices required NSWRA to conduct very significant works that were characterised as "repairs", which included installing access ramps, elevators and amenities for disabled people. The Commonwealth had known of problems at the range for many years, but had not previously notified NSWRA of the need for repair. The notices also required work on a building that was not the subject of the Licence and treatment of asbestos contamination, despite the Commonwealth effectively having assumed responsibility for that contamination many years earlier. Unsurprisingly, the nature and scale of the works led to the court's finding that the Commonwealth had acted unreasonably in setting a 14-16 day remediation timeframe. In making that finding, the court found there was an "overwhelming" inference that the Commonwealth was not genuinely concerned about the state of the buildings, but was seeking a plausible basis to terminate.
Analysis of the resources and ability of the counterparty
Another issue that was highlighted was the need to assess how the exercise of a coercive power will impact a counterparty's ability to meet its obligations. In its analysis of the Commonwealth's duty to act reasonably and in good faith, the court examined the NSWRA's ability to comply with the remedy notices. This involved considering factors such as the nature of the Licence (which was not considered a commercial arms' length arrangement) and the NSWRA's nature and resources (the NSWRA had two employees, one of which was part-time). It also considered the impact on the NSWRA of each alleged breach and the cumulative list of breaches in the remedy notices. The court found that the number and nature of things requiring remediation, given the NSWRA's ability to arrange for that remediation, required a reasonable timeframe and that the Commonwealth's timeframe was unreasonable.
The key points
From time-to-time policy objectives and legal obligations create conflicting demands of Commonwealth decision-makers. This decision makes it clear that policy imperatives don't mean contractual obligations can be ignored, other than in some Crown-specific situations.
The decision also emphasises the importance of:
- Commonwealth contracts containing an enforceable termination for convenience clause clearly setting out the circumstances where a termination right will arise, and
- such rights being properly exercised in line with the contract (including any implied term of reasonableness and good faith).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.