The doctrine of executive necessity and termination for convenience in government contracts
The Coalition Government has stated that it has been elected with a mandate to abolish the Carbon Pricing Mechanism (CPM). While the Government hopes that this process will be quick and finally remove the uncertainty which has recently surrounded this policy area, there remains some uncertainty in the business community about the ease with which the broader Clean Energy Future package may be able to be completely disbanded.
This uncertainty is felt by both liable entities and other participants in the broader scheme, such as recipients of the industry specific assistance schemes, funding programs and finance packages. For example, the Coalition has consistently stated that it intends to abolish the Clean Energy Finance Corporation (CEFC) and unwind any finance arrangements it has put in place.1
More recently, it also announced that it will make funding cuts to the Australian Renewable Energy Agency (ARENA), redirect the carbon capture and storage flagships funding and discontinue the jobs and competitiveness program, the steel transformation plan, the coal sector jobs package, the clean energy skills package and the clean technology supply chains program.2
The CEFC, ARENA and other Commonwealth agencies have entered into numerous financing and funding arrangements across all of the Clean Energy Future assistance packages. Many of these arrangements provide for large amounts of funding over a number of years for the carrying out and completion of large-scale energy efficient and low pollution projects. Typically, the private sector uses the Government assistance to secure additional finance.
Business remains concerned about whether the repeal of the CPM will remove the budgetary source for much of this funding and will therefore require the new Government to revisit those arrangements. This uncertainty was increased last week with the release by Senator Christine Milne of information from the Clerk of the Senate that the ability to defund the CEFC and ARENA by administrative action alone is questionable and, where it led to these entities defaulting on specific contracts, could lead to legal action.3
The Government will only be able to terminate such arrangements in accordance with their agreed terms or by relying on the doctrine of executive necessity. Alternatively, if the Government passed legislation which provided for such contracts to be set aside, the consequences for an individual contract would still need to be assessed on the terms of each contract and the extent to which those terms provide for frustration and/or future unlawfulness.
In relation to the doctrine of executive necessity, however, the 2012 decision of the NSW Supreme Court 2012 in NSW Rifle Association v the Commonwealth,4 means that the ability of the Government to rely on this doctrine to exit such arrangements is unclear and will be inherently risky.
Early case law has warned that "the repudiation of subsisting agreements by a new administration can seldom be ventured upon with success".5 Warnings such as these elevate the importance of the existing termination for convenience clauses in those agreements.
Is there an inherent power to break a contract?
In NSW Rifle Association, theNSW Supreme Court placed a substantial obstacle in the path of the Commonwealth in its purported attempt to evict the Rifle Association from the Malabar Headland and in the process set down an important new restriction on the exercise of the doctrine of executive necessity.
By way of background, 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 an otherwise binding contract where this was now required due to a change in policy.
In NSW Rifle Association, the Commonwealth argued that it could terminate the occupation licence held by the Rifle Association over Commonwealth land by relying on the doctrine of executive necessity rather than the express right set out in the terms of the licence to terminate for breach.
Further, the Commonwealth argued that reliance on the doctrine of executive necessity meant that it did not have to exercise that power reasonably or in good faith. A change in Government policy meant that the relevant land was intended to be dedicated as a national park and as public open space and could no longer be used for a rifle range.
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 its express terms. 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:
"The fact that the contract is with Government does not displace an obligation of good faith and reasonableness. If anything, that is a factor in favour of the implication of the term".6
What are the alternatives to relying on a prerogative power?
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 of an otherwise enforceable contract outside its express terms. Accordingly, if the new Government seeks to exist from the financing or funding arrangements that are reliant on the existence of the CPM, it will need to look closely at its rights under the standard termination for convenience clauses.
Termination for convenience clauses are widely used by the Commonwealth and are intended to provide certainty to contracting parties about the potential circumstances for the Government's termination and the consequences for both parties. 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 and provides certainty for the private sector about the consequences of such termination.
A contractor who has agreed to such a clause will be less likely to challenge an exercise of the right of termination, particularly if the clause provides for an agreed level of compensation. If a contractor does challenge the termination, the courts are more likely to be reluctant to interfere with the expressly agreed bargain.
Most commonly, and understandably from a funding recipient's position, those clauses also provide a mechanism for compensation. In our experience of these arrangements, it is common for the compensation obligations to provide for direct costs arising from the Government's termination.
Depending on the nature of the project and the timing of the termination, however, such compensation may at times outweigh the financial benefit of termination. This is particularly the case where the project is complex and long term, requires the letting of significant construction contracts and the procurement of large-scale equipment and machinery.
1Daniel Palmer, A Coalition game of
intimidation, The Climate Spectator, (5 February 2013).
2Transcript of Joint Press Conference of the Honourable Joe Hockey MP, Shadow Treasurer and the Honourable Andrew Robb AO MP, Shadow Finance Minister, Canberra, Wednesday, 28 August 2013 and Carbon + Environment Daily, Coalition cuts leave business only one avenue for clean energy cash (28 August 2013).
3Letter from Rosemary Laing, Clerk of the Senate, Australian Senate to Senator C Milne, Leader of the Australian Greens dated 6 February 2013 accessed from Carbon + Environment Daily, CEFC funding block may be illegal (4 September 2013) http://www.cedaily.com.au/files/2013/cladvsencm_18357.pdf.
4(2012) ALR 158, White J, 20 July 2012
5State of New South Wales v Bardolph  HCA 74; (1934) 52 CLR 455 per Evatt J at 463.
6NSW Rifle Association Inc v The Commonwealth of Australia  NSWSC 818 per White J at 108
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.