Australia: Clarence City Council v Commonwealth of Australia: key learnings for councils, airport operators and other Commonwealth lessees

The Federal Court's recent decision in Clarence City Council v Commonwealth of Australia [2019] FCA 1568 reinforces that a claimant who is not a party to a contract will only be able to seek relief in relation to that contract in very limited circumstances.

In the case, Clarence City Council (Council) commenced proceedings in Federal Court against Hobart International Airport Pty Ltd (Hobart Airport) and the Commonwealth. The airport site is situated within the Council's local area but, as it is owned by the Commonwealth, the airport site is not subject to rates. Nonetheless, the lease between Hobart Airport and the Commonwealth for use of the airport land included a clause that required Hobart Airport to make payments to the Council 'in lieu of rates'. The Council was not a party to the lease, but sought relief in relation to the interpretation and enforcement of that clause on the basis that it was a beneficiary of the clause.

The proceedings were heard in March and July this year (together with similar proceedings commenced against Launceston Airport by the Northern Midlands Council). O'Callaghan J handed down his judgement on 24 September 2019, in a resounding win for Hobart Airport. His Honour's decision reinforces that a claimant who is not a party to a contract will only be able to seek relief in relation to that contract in very limited circumstances.

Background

In July 2018, two local councils in Tasmania, Clarence City Council and Northern Midlands Council (Councils) commenced proceedings in the Federal Court against the Commonwealth, Hobart Airport and Launceston Airport, seeking declaratory relief about the meaning of a clause in the lease between the Commonwealth and the airport operators that required the operators to make 'ex gratia payments in lieu of rates' to the Councils.

The clause in question (clause 26.2(a) of the lease) required the airport operators to pay to the Councils an amount 'equivalent to the amount which would be payable for rates as if such rates were leviable or payable' in respect of the parts of the airport:

  • which were subleased to tenants; or
  • 'On which trading or financial operations are undertaken.....but excluding runways, taxiways, aprons, roads, vacant land, buffer zones and grass verges, and land identified in the airport Master Plan for these purposes.'

Clause 26.2(a) was included in the leases between the Commonwealth and airport operators around Australia (including Hobart Airport) in acknowledgement of the fact that the airports were on Commonwealth land and would otherwise not be subject to council rates on account of s 114 of the Constitution. The Commonwealth's intent in including the obligation to pay an amount 'equivalent' to rates was to ensure a level playing field between businesses located on airport land and their off-airport competitors, a principle otherwise known as competitive neutrality.

Issues in dispute

The key issues in dispute were:

  1. Did the Councils, which were not parties to the lease, have standing to bring the claims? The Commonwealth agreed that they did, but Hobart Airport contended that the Councils were 'strangers' to the leases between the airport operators and the Commonwealth and that their claim could not be considered by the Court on that basis.
  2. What was the meaning of 'trading or financial operations', and did payment need to be made to the Councils in relation to areas of the airports that were used for aeronautical services (including departure and arrival lounges, baggage claim areas, security facilities, bathrooms and queueing or circulation areas)? The Councils argued that payments needed to be made for all areas used for aeronautical services, while Hobart Airport and the Commonwealth said they should be excluded.
  3. What was the valuation methodology that should be applied to determine the amount payable by the airport operators to the Councils? The Councils claimed the methodology applied by the Valuer General in compliance with the statutory regime in Tasmania should apply, while Hobart Airport and the Commonwealth contended that the methodology should be objectively appropriate and engaged Herron Todd White to prepare valuations that resulted in significantly lower payments being required to the Council.

Decision

Hobart Airport had run the case on the basis that the relevant Council had no standing to enforce a lease provision where it was not a party to the lease itself. Hobart Airport won the case on that point, with Justice O'Callaghan accepting that the Council had no standing to enforce clause 26.2(a) despite having the benefit of payments under that provision. The judgment centres around the fundamental principle of privity of contract – that only the parties to a contract are bound by it and have rights to enforce that contract.

Only very limited exceptions apply to the principle of privity of contract. The Council had submitted that, because it had a real interest in the subject matter of the declarations that it sought, being the economic advantage that would accrue to it depending upon the meaning of clause 26.2(a) of the lease, it was able to rely on the exception identified in CGU Insurance Ltd v Blakeley (2016) 259 CLR 339 (CGU).

In the CGU case, an "outsider" to a contract was able to obtain declaratory relief despite being a non-party to the contract in question. However, His Honour sided with Hobart Airport's interpretation of CGU, distinguishing the Council's claim from the claim in CGU because the relief sought by the non-party in CGU was based upon an enforceable legal right that arose under legislation, whereas the Council was able to point only to a financial benefit said to arise under the lease itself (as opposed to a right that came into existence due to legislation or some other source outside the lease). O'Callaghan J found that 'CGU Insurance Ltd does not support any abandonment of the principle of privity of contract, nor does it support an entitlement to declaratory relief in every case in which a third party may have an expectation of an economic benefit under a contract between other entities'.

The Council also relied on another exception to privity of contract where a third party to a contract may be permitted to seek declaratory relief in relation to legal rights under the contract in circumstances where the parties to the contract were themselves relevantly in dispute. However, that also was rejected by his Honour, who was unpersuaded that there was a general exemption to the doctrine of privity of contract of this kind and also pointed to the fact that in this case, Hobart Airport and the Commonwealth were manifestly in agreement about Hobart Airport's obligations under clause 26.2(a), including that Hobart Airport had discharged those obligations.

His Honour relied heavily on the decision of Deane J in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 (Trident), which makes clear that the doctrine of privity of contract is a fundamental and long-settled rule of the common law which has been consistently reinforced by case law. He found that the Council's position could not be reconciled with Trident and the accepted principles of privity of contract which required that a third party to a contract will only have rights in relation to a contract if those rights have some basis outside the contract itself.

In short, the decision represented a resounding victory for Hobart Airport, which also received costs orders in its favour. The Council has appealed the decision to the Full Court of the Federal Court, with the appeal likely to be heard next year.

Key takeaways

The decision reinforces that a claimant who is not a party to a contract will only be able to seek relief in relation to that contract in very limited circumstances, and demonstrates that the exception relied upon in CGU remains narrow in operation. It also underscores the importance of drafting clear and unambiguous clauses in contracts where payment obligations are involved, particularly where the payments are directed to a third party.

Although O'Callaghan J ultimately did not make any findings on valuation methodology, there are also important learnings about how airport operators and other lessees on Commonwealth land should be calculating amounts payable to local councils under their leases with the Commonwealth. This case will be of interest to all major airport operators and other Commonwealth lessees as liability to local councils for rates and levies is a major overhead and has been the subject of considerable debate.

Some important learnings from the case are as follows:

  • local councils are unlikely to be able to seek assistance from the courts to enforce benefits that they have as a result of provisions in leases between the Commonwealth and its lessees, including airport operators;
  • airport operators and other Commonwealth lessees should be strategic in their approach to negotiations with local councils to ensure they are not paying more in rates and levies than they are strictly obliged to pay; and
  • airport operators and other Commonwealth lessees should be calculating amounts payable to local councils under their leases with the Commonwealth by reference to the approach taken by Hobart Airport in this case, including with respect to the applicable valuation methodology.

It should also be noted that the result in this case may have been different had the dispute arisen in any of Queensland, Western Australia or the Northern Territory, which each have statutory provisions that enable beneficiaries of a provision in a contract to which they are not a party to enforce that provision against the parties to the contract, provided certain conditions are met (for example, in Queensland and the Northern Territory, the beneficiary must have communicated their acceptance of the term for it to be enforceable). Airport operators and other Commonwealth lessees in these jurisdictions will want to ensure that any provisions in their contracts which confer a benefit or right to a third party be carefully drafted with this in mind.

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.

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