Australia: Standared of Government Conduct depends on nature of Contract

Procurement Update
Last Updated: 7 February 2010
Article by Scott Alden and Alyson Eather

The Facts

The New South Wales Land and Housing Corporation (the Corporation), a statutory body associated with the NSW Department of Housing (the Department), entered into two largely identical contracts with Willowdene Constructions Pty Limited (Willowdene) and Transfield Services (Australia) Pty Limited (Transfield) for the provision of maintenance services on Department-owned properties (head contracts). Both Willowdene and Transfield entered into subcontracts with CPR Property Pty Ltd (CPR Property) (second applicant), a sole director company owned by the first applicant, Mr Robert Hine (Hine).

Clause 16 of the head contracts gave the Corporation the power to prohibit Transfield and Willowdene from using any subcontractor which it reasonably regarded as 'incompetent, negligent or otherwise unsuitable'. On 24 March 2004, the Corporation prohibited its contractors from using CPR Property as a subcontractor, relying on the clause. Both Willowdene and Transfield immediately ceased to use the services of the company.

The Corporation prohibited its contractors from engaging CPR Property due to allegations of an improper relationship between CPR Property and a Corporation employee, which resulted in an apparently excessive amount of work being given to it. Several investigations were conducted into this relationship. As a result of ICAC and internal investigations into the allegations of a conflict of interest, the Department terminated the employee's contract. The Department also subsequently withdrew the direction to Willowdene prohibiting it from using CPR Property as a subcontractor in March 2006.

The hearing was run on the basis that the conduct of the Corporation was treated as conduct of the Department.


The applicants claimed that, amongst other things, the Department had:

  • Contravened section 42 of the Fair Trading Act 1987 (NSW) ('[a] person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive').
  • Breached a duty of care it owed to the applicants and made a negligent misstatement to both Transfield and Willowdene.

The applicants contended that, by reason of the Corporation's conduct, they had suffered loss and damage for which the Corporation and the State of New South Wales should be held liable.

Misleading and Deceptive Conduct Claim

The applicants argued that the Department had breached section 42 of the Fair Trading Act 1987 (NSW) as the written direction to Willowdene and oral direction to Transfield from the principal's representative represented to each that he, as the Department's representative, reasonably regarded CPR Property as unsuitable to warrant it being prohibited from carrying out work on the Department's properties. The applicants submitted that, because a prohibition is inherently permanent, the directions conveyed a message that CPR Property was unsuitable so as to warrant permanent preclusion from working as a subcontractor for the Department. According to the applicants, this representation was not true because it did not reflect the actual state of mind of the principal's representative at the time the directions were given.

The Department submitted that clause 16 of the head contracts permitted the principal's representative to form the opinion in any way he liked, provided the opinion was 'subjectively (that is honestly) reasonable'. The Department submitted that 'reasonableness' must be informed by the objects of the Corporation, particularly as specified in sections 5 and 12 of the Housing Act. The purpose of clause 16 should be understood as vesting in the Corporation a wide discretion to exclude from the State's properties any subcontractor that the principal's representative honestly regarded as unsuitable.

The Court found that clause 16 was not satisfied merely by the principal's representative having a 'subjectively reasonable' belief in the unsuitability of the subcontractor, in that he or she only had to honestly hold that view. Rather, Justice Jagot explained:

  • '[a] person's view is not reasonable merely because it is honestly held. For example, an honest but capricious and arbitrary view is not a reasonable view. A person reasonably regards some matter to be so where the opinion or view is reached by a process of reason. The view must thus be rational having regard to the circumstances known to the person at the time'.

This was not a particularly high standard in that it didn't require any sort of investigation to occur, or a particular standard of proof to be reached.

In any event, the Court held that the principal's representative did regard CPR Property unsuitable to work as a subcontractor on the Department's properties. This was so despite the fact that the principal's representative, who issued the directions, did not carry out any independent investigations, but rather had based his opinion on what he had heard at the meetings he attended regarding the issue.

Justice Jagot concluded that the opinion of the principal's representative was reasonable in that it was reached by a rational process, namely, the Department was undertaking an investigation into the allegations of misconduct, and the Department had 'sufficient cogent information' indicating the existence of an improper association. This information was found to warrant the principal's representative prohibiting CPR Property from working on the Department's properties.

His Honour did not accept that the word 'prohibit' necessarily conveyed a representation that CPR Property was unsuitable so as to warrant permanent preclusion from working on Departmental properties. He also said that the direction did accurately convey the state of mind of the principal's representative, and that of the Director-General and on this basis it was determined that the directions were not misleading or deceptive.

Duty of Care Claim

The applicants also claimed that the respondents breached a duty of care owed to the applicants, namely, to exercise reasonable care and skill in determining whether the contractual conditions of clause 16 had been fulfilled. According to the applicants, this duty required that there be sufficient objective grounds to justify the Department's exercise of its contractual rights. The applicants said that part of this duty included the Department investigating the matter properly before giving a direction under clause 16, such proper investigation to include giving Mr Hine an opportunity to be heard (which he was not).

In rejecting this claim, the Court noted that this case did not fall within any established category in which liability for negligence has been imposed, noting 'the fact that the harm suffered by the applicants (loss of profits from the business of CPR Property) was a reasonably foreseeable consequence of the issue of the directions under clause 16 of the head contracts does not mean that the respondents are liable in the tort of negligence to the applicants'. Rather, the relationship between them was purely commercial.

The Court found that no duty of care existed between the Department and CPR Property. Even if it did, the standard of the duty was what the terms of clause 16 of the head contracts required, namely, that the principal 'reasonably regards that person or subcontractor as incompetent, negligent or otherwise unsuitable', and that was found to have existed.

In rejecting the argument that the Department owed the subcontractor a duty of care, the Court noted that the nature of the duty of care owed by the Department cannot be 'affected by any generalised notion that government agencies should somehow be better or fairer than private entities in their commercial dealings with third parties'. The Court also noted that the '[t]he Department's purpose in retaining the contractor is not to ensure the subcontractor gets work and can profitably run a business. It is to ensure the work gets done properly and for a reasonable price'.

In conclusion, the Court found that the Department was 'pursuing its legitimate interest in ensuring the integrity of its systems for work and that public money was not either being misappropriated or at risk of misappropriation'. The Court was not willing to accept that in these circumstances the Department should have acted with the interests of the applicants in mind and, accordingly, the Department did not owe a duty of care to the applicants.


This case is particularly relevant in the context of modern developments which suggest that governments and their agencies may be subject to a different standard of conduct to the private sector. In the case of Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1, the Court found that, whilst the government was not in a fiduciary relationship with a tenderer, an implied term of fair dealing existed under the tender documents, under which the government was obliged to act fairly with all tenderers. This was found to be the case particularly due to the fact that the contract involved the expenditure of public money and the public being entitled to expect that government agencies will act as 'moral exemplars'. In 2004 the NSW Attorney General's Department issued the Model Litigant Policy for Civil Litigation, which was approved for adoption by all NSW government agencies in July 2008. In essence, the policy articulates principles that are intended to express the law and that direct the government bodies to act in a fair, honest and ethical manner in relation to the conduct of litigation.

In light of such developments, Hine v NSW Land and Housing Corporation is particularly significant, as the Court refused to find a duty of care between the government agency and a subcontractor under the particular contractual arrangements. Had this not been the case, the Court's decision could have further restricted government decision- making over contracts. Instead, the Court indicated that it is legitimate for a government agency to make decisions having regard to its own commercial interests and the integrity of its processes involving the use of public funds, rather than the commercial interests of others.

(The authors would like to acknowledge the assistance of Alison Ewart, solicitor, in relation to this article.)

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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