Focus: Executive necessity or a shot in the dark
21 August 2012
In brief: A recent NSW Supreme Court decision has continued a trend against the Federal Government's ability to use the doctrine of executive necessity to break its contractual obligations. Partner Paul Kenny (view CV) and Lawyer Amelia Hanscombe report on a case that serves as a reminder that the repudiation of existing agreements with government by a new administration will seldom be successful.
How does it affect you?
- A seldom-used form of government privilege is 'executive necessity,' which entitles the Government to break an otherwise valid and enforceable contract because it is necessary for acceptable Governmental reasons (such as a change in policy). Using such privilege, the government can avoid liability for breaking the contract in common law. This reflects the principle that a contract cannot, despite its binding nature, hinder a government's ability to exercise its statutory powers or future discretion in accordance with the public interest or by criteria specified in statute.
- Despite some successful attempts by governments to plead 'executive necessity' as a defence to an action for breach of contract, the doctrine has been judicially criticised. The case of NSW Rifle Association v Commonwealth  NSWSC 818 (20 July 2012) continues the trend against the doctrine, suggesting that future courts will be disinclined to accept the argument unless the contract affects a future exercise of power, or there are compelling reasons justifying breaking the contract in question. Mere changes to policy will not justify the government terminating a contract.
- Furthermore, the doctrine of executive necessity will not prevent implied terms, such as a duty to act reasonably and in good faith, from being incorporated into a contract. Instead, this case suggests that the fact the contract is with the government is a factor in favour of the implication of a duty of good faith or reasonableness.
- Governments and government agencies will need to consider whether contractual arrangements allow sufficient flexibility to accommodate future policy decisions, as the doctrine of executive necessity is unlikely to provide a realistic defence for breaking contractual arrangements with third parties.
Under a contractual licence granted by the Federal Government in March 2000, the NSW Rifle Association (the NSWRA) occupies part of the ANZAC Rifle Range at the Malabar Headland, situated on Commonwealth land. The NSWRA had occupied the ANZAC Rifle Range for many years, and had a long history of negotiations with government as to its right to reside there.
Under the licence arrangement, and subject to a couple of qualifications, the NSWRA was entitled to occupy the range until the Commonwealth gave notice that the nearby Holsworthy Range, or a comparable range nominated by it, was available for the NSWRA's use.
Although the Federal Government had previously proposed to transfer the Malabar Headland to the State of NSW for use as a national park, before October 2011 there had been no indication from it that the transfer would proceed without the NSWRA first being relocated to a comparable range.
However, in October 2011 and January 2012, the Commonwealth purported to terminate the licence by serving three 'remedy notices' on the NSWRA, asserting that it was in breach of its obligations under the licence, in that it failed to keep the NSWRA club buildings in an adequate state of repair.
In May 2012, the Federal Government also introduced the Malabar Headland Protection Bill 2012, along with a proposal that part of the Malabar Headland be transferred to NSW. The Bill itself did not provide for, or authorise, the transfer, but provided for a regulatory framework for land use as a national park, once the land was transferred.
The questions before Justice White were:
- Was the Commonwealth entitled to evict the NSWRA from the ANZAC Range; and
- If not, could the Commonwealth transfer part of the Malabar Headland to NSW for use as a national park?
The NSWRA's principal contentions were that the remedy notices were issued as part of a political campaign spurred by the member for Kingsford Smith, aimed at evicting the NSWRA from the range. According to the NSWRA, the Commonwealth was under a duty to act reasonably and in good faith, particularly in specifying a reasonable time to remedy the building maintenance breaches. It submitted that the Commonwealth had not acted reasonably when it gave the NSWRA a 14-16 day deadline for the clubhouse repairs. The Commonwealth itself did not dispute that it would have been impossible for the NSWRA to carry out all the work required under the remedy notices within the time specified.
The Commonwealth, however, submitted that the licence contained an implied term reflecting the doctrine of executive necessity – namely, that the Commonwealth may determine the licence or decline to perform its obligations either as a matter of convenience or in the exercise of Commonwealth executive discretion.
Furthermore, the Commonwealth relied upon the doctrine as displacing any implied term of good faith in the licence. According to the Commonwealth, any implied term had to be qualified 'so as not to impinge upon the future exercise by the Commonwealth of its executive discretion and common law right to determine the appropriate use of the land.'
Justice White recognised the principle that the Crown cannot contract so as to hinder the future exercise of a statutory power or discretion required to be exercised according to the public interest or by criteria specified in the statute. However, he did not consider it applicable to the present facts and was highly critical of the breadth of the doctrine as asserted by the Commonwealth. His Honour emphatically rejected the notion that a contract entered into by the Commonwealth (as a landowner) could be terminated at will or on reasonable notice, or that particular terms that might otherwise be implied could not be implied because the Commonwealth had changed its policy in relation to the NSWRA's licence. Consequently, the Commonwealth was not entitled to terminate the licence.
According to Justice White, the licence did not hinder the exercise of a future duty or discretion by the Crown. He did not consider any of the authorities cited regarding executive necessity as analogous to the present facts – namely, a situation that involved no hindering of a future or statutory discretion, and no action by the Crown in a different capacity from that in which it originally contracted.
Justice White also found that an implied duty of good faith and reasonableness was applicable in the circumstances. The fact that the agreement was with the Government was viewed as a factor in favour of implying the term. In his Honour's view, the purpose of the clause regarding building maintenance was to provide the NSWRA with an opportunity to remedy a breach, and the Federal Government was using its contractual power unreasonably by requiring the remedying of breaches that were of no genuine concern to the Commonwealth, within unrealistic timeframes. The remedy notices were invalid because the Commonwealth's motivation to serve them was not to have the buildings repaired, but to trigger a default that would allow it to terminate the licence and meet political promises.
His Honour regarded the threatened transfer of part of the range without securing to the NSWRA the continued right to use it, as an anticipatory breach. The Commonwealth was not entitled to deal with any of the headland inconsistently with the terms of NSWRA's licence.
While it was not necessary to decide in this instance, he also would have found the NSWRA entitled to relief against forfeiture of the contractual licence.
While it is difficult to predict the precise circumstances in which the doctrine of executive necessity may be invoked successfully, Justice White's finding continues a trend against the doctrine. The effect of his decision is to curb the breadth of the doctrine and restrict it to the restraining of the Government's future discretion or exercise of statutory powers.
The decision also suggests that governments may be held to higher standards in their dealings with third parties, and will be expected to act reasonably and in good faith in meeting contractual obligations, regardless of any policy change or other public interest motivation.
- Paul KennyPartner, Sector Leader - Government,
Ph: +61 3 9613 8860
- John GreigExecutive Partner - Energy, Resources & Infrastructure,
Ph: +61 7 3334 3358
- Michael HollingdalePartner,
Ph: +61 8 9488 3708