What will come of the Coalition's CEFC bluster?

The Coalition has said it will scrap any contracts entered into by the Clean Energy Finance Corporation. The legal precedent, however, suggests such a move will prove very costly.

The next federal election will be held in just under six months. One of the key issues likely to be ventilated in the lead up to the election is Australia's policy response to climate change.

Australia currently has a price on carbon – the carbon pricing mechanism – which started on July 1 2012 and was introduced through the Clean Energy Act. If the Coalition wins power, they have vowed to repeal this legislation. Labor remains loyal to the CPM and has committed to the position of refusing to support a Coalition government’s repeal.

Whether Australia will maintain its carbon price following the election is causing significant uncertainty in the business community, both for liable entities and for other participants in the broader Clean Energy Future policy such as recipients of the industry specific assistance schemes, funding programs and finance packages. For example, the Coalition has stated it intends to repeal the Clean Energy Finance Corporation and unwind any finance arrangements it has put in place.

If the CEFC is disbanded, there are likely to be transitional arrangements that would need to be managed given that the CEFC has indicated it has legal obligations to continue operating. This is likely to mean that the CEFC will have entered into contracts prior to any repeal of the CPM, which may involve ongoing obligations to fund or to honour guarantee claims or to pay compensation.

Similarly, the government is continuing to enter into funding arrangements across all of its assistance packages. Many of these 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. Any repeal or significant amendment of the CPM will remove the budgetary source for much of this funding.

The government of the day will only be able to terminate such arrangements in accordance with their agreed terms or by relying on the doctrine of executive necessity. On the basis of the NSW Supreme Court 2012 decision in NSW Rifle Association v the Commonwealth, and the associated public backlash, reliance on the doctrine of executive necessity to exit such arrangements is unclear and will be inherently risky.

Executive necessity – will it work?

In the case of the NSW Rifle Association, the NSW 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 contractual obligations where this was necessitated by a change in policy.

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 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 the express provisions. 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. The judge 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.”

Future proofing – avoiding the doctrine

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 a contract outside of the express terms of that contract.  Accordingly, in relation to financing or funding arrangements reliant on the existence of the CPM, the government of the day will need to rely on the standard termination for convenience clause. 

Termination for convenience clauses are widely used and 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 the 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 will be reluctant to interfere with the expressly agreed bargain.

Most commonly, and understandably from the 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 outweigh the financial benefit of termination. This is particularly the case where the project requires the letting of significant and lengthy construction contracts and the procurement of large-scale equipment and machinery.

Note that this article includes some parts previously included in [link to The future of the Carbon Pricing Mechanism – Managing Uncertainty]. 

Noni Shannon is a partner at law firm Norton Rose.

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