Can the Commonwealth terminate a contractual licence contrary to express terms?

NSW Rifle Association Inc v The Commonwealth of Australia [2012] NSWSC 818

In this decision, the Court held that the doctrine of executive necessity did not relieve the Commonwealth from its contractual obligations on the basis of a change in policy. This decision has implications for the way in which governments and government agencies deal and contract with third parties.

Background

This decision concerned certain Commonwealth land on the Malabar Headland occupied by the NSW Rifle Association (NSWRA) under a contractual licence for use as a rifle range (Licence).

The Licence was for a defined term. It was to terminate 14 days after the Commonwealth provided a Relocation Notice to NSWRA to the effect that the Holsworthy Range or a comparable range was available for the NSWRA's use. Alternatively, the Commonwealth was expressly entitled to terminate the Licence if the NSWRA was in default.

The Commonwealth wanted to transfer the Malabar Headland to the State of New South Wales for use as a national park. A Bill was introduced to Parliament to provide a framework for the regulation of the use of the land once it was transferred.

The Commonwealth issued three Remedy Notices to the NSWRA alleging certain breaches of the Licence and giving 14 days to remedy the breaches (Remedy Notices). The NSWRA commenced proceedings seeking declarations that the Remedy Notices were invalid and an injunction to restrain the Commonwealth from transferring the land.

Decision

The Commonwealth advanced the doctrine of executive necessity. The doctrine provides that the Crown cannot contract so as to fetter the future exercise of a statutory power or discretion required to be exercised in accordance with the public interest or by statutory criteria.

On that basis, the Commonwealth argued that no term could be implied in the Licence which would restrict its right to deal with the land. Such a term would have the effect of fettering the exercise of the discretion of the Executive to determine the use of its land in the public interest. On this basis, the Commonwealth alleged it was entitled to terminate the Licence at will or upon reasonable notice.

The Commonwealth asserted that where the Crown exercises its common law powers as an owner of land by entering into a contract for the future use of that land, it cannot disable itself from deciding in the future that in the public interest, the land should be used in a different way, for example, as a national park. It therefore was not bound to continue the Licence for the defined term because it later considered it to be in the public interest that the land be used as a national park, not a rifle range.

Justice White held that the doctrine of executive necessity had no role to play in the case as there was no fettering of a future discretion or a statutory discretion, and no action by the Crown in a different capacity from that in which it contracted. As his Honour stated, "all there is is a change of policy".

In his Honour's view, the Licence did not fetter the exercise of a future duty or discretion by the Crown. Rather, it constituted a contract by which the Crown acted in what it was then perceived to be the public interest in reconciling the competing demands for the use of the Malabar Headland. It was a present exercise of the Commonwealth's power as owner of the land, not the fettering of a future exercise of a duty or discretion.

Accordingly, his Honour held that the Commonwealth was not entitled to terminate the Licence either at will or on reasonable notice, and the NSWRA was further entitled to an injunction restraining the transfer of the land whilst the Licence was on foot.

Further, his Honour found that the Commonwealth had failed to accord the NSWRA the duty of good faith and reasonableness in exercising its contractual power to require and fix the time for defaults to be remedied. Accordingly, his Honour held that the Remedy Notices were invalid and the Commonwealth was not entitled to terminate the Licence for the NSWRA's non-compliance with those notices.

What this means for you

This decision demonstrates a continuing judicial reluctance to allow governments to break commercial contracts. Obviously, the public's confidence in government dealings and contracts would be undermined if all contracts which fettered future executive action were held not to be binding on governments and public authorities.

Accordingly, the doctrine of executive necessity would appear to be limited to contracts which act as a fetter on the Crown's future exercise of a duty or discretion. A mere change in policy will not be sufficient to trigger the application of the doctrine.

Given that the doctrine is unlikely to protect governments from the consequences of breaching contractual arrangements, the need for greater flexibility to accommodate potential policy changes should be considered when entering into contracts with third parties.

Further, policy changes in the "public interest" will not negate the obligation on governments to act reasonably and in good faith in their contractual dealings with third parties.