26 October 2007
Key Points:
Government should review its tenders and other contracting arrangements to ensure that it is not asking the other side to engage in conduct which could breach the Trade Practices Act.
Companies which conduct business with Government can no longer rely on derivative crown immunity if they contravene the Trade Practices Act 1974 (Cth) ("TPA"), following the recent decision of the High Court in Australian Competition and Consumer Commission v Baxter Healthcare Pty Limited [2007] HCA 38. Previously, it had been widely assumed that they could.
It follows that companies supplying Government now clearly have the same rights and responsibilities that are applicable to companies supplying the private sector.
What led to this position?
Baxter Healthcare is a manufacturer of medical products. It had a monopoly in the production of sterile fluids, but faced competition in the market for kidney dialysis products.
A number of State and Territory health purchasing authorities needed to acquire both products, and issued tenders for them. In response, Baxter Healthcare offered significantly lower prices for its sterile fluids if the purchasing authorities also bought its dialysis products. It became unlikely that competitors’ supplies of dialysis products, alone, would be favoured over Baxter Healthcare’s bundled offerings.
The ACCC alleged that Baxter’s bundling of its products for these tenders, and subsequent contracts, breached section 46 of the TPA (dealing with a misuse of market power) and section 47 (proscribing exclusive dealing).
None of the Government purchasing units were "carrying on business", in the course of their procurements. As the TPA only applies to State, Territory or Commonwealth Governments when they carry on business, the Act did not apply to them. But did their crown immunity extend to a company supplying to a Government, as Baxter Healthcare was?
What did the High Court decide?
The question for the Court was whether sections 46 and/or 47 of the TPA apply to the conduct of a company in relation to negotiations for, entry into, or performance of, a contract with a State or Territory Government, where the Government’s conduct is not in the course of carrying on a business.
The High Court held that the TPA does apply. There is no derivative crown immunity granted to a company negotiating, or contracting, with a Government - that is, itself, immune from the TPA - when not "carrying on business".
Baxter Healthcare, when dealing with the States and Territories, did not enjoy a general immunity not otherwise available to those Governments. Such a conclusion would go beyond what is required to protect the legal rights of Governments under the TPA.
What was the underlying reasoning?
In essence, the High Court was confronted with, and decided against, the proposition that a company that dealt with Government, in the course of its own business, enjoyed a general immunity, because of the derivative effect of crown immunity.
The argument went like this: if the operation of the TPA was extended to Baxter Healthcare’s conduct, it would then be unlawful to perform obligations or take advantage of rights bargained for, or granted contractually by, Government. The rights of the crown would be directly affected.
That proposition however was impossible to reconcile against the objective of the TPA: to enhance the welfare of Australians through the promotion of competition and fair trading. So, the High Court found that supporting that proposition would go beyond what was necessary to protect the legal rights (stemming from the limited crown immunity) of Government.
If Baxter Healthcare was to be benefited by a derivative crown immunity, a significant qualification of the TPA’s objective of promoting competition would have been imposed.
The High Court also rejected an argument that the TPA does not prevent the crown in right of a State or Territory from making any contract it wishes, and that the TPA preserves the crown’s freedom by providing that companies that deal with the crown should be free to make any contract, unfettered by any constraints.
As a broader matter, it was found that this argument was not supported by established principles of statutory construction, and could not be reconciled with the purpose and subject-matter of the TPA. In particular:
"The construction urged by the respondents [Baxter Healthcare] imposes a very extensive qualification upon the Act’s object of promoting competition and fair trading in the public interest, in the name of the protecting of the capacities of the Crown, a qualification strikingly at odds with the way the Act deals with governments when they themselves carry on a business."
So, in dealings with the States and Territories, Baxter Healthcare was bound by sections 46 and 47.
With the High Court making it clear that crown immunity does not apply to Baxter Healthcare, the matter will now return to the Federal Court, to consider the underlying issue - whether Baxter’s conduct did constitute a misuse of market power or had the purpose, effect or likely effect of substantially lessening competition.
What are the consequences for Government?
If Government is not "carrying on a business", it is still not bound by the TPA.
That immunity now however does not extend to companies negotiating or contracting with Government. For Government, this has implications for the way it can undertake
a procurement.
It is also desirable for agencies to review their tendering and contracting processes, to ensure that no company, in a Government procurement, is being asked to engage in conduct, or otherwise act, in breach of the TPA.
In particular, any thought of inviting bundled bids - in essence, the grouping of goods or services, to achieve volume for the company and lower prices for Government - should be very closely considered.
Of course, contractors will need to look carefully at their tender responses and contracts, to ensure that they are not now acting on the wrong side of the law.
For further information, please contact Philip Harrison.
