24 Dec 2015
Watch this space: High Court challenge to validity of Government contract
by Timothy Gordon, Emily Costello
If the Acquista appeal is upheld, there could be more challenges to seemingly valid contracts by third parties such as disgruntled competitors, unsuccessful tenderers and public interest bodies.
The High Court will in 2016 consider a challenge to the validity of a Government contract in a case which may have very important implications for the risk profile of parties entering into contracts with Government, particularly where statutory processes are involved. The case may provide helpful guidance when a Government agency has failed to follow statutory requirements and will be of particular interest to parties involved in public procurement activities.
The Acquista case
The High Court granted special leave to appeal the South Australian decision of Acquista Investments Pty Ltd v Urban Renewal Authority on 13 November 2015.
The Acquista case concerns 407 hectares of Crown land north of Adelaide, known as the Gillman land. A statutory authority, the Urban Renewal Authority (URA), was responsible for the redevelopment of the Gillman land. The URA had developed a marketing and pricing policy to ensure that property sales were properly benchmarked and that appropriate sales processes were undertaken. In accordance with that policy, the URA usually offered parcels of land to developers through a competitive tender process.
In 2013, several parties approached the URA seeking to purchase part of the Gillman land. On 6 March 2013, the appellants, a joint venture business trading as Integrated Waste Services (IWS), approached the URA with an unsolicited proposal to fill the land and construct the necessary earthworks. In June 2013, the URA received a proposal for the redevelopment of the Gillman land as an “oil and gas hub” from Adelaide Capital Partners Pty Ltd (ACP).
When IWS became aware of ACP's proposal, it wrote to the URA asking for confirmation that it would be included in any process for the sale of the Gillman land. In December 2013, following detailed consideration, including at Cabinet level, the URA entered into a contract with ACP, granting it an option to purchase and redevelop the Gillman land.
This decision effectively shut out other potential developers, such as IWS, without giving them an opportunity to tender for the Gillman land.
Challenge to the validity of the contract
IWS initiated a judicial review to challenge the URA's decision to sell the land by entering into a deed with ACP, arguing that:
- the decision was unlawful, as the URA failed to comply with various mandatory obligations under section 11(1) of the Public Corporations Act 1993 (SA). As a public corporation, the URA must perform its commercial operations in accordance with prudent commercial principles and use its best endeavours to achieve a level of profit consistent with its functions. Many statutory authorities across the country (including electricity businesses, port authorities and statutory insurers) have similar obligations to act in in accordance with "prudent commercial principles" or to "act commercially"; and
- the decision was unreasonable (in the sense that the decision was so unreasonable that no reasonable decision-maker could have come to it) because of insufficient investigation of the land's value and of the alternative option of selling the land on the open market.
The trial judge accepted some of IWS' arguments, finding that the decision to enter into the deed failed to comply with the Public Corporations Act and was unreasonable. However, based on the reasoning in the High Court's decision in the Project Blue Sky case and subsequent cases, the trial judge held that while the URA's decision to sell the land to ACP without considering alternative bids was not in accordance with prudent commercial principles as required by the Public Corporations Act, this non-compliance did not render the resulting contract void or unenforceable.
IWS appealed the decision to the Full Court of the Supreme Court of South Australia. In a 2-1 judgment the appeal was dismissed, with Justices Vanstone and Lovell finding that:
- IWS did not have standing and the decision was not amenable to judicial review;
- the deed entered into with ACP was not unlawful, as section 11 of the Public Corporations Act provided a rule for the internal governance of the URA, and was not aimed at restricting the powers of the Authority; and
- the decision to enter the contract with ACP was not unreasonable even if a higher rate could have been achieved by going to open market. It was not for the Court to assess a commercial decision made by Cabinet (as delegate) for the URA involving wider questions of policy and strategy.
In dissent, Justice Debelle found that there was a failure to comply with section 11(1) of the Public Corporations Act and the decision was unreasonable, so the deed should be declared invalid. Justice Debelle held that a prudent vendor would have carefully examined the advantages of the land, the likely demand for the land as well as the merits and expected result of selling the land by a form of competitive process before deciding whether to accept the unsolicited offer.
Why should you be interested in the High Court's consideration of this issue?
The decision to enter into a contract with Government, or indeed any private entity, requires a consideration of the risk profile associated with that transaction. When challenges are made to Government contracts, as in the Acquista case, this has the potential to undermine the certainty which a party requires when entering into a contract with Government that their contract will be valid and enforceable.
If the appeal in the Acquista case is upheld by the High Court, it is likely that there could be an increase in the challenges that are made to seemingly valid contracts by third parties such as disgruntled competitors, unsuccessful tenderers and public interest bodies.
There has already been significant public debate over the process that was undertaken by the Government and URA to enter into the contract with the ACP. A report provided by the South Australian Auditor-General in 2014 concluded that a key deficiency of the Gillman site transaction process was the absence of a dedicated policy framework for the consideration and assessment of unsolicited proposals. The SA Government has now issued "Guidelines for the Assessment of Unsolicited Proposals". A range of other State and Territories have also recently updated their guidelines for unsolicited proposals.
The Acquista case shows the importance of ensuring that Government decision-makers at all levels comply with statutory requirements and guidelines made in support of those requirements, particularly when the decision-maker is statutorily required to carry out their activities in accordance with prudent commercial principles.
Written submissions are due to be filed in the High Court for the Acquista case in December and January with the matter to listed for hearing later in 2016. We will keep you informed of any further developments with this case.
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