• Home
  • Law
  • “It is in the public interest that when a government contracts with an ordinary person, it deals fairly with that person, and is seen to do so.”

“It is in the public interest that when a government contracts with an ordinary person, it deals fairly with that person, and is seen to do so.”

  • Category:
    Law
  • Document type:
    Essay
  • Level:
    Undergraduate
  • Page:
    5
  • Words:
    3522

12Insert Surname

Lecturer

Contracting with the Government

Introduction

The government in many countries in the world makes use of contracts to carry out its work and achieve various policy objectives. In Australia, Government spending accounts for significant business revenue every year. The use of contract by the government has become more widespread than ever before as the government is increasingly contracting in areas it used to be directly involved. The need to contract government functions means that the government is in constant interaction with the private sector through contractual relationship. However, the government holds unparalleled power as a contractual party. The superior power of the government in relation to private parties dealing with it lead to concern about the fairness of the government as a contractual party. For example, the government’s power to terminate contracts due to breach is unparalleled in the public sector.

This paper discusses the need for the government to act fairly in contract and to impress other contract parties they will be treated fairly. The paper discusses several reasons that compel the government to be fair when entering and dealing with other contractual parties. Some of the reasons include the need to set an example for the private sector. The government must be a fair and responsible contract party to make sure that the public follows its example while entering into contract. The government must also act fairly to attract more contractors to its works and thus increase the chances of quality outcomes. Thirdly, the government is obliged to act fairly to ensure equitable access to government contracts by all parties involved. However, the government can exercise its undoubted power to the detriment of contractual parties to ensure that public interests are preserved. The paper also discusses how courts respond to the perceived unfairness of the government as contractual party.

Why the Government should be Fair?

Justice Kearney remarked in Northern Territory v Skywest Airlines Pty Ltd (1987) 48 NTR 20; 90 FLR 270 that the government must treat contractual parties fairly and be seen to be a fair party in contract1. The government is supposed to act as “moral exemplar” for its subjects when it comes to following contract laws and indeed all laws of the land. Hughes Aircraft Systems International vs Airservices Australia (1997) 146 ALR J at 41 supported this view, and noted that the government must observe the standards it expects the private sector to follow in terms of execution of contracts2. The government conduct in all its relations with private parties should be exemplar to promote observance of the law by the other parties.

Businesses argue that the government must behave like any other commercial entity when entering into contract with private parties3. The government should not deny the private party reliance on private law contract remedies incase of breach. Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333 asserted that the government is supposed to act impeccably and restrain from exercising its undoubted power when engaged in contract4. According to Nicholas Seddon, this moral imperative means the government is held to higher standards of contract than private parties as it has to set an example for them5. The government also operates under a number of public sector values that include fairness, openness, impartiality, participation, accountability, rationality and honest6. These values imply that the government has obligation to fulfill these values when entering into contract with private parties.

However, the government also has to contend with a competing set of values that may compel them to treat contractors unfairly. The government acts as trustee for public resources and is supposed to get the best value for money while preserving public resources while contracting. As a trustee, the government is supposed to pursue the interests of the public in contracting. Thus, the government is involved in a delicate balancing act where it has to cater for the interest of the public (contact beneficiaries) and the interests of the contractor. In some cases, the government may override contractual principle and remedies for the sake of public interest. Sometimes the governments refrains from applying full contractual remedies in order to preserve businesses and to avoid being seen as a destroyer of local businesses.

There is a second and equally compelling reason why the government should act fairly in contract. According to Seddon, the government is at a better chance of getting good deals from commercial partner if it is regarded as a fair contract party7. The government can encourage competitive tender binding when it acts fairly in contract. When the government is fair suppliers who are keen on delivering high quality services and good are more likely to apply for government contracts. The high quality of services delivered by keener suppliers ensures that public resources are being used efficiently. In contrast, when the government undercuts contractors and acts unfairly, the market for government contracts narrows considerably. In effect, the quality of services or goods delivered may decrease significantly. The government may thus be obliged to act fairly in contract to ensure that the quality of services and goods delivered in relation to government contracts remains high.

The government is also obliged to ensure equal access to government contracts by all parties interested in applying for the contract. According to Seddon, government contracts offer significant commercial opportunities for Australian businesses8. All suppliers must be seen to have equal chances of landing government contracts to ensure that the principle of open and fair government contracting is observed. In contrast, the private sector has no obligation to ensure equitable access to its contractual business. The government as the trustee of public resources is also obliged to distribute these resources in a fair and equitable manner. However, the access principle is not always easy to enforce by way of law as there is limited mechanism to force the government to guarantee equitable access to its business. However, in Victoria v Master Builders’ Association of Victoria (1992) 2 VR 121, the plaintiff was partially successful in obtaining redress for denial of government contracts9. However, the parties could only obtain relief under judicial review as mechanism for enforcing equitable distribution of government contracts is poorly established in Australian contract law. Despite these compelling reasons for the government to act fairly in contract, the government sometimes relies on its legal immunities to frustrate contract parties. In the next section, this essay looks at how courts treat the issue of fairness when it comes to government contracts.

How the courts respond the issue of government fairness

Courts have ruled that the absence of legislation to authorize the government to enter into contract does not affect the government capacity to contract. The government is free to enter into contract in areas where there are no legislative guidelines for entering into contract10. In New South Wales v Bardolph (1934) 52 CLR 455, the court held that specific statutory power was not needed to bind the government into contract11. Courts have also removed another limitation to government power to enter into contract. Government cannot deny the validity of a contract because an appropriation of money has not been made in relation to the contract. In Auckland Harbour Board v The King [1924] AC 318, It was asserted that a contract could exist without any legislative appropriation of funds to the contract12. However, any payment of money in relation to a contract needs legislative appropriation. The requirement that payment to contracts must be approved by the legislature may allow the government to treat contractors unfairly13. In practice, the government can enter into a contract and refuse to pay for it on the basis that funds have not been appropriated to the contract14. This situation puts contractors dealing with the government in a precarious situation as the government could take advantage of this gap in government contracting to frustrate contractors.

Australian courts have often made decisions that force the government’s hands in contracts. In Renard Construction Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, the courts were able to enforce the requirement of reasonableness in a contract with the government15. The reasonableness formulation is a significant hurdle for the government where it wishes to terminate a contract due to a breach by the contractor. In Renard Construction, the New South Wales of Appeal limited the powers of the Minister of Public Works to terminate a construction contract, and take over the works under a standard government construction contract. Clause 44.1 of the Standard government construction contract NPWC Edition 3 (1981) allowed the government to suspend payment for the contract in case the contractor was in breach of the contract. However, the clause also required the government to issue the contractor with a ‘show cause notice’ which required the contractor to satisfy the government there was no reason to terminate the contract16. Failure to satisfy the government within the time set out in the notice entitled the government to cancel the contract and take over the work. The government could also exclude the contractor from the site. The project was scheduled to be completed on January 17 1986, but the two contractual parties agreed to extend the project time by two month to March 3rd 1986. However, the contractor applied for a fresh extension of time on 17th January 1986. In response, the government issued Renard Construction with a “show cause notice” which had to be responded to be 5.00 pm on March 18th. In the notice, the state sought an explanation from the contractor justifying their delay in completing the contract. On 17th March, the contractor responded by stating the cause of the delay as among other things, was the state’s failure to deliver material agreed under the contract. The contractor also promised with certainty that the construction work would be completed by 30th March17. However, the contractor again failed to finish the works within the new deadline. The contractor had again breached the contract, and the state responded by issuing a show cause notice. Again Renard construction partially blamed the state for failing to provide materials. However, the state went ahead to issue a notice to terminate. At court, Priestley JA asserted that the state was acting unfairly and unreasonably by moving to terminate the contract18. He argued that the state was moving to terminate the contract on the basis of incomplete, misleading and prejudicial information. Priestley JA found the government had breached an implied clause to act fairly and reasonably while dealing with private contractual parties.

The duty to act fairly and reasonably is now firmly established in Australian law and all parties in contract must observe this implied obligation. According to Amawn Aviation Ltd v Commonwealth (1990) 92 ALR 601, the government should justify the issue of a show cause notice in contracts19. It should not also move to terminate contracts without fairly considering the contractors response to the show cause notice. In the case, the government was placed under an obligation to show a bonafide reason to terminate a contract as a result of a breach. According to Amawn Aviation, the party administering the contract must act as an umpire, and ensure all the parties to the contract are fairly treated despite being the agent of the principal. In this Renard Construction and Amawn Aviation, the courts apply their discretion to check the government from unfairly terminating construction contracts, and denying contractors just compensation for their work.

Courts have also come to the aid of parties that can prove they have been discriminated against in the award of government contracts. In Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1, the government was forced to award Hughes a contract to supply a new air traffic control system, after it was found to have conducted the tendering process unfairly20. According to the court, the tendering process for the new Air traffic control system was tainted by political interference. The civil aviation association had failed to award the contract to Hughes despite recommendations by the tendering committee they were the more suitable candidates for the contract. In contrast, private sector parties are not required to act without bias while awarding competitive tenders21. However, failure to ensure the government is acting fairly in the award of tenders will likely have many negative implications for the utilization of public resources. In many cases, if the government is seen to act unfairly many prospective applicants for future government tenders are likely to stay away.

Courts have also come to the aid of private parties dealing with the government in cases related to government agent’s power to enter into contract. On occasion, the government has attempted to rely on the argument that employees acting on its behalf have no authority enter into contract. The government must contract through its employees and thus many contract made by its employees are binding on the government22. However, the government may argue that the employee entering into a contract on behalf of the government has not been properly designated authority to act on behalf of the government. As seen in Howell v Falmouth Boat Construction Co Ltd (1951) AC 837, many commercial parties ordinarily do not bother to check the credentials of public officials who are acting on behalf of the government23. If two commercial entities are contracting they would be protected by the indoor management rule. Similarly, the commercial party dealing with the government should not also have to check whether the government servant there are dealing with has adhered to internal governing procedures that give him authority to act on behalf of the government. According to Seddon, the government should not be allowed to deny valid contracts because it had not authorized its servants to enter into contracts24. Denning LJ in Falmouth Boat Construction Co Ltd v Howell (1950) KB 16 at 26 argued that the outsider can rely on the assumption that a government official has the authority they appear to have when negotiating contracts on behalf of the government25. In Robertson v Minister of Pension, Lord Denning had held a similar position arguing that the outsider has no way of knowing the limits of authority of the public servant they are dealing with. However, the House of Lord rejected Lord Dennings view on appeal but still found that the government was bound by the contract they it was attempting to deny26.

In Australia, fairness related to whether authority to contract is achieved by making formal government requirement meant to delegate authority to contract “directory not mandatory”27. Courts have argued in Cooge Esplanade Surf Motel Pty Ltd v Commonwealth (1976) 50 ALR 363 and Commonwealth vs Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 576, that failure to adhere to the Commonwealth Executive Orders does not render a contract void28. The government is treated as a commercial entity where the indoor management rule set out in section 126 of the Corporation Act applies29. It is important that the public are protected from possible denial of the validity of contract by the government. In many cases, the contractor has committed substantial resources and time to executing a contract that the government may seek to cancel on the basis that it had not authorized its agent to contract.

Courts have come out strongly to protect the public exposed to internal delegation irregularities in the government. In Keboki Business Group Inc V Papua New Guinea (1985) PNGLR 369 and Northern Territory v Skywest Aviation Pty Ltd (1987) 48 NTR 20, the courts refused to void a contract on the basis the power to contract had not been delegated properly30. A similar argument was used in McDonald Pty Ltd v Hamance (1984) 1 FCR 45 where the court held that absence of a formal delegation mechanism does not mean the government cannot enter into contract31. Neaves J in the case argued that many activities in government body may imply that a government agent has authority to act on behalf of the government. In Commonwealth and the Australia Capital Territory v Rian Financial Services and Developments Pty Ltd that the absence of formal delegation mechanism did not mean the newly independent state could not be bound into contract32.

However, the power of agents of the government to enter into contract may be limited by legislation. Legislation differs from financial expenditure guidelines which have limited impact on government officials’ power to contract. Contract made in contravention to legislative limits to power to contract are not considered valid. In contrast, where the legislative requirements are merely guidelines, the resulting contract is ruled to be valid. In Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454, the court ruled that the subject contract was valid even though ABC did not comply with a provision in the Australian Broadcasting Corporation Act 1983 (Cth) which required the approval of the Minister for that type of contract33.

Conclusion

The involvement of the government in contractual relations means the government has to treat other contractual parties fairly and be seen to be doing so. The government is compelled by several policy reasons to be a fair and responsible contractual party. First, the government is supposed to be fair in contract to set an example for commercial parties. By observing the rules of contract, the government sets a good example. The government also needs to attract contractors to bind for its contracts and this can only be achieved by being fair to contract parties. In addition, the government is also obliged to ensure all binding parties have equal possibilities of landing government contracts. However, the government has not always acted fairly in contract and has often treated its contractual parties harshly as seen in the cases reviewed in this paper. However, courts have acted as an effective check and have been very effective at ensuring the government treats its contract partners fairly.

Bibliography

  1. Articles/Books/Reports

Nicholas Seddon, Government Contracts: Federal, State and Local (2nd ed, 1999)

Aircraft Systems International v Airservices Australia (1997) 146 ALR 1

Amawn Aviation Ltd v Commonwealth (1990) 92 ALR 601

Auckland Harbour Board v The King [1924] AC 31

Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454

Commonwealth and the Australia Capital Territory v Rian Financial Services and Developments Pty

Commonwealth vs Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 576

Cooge Esplanade Surf Motel Pty Ltd v Commonwealth (1976) 50 ALR 363;

Cudgen Rutile (No 2) Ltd v Chalk [1975] AC 520, 533

Falmouth Boat Construction Co Ltd v Howell (1950) KB 16

Howell v Falmouth Boat Construction Co Ltd (1951) AC 837

Hughes Aircraft Systems International vs Airservices Australia (1997) 146 ALR J

Keboki Business Group Inc V Papua New Guinea (1985) PNGLR 369; Northern Territory v Skywest

Aviation Pty Ltd (1987) 48 NTR 20

McDonald Pty Ltd v Hamance (1984) 1 FCR 45

New South Wales v Bardolph (1934) 52 CLR 455

Northern Territory v Skywest Airlines Pty Ltd (1987) 48 NTR 20; 90 FLR 270

Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, 389–93

Renard Construction Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234,

Steamship Co Ltd v Moorehead (1912) 15 CLR 333

Victoria v Master Builders’ Association of Victoria (1992) 2 VR 121

  1. Legislation

Corporation Act, s. 126

1
Northern Territory v Skywest Airlines Pty Ltd (1987) 48 NTR 20; 90 FLR 270

2
Hughes Aircraft Systems International vs Airservices Australia (1997) 146 ALR J

3 Nicholas Seddon, Government Contracts: Federal, State and Local (2nd ed, 1999)

4
Steamship Co Ltd v Moorehead (1912) 15 CLR 333

5
See, Seddon, above n 3

9
Victoria v Master Builders’ Association of Victoria(1992) 2 VR 121

10 Cudgen Rutile (No 2) Ltd v Chalk [1975] AC 520, 533

11
New South Wales v Bardolph (1934) 52 CLR 455

12 Auckland Harbour Board v The King [1924] AC 318

13 Nicholas Seddon, Government Contracts: Federal, State and Local (2nd ed, 1999)

14
See, Seddon, above n 3

15
Renard Construction Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234,

16
See, Seddon, above n 3

17
See, Seddon, above n 3

18
Renard Construction Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234,

19
Amawn Aviation Ltd v Commonwealth (1990) 92 ALR 601

20
Aircraft Systems International v Airservices Australia (1997) 146 ALR 1

21
See, Seddon, above n 3

22
See, Seddon, above n 3

23
Howell v Falmouth Boat Construction Co Ltd (1951) AC 837

24
See, Seddon, above n 3

25
Falmouth Boat Construction Co Ltd v Howell (1950) KB 16

27 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, 389–93

28
Cooge Esplanade Surf Motel Pty Ltd v Commonwealth (1976) 50 ALR 363; Commonwealth vs Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 576

29
Corporation Act, s. 126

30
Keboki Business Group Inc V Papua New Guinea (1985) PNGLR 369; Northern Territory v Skywest Aviation Pty Ltd (1987) 48 NTR 20

31
McDonald Pty Ltd v Hamance (1984) 1 FCR 45

32
Commonwealth and the Australia Capital Territory v Rian Financial Services and Developments Pty

33
Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454