If Labor is elected in Victoria in November, it has said it will cancel contracts the Napthine government enters into for construction of the East West Link tunnel. Can it do this legally?
Anybody can break a contract. This usually provides the other party with a legally enforceable remedy, which in most cases is compensatory damages. This applies to government, but government may get special treatment.
The law has recognised that there is a basic tension between the binding nature of contracts and the need for elected governments to be able to govern in pursuit of their policies, and transport policy is no different in this respect from any other policy field. If a government is hampered in governing — for example, in implementing a new policy or responding to a crisis — the law may recognise that the government can break the contract without the usual consequence of having to pay damages. No party can contract out of the law, and in this case the foundation of the law is the constitution of Victoria.
Under the constitution, Parliament is supreme, meaning Parliament can pass legislation that simply shuts down an existing contract. When it comes to the matter of compensation, the situation is a little more complicated. A contract creates a right, which the law regards as “property”. If that right is taken away, this could constitute an acquisition of property and, unless just terms (for monetary compensation) are provided under the legislation, in some jurisdictions the legislation can be challenged. If the challenge is successful, the legislation is declared invalid.
In Australia, in three jurisdictions such legislation can be challenged in this way. Under the Commonwealth constitution and in the two Commonwealth acts that established the Northern Territory and the Australian Capital Territory, there is a section that prohibits the acquisition of property other than on just terms.
However, state constitutions, such as the Victorian constitution, do not include a “just terms” section. Importantly for the present debate, Victorian Parliament is not inhibited in passing legislation that could constitute an acquisition of property other than on just terms. In short, legislation by the Parliament of Victoria can shut down a government contract without paying any compensation. A government may still wish to compensate a contractor for the expenses the contractor has incurred after signing the contract, but it is not required by law to do so.
The High Court has confirmed that a state parliament can legally pass such legislation. In Durham Holdings Pty Ltd v New South Wales (2001) 205 CLR 399 the New South Wales Parliament passed an act to acquire coal assets. The act did provide for compensation but the company considered that it was inadequate. The High Court held that the legislation was valid. A state parliament has full power to make laws for the “peace, order and good government” of the state and is not required to compensate if legislation is passed that adversely affects a citizen or a company.
The Age has reported the consortium chosen to build the East West Link is negotiating to include a “fee” of $500 million if Labor legislates to terminate the contract. If this “fee” is included, the legislation shutting down the contract could shut the “fee” down, too. It would just be part of the contract.
In any case, the alleged figure should sound a warning. Assuming the contracts are cancelled before any substantial work has been done, the substantial make-up of the “fee” must be pure profit. Is the state of Victoria really about to sign contracts of this nature?
In any case, the alleged figure should sound a warning. Assuming the contracts are cancelled before any substantial work has been done, the substantial make-up of the “fee” must be pure profit. Is the state of Victoria really about to sign contracts of this nature?
Since the goal of the East-West seems largely about enriching the construction companies and land development companies (the government has already said that the EW will allow further release of land North of Melbourne), I don’t see why the sitting government wouldn’t stoop to this level.
Good news indeed. I hope the proposed builders of the proposed East-West Link read this article.
Indeed there is a reductio ad absurdum argument that posits that the pro-pollution, climate criminal Coalition Government might enter into contracts to spend not $8 billion on 1 dirty, high-polluting road but, say, $80 billion on 10 such dirty highway projects, financially crippling the incoming Labor Government and forcing closure of schools and hospitals…
Decent Victorians who care for their children and future generations will eschew the pro-pollution, climate criminal Coalition, vote 1 Green and put the Coalition last.
The Victorian government’s unswerving desire to sign contracts for the East-west tunnel project puts the good governance of Victoria at risk for two reasons not widely canvassed.
First, by setting a pre-election deadline, the favoured contractor has the upper hand in negotiations. Their demands, like the mooted cancellation fee, must be met if the deadline is to be achieved.
Second, with $6 to $8 billion at stake, the incentive to corrupt the electoral process to favour the present government is undeniable. Indeed, it may prove irresistible to parties in both the political and the commercial sectors.
In a nationwide climate of rising distrust in politicians and the political process, any suggestion that the next Victorian election had been bought would gravely undermine Australian democracy.
There is more at stake here, Premier Napthine. than just a road project.
Vincent O’Donnell’s concern for undermining democracy might be more convincing had he shown more interest in the long-running corrupt links among the dominant powerbrokers who made the deals over the last few decades.
Gideon Polya’s concern for the environment might be better directed towards explaining how “Green” dreams can make meaningful binding enforceable agreements at the International level, without which token moves by Australia are irrelevant.
Danger Monkey’s conspiracy theory says zilch about how the results he fears are to be measured and avoided.
But feeling “noble” is a popular pastime for those on all sides of debates.
Of course governments can legislate away contracts, but it is very poor practice and undermines confidence in governments’ contracts. The better position would be to legislate away the obvious penalty clause, terminate the contract and pay damages assessed by standard common law principles.