Dr Ashley TsacalosPartnerNorton Rose Fulbright Australia

Tuesday, 26 November 2013

Comcover’s Legal Services Information Forum Series 2013Administrative decision making – The Impact of Pulling the Plug!

Framework

• ANAO’s Better Practice Guides:

– “Implementation of Programme and Policy Initiatives: Making implementation matter”, October 2006

– “Developing and Managing Contracts”, February 2012

– “Planning and Approving Projects – an Executive Perspective”, June 2010

– “Implementing Better Practice Grants Administration”, June 2010

• According to the ANAO:

“Implementation and delivery of Australian Government policy initiatives is one of the key responsibilities of government agencies. In recent years there has been an increasing focus on and a community expectation of, sound policy implementation and seamless delivery of government policies – on time, within budget and to an acceptable level of quality.”

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• considers the importance of adequate attention, during policy development, to implementation risks and practicalities

• addresses other key considerations as the initiative develops from the initial policy concept including:

– governance

– risk management

– implementation planning

– procurement and contract management

– stakeholder management

– resources

– communication, and

– monitoring and review

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Better Practice Guide “Implementation of Programme and Policy Initiatives: Making implementation matter”

• this provides a useful framework in terms of the conceptualisation and implementation of a policy or program for the purposes of considering the specific question of: how to plan for the possible cancellation of the policy or program?

• this issue needs to be considered specifically in this phase as it determines the types of issues that may arise upon cancellation and the mechanisms or protections that may be available to assist in the event that cancellation eventuates

• there will be issues that arise upon cancellation that:

(i) could not have been foreseen or anticipated,

(ii) are an inevitable result of cancellation

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Outline

•this seminar is divided into two parts:

1. Policy design and implementation – issues to address in preparation for possible cancellation

2. Policy cancellation – issues that arise upon cancellation

• the issues discussed will be addressed by reference to appropriate examples and case studies.

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1. Issues to address in preparation for possible cancellation

(a) Risk management, including an exit strategy (as part of contingency planning)

(b) Specific risk allocation clauses:

(i) insurance and insurance-related clauses

(ii) indemnity clauses

(iii) limitation of liability clauses

(c) Other relevant contractual clauses:

(i) liquidated damages clauses

(ii) fitness for purpose clauses

(iii) termination for convenience clauses

(iv) dispute resolution clauses

(v) “reasonable co-operation and assistance” provisions

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1. Issues to address in preparation for possible cancellation (cont)

(d) Administrative law issues:

(i) merits review

(ii) judicial review

(e) Compliance and enforcement:

(i) information gathering powers

(ii) civil penalty regime

(iii) criminal sanctions

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(a)Risk management, including an exit strategy (as part of contingency planning)

• key implementation challenge – maintain alignment between expectations at ministerial-level and agency-level progress with implementation

• important issue is whether there has been an analysis and assessment of options in terms of contingency planning and exit strategies for high-risk initiatives – “Build in exit strategies very early on”

• identify and assess risks to the project/programme early – need to “know what you don’t know”

• make risk identification and treatment an element of the control framework put in place for effective programme implementation

• ensure there is access to sufficient risk management capability to provide assurance that risks will be dealt with effectively

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• where other parties are involved (e.g. State/Territory governments or private companies), are risks appropriately shared? Is there clear recognition of risk mitigation responsibilities of the various parties?

• risk treatments must be followed through in a systematic way and actively monitored during implementation for their effectiveness – “Having a contract does not absolve you from what the contractor does with your programme”

• risks should be reviewed at key stages of a project

• manage the consequences of risk and when to escalate, e.g. significant action may be needed if important implementation risks begin to materialise

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Case study: Home Insulation Program (Cth)

• Various reviews – Hawke Review (2010), Senate Inquiry (2010), Coronial Inquiry (2013) and Audit Report (2010)

• Home Insulation Program Audit Report, October 2010 – lessons learned:

– compatibility of program objectives

– developing appropriate assumptions

– planning demand-driven programs

– proactive and effective oversight and response to emerging problems

– effective and timely risk treatments

– identification of resources and systems to support implementation

– appropriate compliance and audit program

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(b)Specific risk allocation clauses

(i) insurance and insurance-related clauses

• what types of insurance policies are relevant? E.g. public liability; workers compensation; motor vehicle; professional indemnity; product liability

• contractual obligation to put insurance in place – should also require notification of cancellation of policy or “material” reduction in coverage under policy

• need parallel clause requiring production of policies on a regular basis

• requirement to note third parties on the policy (possible double insurance issues)

• ensures parties contracting with government have insurance so third party claimants have access to insurance as well as government funds

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(ii) indemnity clauses

• particular type of contractual clause that allocates liability between parties, essentially, a promise to ‘hold harmless’

• legally binding promise by which one party undertakes to accept the risk of loss or damage another party may suffer

• 4 key components:

– Who – who should bear the burden of the indemnity?

– What – what types of liability does the indemnity cover?

– When – when does the indemnity apply?

– How – how is the indemnity triggered / what does it cover?

• an indemnity in the government’s favour may give it additional rights against the indemnifier in the event that the government is liable following cancellation for compensation, damages, losses etc.

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• note the following:

– Financial Management and Accountability Act 1997 (Cth) (on 1 July 2014, the Act will be replaced by the Public Governance, Performance and Accountability Act 2013 (Cth)), and

– Financial Management and Accountability Regulations 1997 (Cth), particularly, regulation 9 and 10

– guidelines governing the use of indemnities are prescribed in Financial Management Guidance 6: “Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort”

• Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424

– reaffirmed the traditional English approach

– indemnities should be construed strictly and automatically “read down” (i.e. contra proferentum) in the event of ambiguity

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(iii) limitation of liability clauses

• if the government limits its liability in its contractual arrangements, it can limit its liability in the event of cancellation a policy or programme – assuming the limitation of liability provision applies

• if the government agrees to limit a contractor’s liability then it limits its rights of recovery and exposes itself to more liability potentially (may also have reg 9 and 10 implications)

• interpretation of such clauses – see Darlington Futures Ltd v Delco Australia Pty Ltd (1986) where the High Court stated that such clauses are “to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole”.

• a strict view on the exclusion or limitation of liability for negligence has been adopted - see the English case of Canada SS Lines Ltd v The King [1952].

• the New South Wales Court of Appeal stated in BI (Contracting) Pty Limited v A W Baulderstone Holdings Pty Limited [2007] NSWCA 173 that the 3 principles are not “rigid rules but are broad guidelines to assist the Court’s ascertainment of the intention of the parties to the contract”.

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(c)Other relevant contractual clauses:

(i) liquidated damages clauses

• government may avoid disputes or litigation if damages are agreed to in advance – it can tailor and shape the clause according to the requirements of the policy or programme

• needs to avoid being classified a “penalty” – see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86-87 (Lord Dunedin) and Ringrow v BP Australia Pty Ltd (2005) 224 CLR 656 which approved Lord Dunedin’s statement as a starting point

• note the effect of Andrews v Australian and New Zealand Banking Group Ltd [2012] HCA 30:

– the penalty doctrine is not confined to obligations arising from a breach of contract - that is, the penalty doctrine can operate where a stipulation, regardless of whether or not it is activated by a breach of contract, is in substance a penalty.

– expanded the categories of events which attract the doctrine of penalties; but did not change the test for assessing whether a stipulation is a penalty

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(ii) fitness for purpose clauses

• goods or services need to be fit for the relevant purpose

• contractual warranty – breach entitles innocent party to seek damages

• way of securing quality in goods or services provided

• statutory protections are available for consumers but will any be available to government? Only to the extent that the government is a “consumer” under the Competition and Consumer Act 2010 (Cth).

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(iii) termination for convenience clauses

• all contracts should include a provision that allows government to terminate a contract for convenience

• such a clause incorporates into the contract the doctrine of executive necessity

• recognises governments may need to break contracts because of a change of policy or other similar circumstances.

• normally the agreement to terminate will be given effect by provisions of the original contract, by a deed of termination or by a written settlement that sets out the basis for termination, including any payments owing, and settlement of any outstanding claims or actions.

• see NSW Rifle Association Inc v The Commonwealth of Australia (2012) ALR 158, White J, 20 July 2012:

– no entitlement to terminate at will or on reasonable notice due to policy change

– doctrine of executive necessity had no role to play:

“… the present case… involves no fettering of a future discretion, no fettering of a statutory discretion, and no action by the Crown in a different capacity from that in which it contracted. All there is a change of policy ” [at 179]

– implied term of good faith and reasonableness in exercising power to terminate

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(iv) dispute resolution clauses

• should establish a clear dispute resolution process - including what ‘disputes’ are captured by the clause (can be broad or limited)

• restrict parties’ ability to begin court proceedings until clause is complied with - subject to exceptions (e.g. urgent interlocutory relief)

• appropriate dispute resolution process will depend on the nature of the contract and the parties, e.g. meeting of parties, mediation etc.

(v) “reasonable co-operation and assistance” provisions

• insurance policies typically have such clauses

• useful if government needs to deal with issues and claims post-cancellation

• becomes a contractual warranty – breach entitles government to claim damages

• can be used to provide documents, witnesses for interview etc.

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(d)Administrative law issues:

(i) merits review

• establish a system of merits review related to decisions made pursuant to the policy or programme, e.g. through the AAT

• to do so, need to specifically refer to the AAT in the relevant legislation – AAT can only review those areas specifically made subject to its review by specific legislation

• this assists in terms of the compliance and audit functions and supports its objectives, e.g. power to revoke licence under relevant legislation

(ii) judicial review

• can be in addition to merits review but exists irrespective

• ensures principles of natural justice and procedural fairness (amongst others) are maintained

• demonstrates transparent and accountable processes – supports compliance and audit functions as well as enforcement initiatives

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(e)Compliance and enforcement:

(i) information gathering powers

(ii) civil penalty regime

(iii) criminal sanctions

• rules and principles enable regulators to prohibit or allow certain conduct, communicate expectations and provide guidance as to what is required or allowed

• regulation seeks to govern, direct or alter human behaviour

• regulation may be embodied in legislation and regulations as well as standards, policy statements, rulings, codes of conduct, etc.

• compliance and audit measures – e.g. licensing, reporting obligations etc.

• investigatory powers (such as search and seizure powers, production of documents and attending an oral examination) allow regulators to perform their supervisory and enforcement responsibilities

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• these powers needs to be balanced with the rights of those being investigated, (e.g. natural justice, procedural fairness), protection of property and privacy, rights to privilege against self-incrimination or self-exposure to penalty and legal professional privilege

• enhances compliance and audit functions and objectives

• to ensure regulation is complied with, an effective enforcement strategy is required – see enforcement pyramid

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Policy cancellation - issues that arise upon cancellation

(a) Liability:

(i) negligence

(ii) misfeasance in public office

(iii) other actions

(b) Dealing with claims, disputes and litigation:

(i) alternative dispute resolution mechanisms

(ii) compensation schemes – including the CDDA Scheme and Act of Grace Payments

(iii) model litigant obligations

(iv) document management

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Policy cancellation - issues that arise upon cancellation (cont)

(c) Other issues:

(i) FOI and other compulsory production processes

(ii) administrative law issues

(iii) employment issues and OHS prosecutions (Comcare or State WorkCover agencies)

(iv) parliamentary reviews, inquiries and third party reviews

(v) royal commissions, commission of inquiry and judicial inquiries (and coronial inquiries)

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(a) Liability(i) negligence• governments may be liable in negligence for the negligent exercise of a function or the

failure to exercise a function• the High Court has considered cases involving the conferral of statutory powers and

whether exercised with reasonable care (e.g. Graham Barclay Oysters Pty Ltd v Ryan (2003) and Crimmins v Stevedoring Committee (1999)).

• the High Court has stated this area to be a “multifaceted inquiry” which will include consideration of the following:

1. the terms scope and purpose of the statute – starting point 2. the control over the relevant risk by the statutory decision-maker (including knowledge of

the risk of harm) – not enough control, no duty3. the vulnerability of the persons put at risk4. reasonable foreseeability of risk of harm – not enough alone (more relevant in UK cases

which give no guidance)5. the purpose to be served by the exercise of the power – if for the public at large, it may

count against their being a duty6. the coherence between the law of tort and the object of the relevant statute - would

imposing duty be inconsistent with purpose of the statute? 7. allocation of resources and the policy/operational divide – Brodie decision: complex

budgetary decisions etc. At the moment it is restricted to whether duty is breached rather than exists in the first place.

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(ii) misfeasance in public office

• only public law tort at common law - important for those exercising public power.

• increasingly pleaded as part of a claim against public officers.

• tort which enables a person to recover damages when they have suffered loss from an unlawful act by a public officer that was done maliciously

• four elements: public officer; unlawful act; malice; and loss (Sadler)

• in terms of an unlawful act, in Mengel, Brennan J stated that:

“the purported exercise of power must be invalid, either because there is no power to be exercised or because a purported exercise of the power has been miscarried by reason of some matter which warrants judicial review and a setting aside of the administrative action”.

• malice has been extended from purely targeted malice (deliberate harm) to untargeted malice (deliberate illegality).

• in Mengel, Brennan J stated that:

“the mental element is satisfied when the public officer engages in the impugned conduct… with knowledge that there is no power to engage in that conduct and that that conduct is calculated to produce injury”.

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(iii) other actions

• breach of statutory duty:

1.the statute intended to confer a civil remedy for its breach

2.the defendant breached the duty imposed upon it by the statute

3. this breach caused the loss or injury to the plaintiff and that damage was of a kind the statute was intended to prevent, and

4.the plaintiff was within the protection of the statute.

• pure economic loss

– negligence where loss is not consequent upon any physical damage to person or property

– see Perre v Apand Pty Ltd (1999) 198 CLR 180

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(b) Dealing with claims, disputes and litigation:(i)alternative dispute resolution mechanisms

• informal settlement conferences/negotiations, mediations, expert determinations etc. – “without prejudice” discussions

• class actions

(ii) compensation schemes – including the CDDA Scheme and Act of Grace Payments

• for example: Cornwell – criteria, registration and assessment process

• for example: Defence Abuse Response Taskforce - to assess and respond to cases of abuse in Defence following DLA Piper Review

• Compensation for Detriment caused by Defective Administration (CDDA) – allows government agencies to compensate persons who have experienced detriment as a result of an agency’s defective actions or inaction (discretionary).

• Act of Grace – discretionary payments made where appropriate because of special circumstances (s 33, FMA Act)

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(iii) model litigant obligations

• source: Griffiths CJ in Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR at 342 and Appendix B to the Legal Services Directions 2005 - applies to claims and litigation

• Australian Securities and Investments Commission v Meredith Hellicar & Ors [2012] HCA 17, Heydon J stated government “must act as a moral exemplar” (at [239]) and “the procedural rules are not modified against model litigants - they apply uniformly” (at [240])

(iv) document management

• identify all possible locations of relevant documents – start collecting and indexing

• will inevitably be required in response to an FOI request, subpoena etc.

• important for evidence-gathering purposes – take statements early

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(c) Other issues

(i) FOI and other compulsory production processes

(ii) administrative law issues

(iii) employment issues and OHS prosecutions (Comcare or State WorkCover agencies)

(iv) parliamentary reviews, inquiries and third party reviews

(v) royal commissions, commission of inquiry and judicial inquiries (and coronial inquiries)

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Case study: Solar Bonus Scheme (NSW)

• provides a feed-in tariff for eligible customers with small solar or wind generators that are connected to the grid

• commenced on 1 January 2010 and operates until 31 December 2016

• in April 2011, the NSW Government suspended the Scheme due to its cost and unsustainability. The Scheme closed to new applicants:

– customers who applied to join the Scheme by midnight 28 April 2011 were able to proceed with their connection until 30 June 2012 in order to receive Scheme payments

– systems connected from 1 July 2012 are not eligible to receive Scheme tariff payments.

• in May 2011, the NSW Government reduced the tariff received from 60 cents to 40 cents from 1 July 2011 for the remainder of the Scheme

• class action threatened by solar industry

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Auditor- General’s Report – November 2007

• found that the NSW Government and its agencies grossly underestimated the cost and number of people that would install systems under the Scheme.

• by October 2010, the estimated cost of the Scheme, if it continued the way it was going, would have reached $3.988 billion - more than ten times the original estimate of $362 million.

• in response to the increased cost, the gross tariff for new applicants was reduced from 60 to 20 cents reducing the estimated cost to $1.954 billion.

• ‘The Scheme lacked the most elementary operational controls, had no overall plan and risks were poorly managed,’ said Mr Achterstraat. Latest Government projection for the total tariffs to be paid over the life of the Scheme is $1.75 billion.

• identified major deficiencies in the way the Scheme was handled.

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• the Scheme had three broadly stated objectives with no specific targets to measure progress. These objectives did not include reducing emissions or obtaining value for money.

1. No cost-benefit analysis was undertaken before the Government’s decision to introduce a scheme.

2. Little was done early enough to identify and reduce relevant risks. I found no contingency planning, analysis and assessment of options and exit strategies to address potential high risk situations.

3. There was no budget for dollars or the number of connections and consequently very little control over the cost of the Solar Bonus Scheme.

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Case study: Green Loans Program (Cth)

• consisted of the following main elements:

1.training, registration and contracting of assessors - assessors had to complete approved training, be registered by an Assessor Accrediting Organisation (AAO) and enter into a contract with the Australian Government before being able to provide assessor services under the program;

2.homes sustainability assessments - assessors physically inspected homes and provided to the householders an assessment report recommending measures to improve their home’s environmental sustainability; and

3.provision of green loans—eligible householders could apply to a participating financial institution for an interest‐free green loan of up to $10 000 to fund the purchase and installation of eligible items recommended in their assessment report.

• changes announced to the program in February 201034

Resolution Consulting Services, Final Report, March 2010

• Key findings:

“The review identified a number of key failures. These can be summarised as lack of control over the number of assessors, poor financial controls for the program which allowed regulatory breaches, poor management controls, faulty program design and inadequate procurement controls.”

• This included:

“The Risk Management Plan (RMP) was not properly developed at the commencement of the project and, in RCS's view, is still not adequate for the risks of the program. The current RMP does not fully encompass all of the risks facing the program. In particular, it does not deal with the very large growth that the program has seen over the last two months.”

• “There is no clear exit strategy for the Green Loans program”.

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Green Loans Program Audit Report, September 2010

“The primary cause for the administration problems encountered by the program was, to a very large extent, an absence of effective governance by DEWHA during the program’s design and early implementation. DEWHA had no previous experience in designing and delivering a program with features similar to the Green Loans program. As a multi‐faceted ‘greenfields’ program with a fixed budget and variable (and untested) demand, the Green Loans program required greater oversight than the department’s business‐as-usual activities. However, this did not occur.

…

“From the start of the program, DEWHA assigned day‐to‐day program management responsibility to sub‐executive level officers who had little program delivery experience. As such, program management was devolved to too low a level within DEWHA without sufficient active engagement by executive management.”

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“Key program management plans, including in relation to risk management, procurement, IT and communications, were never finalised and endorsed by executive management. Subsequently, DEWHA encountered difficulties in all these areas.

…

Although legal risks were adequately considered, DEWHA did not sufficiently identify and manage other key risks to effective program implementation in a timely manner. These risks included: the quality of assessor training posed by the absence of an accredited training course; the lack of policy or administrative measures to control assessment demand; and staff in the Green Loans team collectively not possessing sufficient skills and experience in key areas of program management.”

• at one point, assessors considered a class action but decided not to pursue this – they made a claim under the CDDA Scheme instead

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Dr Ashley TsacalosPartnerTel: (02) 9330 8151Mob: 0402 31 32 33Email: ashley.tsacalos@nortonrosefulbright.com

International

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Australia

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