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?

Peter Fray

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