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Arbitration Under Government Contracts and Government Accountability

Published online by Cambridge University Press:  01 January 2025

Caroline Henckels Open the ORCID record for Caroline Henckels [Opens in a new window]
Caroline Henckels*
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Faculty of Law, Monash University, Australia
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The author may be contacted at caroline.henckels@monash.edu.
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Abstract

Much of the core work of government is now done pursuant to contract with private sector bodies, primarily for efficiency reasons. While the phenomenon of contracting out of governmental functions has attracted increasing scholarly attention in terms of public law accountability, the use of commercial arbitration for the resolution of contractual disputes involving governments has until recently attracted scant attention. The law regulating commercial arbitration does not distinguish between arbitrations between private actors and arbitrations involving governments, treating all commercial disputes as wholly private in nature. By controlling government action, arbitrators contribute to governance but without the hallmarks of the judicial process such as impartiality, transparency, the possibility for third-party participation and judicial oversight. As such, the law does not take into account the public dimension of disputes under government contracts or the role of arbitrators as adjudicators of public law disputes. Nor do there appear to be any constitutional constraints on the use of arbitration in government contracts.

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Articles
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Federal Law Review , Volume 50 , Issue 3: Special Issue (Part 2): Constitutional Struggles in Asia , September 2022 , pp. 404 - 418
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Copyright © 2022 The Author(s)

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Footnotes

Thank you to Janina Boughey, Lisa Burton Crawford, Patrick Emerton, Graeme Hodge, Luke Nottage and Stephan Schill for helpful discussions. Any errors are mine.

References

1. Cheryl Saunders and Kevin K F Yam, ‘Government Regulation by Contract: Implications for the Rule of Law’ (2004) 15(1) Public Law Review 51, 52; Janet McLean, ‘For a Law of Public Contract Per Se: An Intervention from Liberal Contract Theory’ (2019) 39(4) Oxford Journal of Legal Studies 856, 857.

2. See, eg, K M Hayne, ‘Government Contracts and Public Law’ (2017) 41(1) Melbourne University Law Review 155, 165, 177.

3. In WA, State Agreements (individual legislated agreements for major projects such as mining projects) made pursuant to the Government Agreements Act 1979 (WA) include arbitration clauses. In 2020 one of these Acts, the Iron Ore Processing (Mineralogy Pty Ltd) Agreement Act 2002 (WA), was amended to invalidate an agreement to arbitration between the WA government and Mineralogy, terminate arbitrations on foot and to declare that existing arbitral awards under the Agreement had no legal effect and consequently that there was no State liability for damages. This legislation was unsuccessfully challenged before the High Court: Mineralogy Pty Ltd v Western Australia (2021) 95 ALJR 832; Palmer v Western Australia (2021) 95 ALJR 868.

4. See Hayne (n 2).

5. Australian governments’ model litigant policies encourage governments to avoid litigation wherever possible: see, eg, Legal Services Directions 2017 app B s (2)(d) (The Commonwealth’s obligation to act as a model litigant) (‘endeavouring to avoid, prevent and limit the scope of legal proceedings wherever possible, including by giving consideration in all cases to alternative dispute resolution before initiating legal proceedings and by participating in alternative dispute resolution processes where appropriate’).

6. Although the Palmer saga might suggest that the WA government will be less willing to enter contracts providing for arbitration in future.

7. Australian Government, Department of Finance, ‘Commonwealth Contract Terms’, Commonwealth Contracting Suite (CCS) (Web Page, 11 October 2021) < www.finance.gov.au/government/procurement/commonwealth-contracting-suite-ccs#ccs-terms >. These terms do not apply to procurement for major construction works or specialist military goods or services, or where both procurement and delivery will take place outside Australia. The Australian Standard for Defence Contracting (ASDEFCON) contracting templates includes an option to use alternative dispute resolution: see, eg, Australian Government, Department of Defence, ASDEFCON (Services) (draft conditions of contract) < https://www1.defence.gov.au/sites/default/files/2020-12/services_part_2_-_draft_conditions_of_contract.pdf >. As noted above (n 5), the Legal Services Directions exhort the Commonwealth government to use alternative forms of dispute resolution.

8. See, eg, Government of Victoria, Victorian Government Purchasing Board, ‘Contracts’, Making it easier to do business with government (Web Page, 5 April 2022) <procurement.vic.gov.au/Buyers/Market-Approach-Templates/Contracts> (providing for mediation followed by arbitration only if both parties agree); Government of Victoria, Department of Treasury and Finance, ‘Policy, Guidelines and Templates’ Public-Private Partnerships (Web Page, 1 November 2021) <dtf.vic.gov.au/public-private-partnerships/policy-guidelines-and-templates> (providing for disputes to be resolved by ‘expert determination’, whereby the procedure is solely defined in the contract between the parties and thus is not within the scope of the applicable arbitration legislation and ordinary judicial oversight); Northern Territory Government, Conditions of Contract — Supply of Services (2018) (providing for disputes to be resolved through expert determination); Queensland Government, Department of Housing and Public Works, General Contract Conditions for General Goods and Services (2014) and Comprehensive Contract Conditions for General Goods and Services (2014) (providing that disputes are to be resolved by way of legal proceedings in the event of failure to reach an agreement through negotiation or negotiation and mediation, respectively). Information is not readily available for all Australian jurisdictions.

9. There are of course other accountability mechanisms regarding government contracts such as freedom of information laws, social and other media, leaks and whistleblowers, human rights bodies and governments’ obligations under World Trade Organization rules and under free trade agreements and investment treaties.

10. See Nicholas Seddon, Government Contracts: Federal, State and Local (Federation Press, 6th ed, 2018) 266–8 (‘Government Contracts’).

11. Ibid 271–2 (with further references).

12. Ibid 273–6 (with further references).

13. Ibid 197–9.

14. Ibid 276–9.

15. For example, restricted to ‘war time or some other situation of dire peril’: Seddon, Government Contracts (n 10) 256–9. Additionally, some government contracts contain a termination for convenience clause, permitting government to unilaterally terminate the contract the event of a change of government policy or related governmental exigencies, obliging the government to compensate the contractor up to the point of termination but not for loss of future profits: Seddon, Government Contracts (n 10) 259–6.

16. See eg, Nick Seddon, ‘The Interaction of Contract and Executive Power’ (2003) 31(3) Federal Law Review 541, 547.

17. For criticism of this position from the perspective of liberal contract theory, see McLean (n 1).

18. Administrative Decisions (Judicial Review) Act 1977 (Cth) ss 3, 5, 6 (‘ADJR Act’).

19. See Griffith University v Tang (2005) 221 CLR 99; NEAT Domestic Trading Pty Ltd v AWB Ltd (2003) 216 CLR 277.

20. See Denis O’Brien, ‘Administrative Law Dimensions of Commonwealth Tendering and Contracting’ (2004) (40) AIAL Forum 40, 42 (with further references).

21. See Australian Government, Administrative Review Council, Review of the Administrative Decisions (Judicial Review) Act: The Ambit of the Act’ (Report No 32, March 1989); Administrative Review Council, Federal Judicial Review in Australia (Report No 50, September 2012). The Administrative Review Council was formerly an advisory body to the Attorney-General on matters of administrative law.

22. Seddon, Government Contracts (n 10) 50–4. See, highlighting the conceptual difficulties that arise in this regard, Stephen Thomson, ‘Judicial Review and Public Law: Challenging the Preconceptions of a Troubled Taxonomy’ (2017) 41(2) Melbourne University Law Review 890.

23. Australian Constitution ss 75(iii), (v). Legislation permits the Federal Court to exercise largely the same powers: Judiciary Act 1903 (Cth) s 39B.

24. In Plaintiff M61/2010E v Commonwealth (2010) 243 CLR 319, 345 [51] (French CJ, Gummow, Hayne, Heydon, Crennan, Kiefel and Bell JJ), 350 [68]–[69] (French CJ, Gummow, Hayne, Heydon, Crennan, Kiefel and Bell JJ), the Court held that processing of asylum claims by private contractors pursuant to a contract with the federal government could be set aside for error of law or failure to afford procedural fairness, because the immigration Minister was the statutory repository of the power to determine applications and the role of the contractor was regarded as advisory in nature. The High Court said that it would leave for a future case the question whether a contractor would fall within the definition of ‘officer of the Commonwealth’ in circumstances where the contractor was acting without other governmental involvement.

25. [1987] QB 815.

26. See Janina Boughey and Greg Weeks, ‘“Officers of the Commonwealth” in the Private Sector: Can the High Court Review Outsourced Exercises of Power?’ (2013) 36(1) University of New South Wales Law Journal 316; Emilios Kryou, ‘Judicial Review of Decisions of Non-Governmental Bodies Exercising Governmental Powers: Is Datafin Part of Australian law?’ (2012) 86(1) Australian Law Journal 20; Mark Aronson, Matthew Groves and Greg Weeks, Judicial Review of Administrative Action and Government Liability (Thomson Reuters, 6th ed, 2017) 149–56.

27. [1993] 2 All ER 853.

28. (2016) 257 CLR 42.

29. See Thomson (n 22) 901–2.

30. State and territory supreme courts enjoy common-law judicial review jurisdiction, which does not have the same constraints as federal law in terms of limiting jurisdiction to reviewing decisions made under statutory authority and/or by a governmental officer. Like federal law, some states and territory statutes only permit judicial review of decisions made under an enactment, but other decisions can be reviewed using the common-law mechanism.

31. As courts that exercise federal judicial power: Kable v Director of Public Prosecutions (NSW) (1996) 189 CLR 51.

32. Although only on the limited basis of failure to observe procedural fairness in decision-making, rather than the whole gamut of judicial review grounds: see Aronson, Groves and Weeks (n 26) 496–500 (with further references).

33. Still, the appropriate grounds of judicial review are uncertain (as is the underlying question of how this development might fit within a theory of the constitutional foundations of judicial review): see Aronson, Groves and Weeks (n 26) 136.

34. Report of the United Nations Commission on International Trade Law on the Work of Its Eighteenth Session, UN GAOR, 40th sess, Supp No 17, UN Doc A/40/17 (21 August 1985) annex I (‘Model Law’); Commercial Arbitration Act 2010 (NSW); Commercial Arbitration Act 2011 (Vic); Commercial Arbitration Act 2011 (SA); Commercial Arbitration (National Uniform Legislation) Act 2011 (NT); Commercial Arbitration Act 2011 (Tas); Commercial Arbitration Act 2013 (Qld); Commercial Arbitration Act 2012 (WA); Commercial Arbitration Act 2017 (ACT). The provisions referred to in this article are to the New South Wales legislation.

35. This Act implements the Convention on the Settlement of Investment Disputes between States and Nationals of other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966) (‘ICSID Convention’) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (‘New York Convention’). Recent reforms to the International Arbitration Act incorporated most of the revisions made in 2006 to the Model Law (s 16(1)), partly in an attempt to attract more arbitrations to the jurisdiction; Australia is not a leading venue for international commercial arbitration due to the popularity of nearby Singapore and Hong Kong: see Luke Nottage and Richard Garnett, ‘Introduction’ in Luke Nottage and Richard Garnett (eds), International Arbitration in Australia (Federation Press, 2010) 1, 16.

36. Commercial Arbitration Act 2010 (NSW) (n 34) s 12, Model Law (n 34) art 12 (as well as the additional ground that ‘the arbitrator does not possess the qualifications agreed to by the parties’). Persons approached to serve as arbitrators must disclose ‘any circumstances likely to give rise to justifiable doubts as to the person’s impartiality or independence,’ and must disclose any such circumstances that arise throughout the proceeding. However, a recent Federal Court decision expresses the view that the ‘real danger’ test should be equated to one of the ‘reasonable bystander’ or ‘reasonable [person]’: Hui v Esposito Holdings Pty Ltd (2017) 345 ALR 287, 346 [241] (Beach J). Yet, the Explanatory Memorandum to the Bill introducing that provision refers to R v Gough [1993] AC 646, which sets out the ‘real danger of bias’ test from the perspective of the Court as opposed to a lay observer: Explanatory Memorandum, International Arbitration Amendment Bill 2009 (Cth) 12–13 [85]–[92].

37. The relevant test is apparent bias. The test for actual bias requires proof that the decision-maker had prejudged the issue or had a closed mind — something that is very difficult to prove, requiring an assessment of the actual state of mind of a decision-maker. See Aronson, Groves and Weeks (n 26) 652–3.

38. This is regarded as a question of possibility rather than probability: see Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337, 343 [2], 345 [7] (Gleeson CJ, McHugh, Gummow and Hayne JJ); Clenae Pty Ltd v Australia and New Zealand Banking Group Ltd [1999] 2 VR 573.

39. See Webb v The Queen (1994) 181 CLR 41, 50–1 (Mason CJ and McHugh J); Mark Elliott, Beatson, Matthews and Elliott’s Administrative Law (Oxford University Press, 4th ed, 2011) 309 (explaining similar developments in English law).

40. Sam Luttrell, Bias Challenges in International Commercial Arbitration: The Need for a ‘Real Danger’ Test (Wolters Kluwer, 2009) 4; Doug Jones, Commercial Arbitration in Australia (Thomson Reuters, 2nd ed, 2013) 143.

41. See generally Gus Van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press, 2008).

42. See Jones (n 40) 356–7 (with further references).

43. Commercial Arbitration Act 2010 (NSW) (n 34) ss 27E-27I; International Arbitration Act (n 34) ss 23C–23D.

44. Commercial Arbitration Act 2010 (NSW) (n 34) s 26G; International Arbitration Act (n 34) s 23E. The legislation does not stipulate criteria upon which such a decision would be based.

45. Commercial Arbitration Act 2010 (NSW) (n 34) ss 27H–27I; International Arbitration Act (n 34) ss 23F, 23G.

46. Commercial Arbitration Act 1984 (Vic).

47. (1995) 183 CLR 10, 31 (Mason CJ) (‘Esso’).

48. Ibid.

49. Ibid 36 (Brennan J), 48 (Toohey J). See further Richard Garnett, ‘The Legal Framework for International Arbitration in Australia: The Old and the New’ in Nottage and Garnett (n 35) 38, 56–7.

50. However, many arbitration cases end up in the courts, where the matter becomes public and there is the potential for third-party participation in such cases. For example, the Australian Centre for International Commercial Arbitration, the Institute of Arbitrators and Mediators Australia Limited and the Chartered Institute of Arbitrators (Australia) were amici curiae in the TCL Air Conditioner v Judges of the Federal Court of Australia case discussed in Part IV.B below.

51. Administrative Decisions (Judicial Review) Act 1977 (Cth) s 12. The federal and state Attorneys-General have rights to intervene in proceedings in any court which ‘relate to a matter arising under the Constitution or involving its interpretation’ (Judiciary Act 1903 (Cth) s 78A).

52. Including by the Australian Human Rights Commission in matters raising human rights issues: Australian Human Rights Commission Act 1986 (Cth) s 46PV(1)(a) (where the Commissioner thinks that the orders sought, or likely to be sought, may affect to a significant extent the human rights of persons who are not parties to the proceedings).

53. As has taken place in the realm of investor-state arbitration since 2001. See further Lucas Bastin, ‘Amici Curiae in Investor-State Arbitration: Eight Recent Trends’ (2014) 30(1) Arbitration International 125.

54. By way of comparison, the Federal Court and High Court have supervisory jurisdiction over administrative tribunals and over lower courts.

55. In The State of Western Australia v Mineralogy Pty Ltd [2020] WASC 58, the Supreme Court of Western Australia heard an unsuccessful attempt to appeal against an arbitral award rendered under the Iron Ore Processing (Mineralogy Pty Ltd) Agreement Act 2002 (WA) (see n 3).

56. Commercial Arbitration Act 2010 (NSW) (n 34) s 34A(3)(c)(ii).

57. Ibid s 34A(1).

58. Jones (n 40) 504.

59. Commercial Arbitration Act 2010 (NSW) (n 34) s 34A.

60. See Jones (n 40) 504.

61. Model Law (n 34) Art 34(2)(b)(i) (incorporated into Australian law by virtue of the International Arbitration Act (n 34) s 16); Commercial Arbitration Act 2010 (NSW) (n 34) s34(2)(b)(i).

62. See Jones (n 40) 161–62, 487, citing Nicola v Ideal Image Development Corporation (2009) 261 ALR 1.

63. Jones (n 40) 169–70 (with further references).

64. Jones (n 40) 162–66, citing eg, Nicola v Ideal Image Development Corporation (n 2); Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45, 93 (an international arbitration case that is relevant to the domestic commercial arbitration legislation on this point).

65. Jones (n 40) 168, citing AED Oil Ltd v Puffin FPSO Ltd [2009] VSC 534.

66. Jones (n 40) 169, citing ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896; A Best Floor Sanding Pty Ltd v Skyer Australia Pty Ltd [1999] VSC 170.

67. Jones (n 40) 170, citing Metrocall Inc (Successor by Merger to Pronet In) v Electronic Tracking Systems Pty Ltd (2000) 52 NSWLR 1.

68. Jones (n 40) 167–8 citing Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 279 ALR 772.

69. [2006] FCAFC 192 [200] (Allsop J). See also James Morrison and Luke Nottage, ‘Country Report on Australia for: International Commercial Arbitration – An Asia-Pacific Perspective’ (Research Paper No 14/95, Sydney University Law School, May 2015).

70. (1990) 169 CLR 332 [14] (Deane and Gaudron JJ).

71. John Hockley et al, Australian Commercial Arbitration (LexisNexis Butterworths, 2015) 201.

72. Model Law (n 34) Art 34(2)(b)(ii) (incorporated into Australian law by virtue of the International Arbitration Act (n 34) s 16); Commercial Arbitration Act 2010 (NSW) (n 34) s 34(2)(b)(ii).

73. International Arbitration Act (n 34) s 19.

74. See Harold M Holtzmann and Joseph E Neuhaus, A Guide To The UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (Kluwer, 1989) 923–1003.

75. Jones (n 40) 489–90 (also suggesting that this ground would be engaged where an award seeks to give effect to an illegal contract, which would also go to the question of arbitrability).

76. TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361, 376 [54] (‘TCL Air Conditioner’).

77. Ibid (n 76) 394 [111].

78. Commercial Arbitration Act 2010 (NSW) (n 34) s 35; International Arbitration Act 1974 (n 34) s 8.

79. Commercial Arbitration Act 2010 (NSW) (n 34) s 36(b), Model Law (n 34) art 36, or for procedural irregularity in the application for enforcement: see Mineralogy Pty Ltd v The State of Western Australia [2020] QSC 344, where the Court set aside an ex parte order for enforcement of the arbitral awards against the WA government. The Court held that the order had been obtained irregularly and without proper disclosure.

80. International Arbitration Act (n 34) s 39.

81. Williams v Commonwealth (No 1) (2012) 248 CLR 156; Williams v Commonwealth (No 2) (2014) 252 CLR 416.

82. See Lisa Burton Crawford, Patrick Emerton and Emmanuel Laryea, ‘Investor-State Dispute Settlement and the Australian Constitutional Framework’ in Colin Picker, Heng Wang, and Weihuan Zhou (eds), The China Australia Free Trade Agreement: A 21 st Century Model (Hart, 2017) 259, 273–4 (‘Investor-State Dispute Settlement’).

83. In Combet v Commonwealth (2005) 224 CLR 494, the High Court held (at 523 [6] (Gleeson CJ), 577 [161] (Gummow, Hayne, Callinan and Heydon JJ)) that appropriation legislation need not be especially specific.

84. On the basis that the executive branch of a state government has complete freedom of contract as a legal person: the states are regarded as having inherited their power to contract from the British Crown at the point of Australian federation. As to the British position, see Carol Harlow and Richard Rawlings, Law and Administration (Cambridge University Press, 3rd ed, 2009) 341–2.

85. Constitution s 71 (namely, other federal courts created by the parliament and state courts invested with federal jurisdiction).

86. R v Kirby; Ex parte Boilermakers’ Society of Australia (1956) 94 CLR 254.

87. Ibid.

88. (2013) 251 CLR 533 (‘TCL v Federal Court’).

89. Ibid 574–5 [106]–[109] (Hayne, Crennan, Kiefel and Bell JJ), citing Construction, Forestry, Mining and Energy Union v Australian Industrial Relations Commission (2001) 203 CLR 645, 658 [31].

90. Ibid 553–4 [28] (French CJ and Gageler J); 575 [108] (Hayne, Crennan, Kiefel and Bell JJ).

91. Burton Crawford, Emerton and Laryea, ‘Investor State Dispute Resolution’ (n 82) 279.

92. TCL v Federal Court (n 88) [28]–[29], [34] (French CJ and Gageler J); [76]–[78], [81], [101], [106]–[109] (Hayne, Crennan, Kiefel and Bell JJ).

93. Chief Justice Robert French, ‘Transnational Dispute Resolution’ (Supreme and Federal Court Judges' Conference, 25 January 2016). His Honour was not referring to the use of arbitration in connection with government contracts.

94. Chief Justice Robert French, ‘Arbitration and Public Policy’ (Goff Lecture, 18 April 2016). His Honour was not referring to the use of arbitration in connection with government contracts.

95. Ibid.